What's Happening?
As of September 29, 2026, the final phase of Section 232 pharmaceutical tariffs has taken effect in the United States, imposing a 100 percent ad valorem duty on most imported patented pharmaceuticals and their ingredients. This follows Proclamation 11020,
signed on April 2, which initially subjected seventeen large companies to these tariffs since July 31, with many at a zero rate under specific agreements. The tariff rates vary based on the product's origin and the importer's status. For instance, products from the European Union, Japan, Korea, Switzerland, and Liechtenstein face a 15 percent duty. British products are exempt under the US-UK pharmaceutical agreement. Companies with approved onshoring plans pay 20 percent, escalating to 100 percent by April 2, 2030, while those with pricing agreements with the Department of Health and Human Services pay zero until January 20, 2029. Generics, biosimilars, and certain specialty classes like orphan drugs are currently excluded or can enter at zero from specific jurisdictions.
Why It's Important?
This new tariff regime significantly impacts the U.S. pharmaceutical industry, particularly concerning royalty agreements between licensors and licensees. The core issue is whether licensees can deduct these import duties from the net sales base before calculating royalties. International accounting standards classify import duties as a cost of acquiring inventory, part of the cost of goods sold, rather than a reduction in revenue. This distinction is critical because most licensing agreements tie net sales definitions to the licensee's accounting practices. If the duty is deductible, licensors will bear a share of the tariff equal to their royalty rate, potentially reducing their revenue. For example, a 15 percent duty on European products could reduce a 10 percent royalty from $100 million to $94 million on $1 billion in net sales. This shift in cost burden could influence pharmaceutical pricing, supply chain strategies, and the profitability of both domestic and international pharmaceutical companies operating in the U.S. market.
What's Next?
The first royalty reports covering sales after September 29, 2026, are due in early 2027. These reports will reveal how licensees are interpreting and applying the new tariff rules within their existing royalty agreements. Licensors will need to carefully review these reports to identify any deductions for duties and compare them against the specific language in their contracts. Buyers of royalty streams will need to incorporate these tariffs into their due diligence, assessing factors such as whether the product is patented and imported, its origin, the licensee's tariff route, the transfer price, and the specific deduction language in the license. Companies with pricing agreements that currently pay zero duty will face renewed risk to royalty holders starting in January 2029. The tariffs may also prompt licensees to adjust product pricing, reduce import volumes, or consider moving production to the U.S. to mitigate costs, which would indirectly affect all royalty holders.
Beyond the Headlines
The Section 232 pharmaceutical tariffs represent a significant policy move aimed at influencing pharmaceutical supply chains and potentially encouraging domestic production. Beyond the immediate financial impact on royalty payments, these tariffs could lead to broader strategic realignments within the pharmaceutical sector. Companies might accelerate onshoring initiatives, invest more in U.S.-based manufacturing, or seek new trade agreements to mitigate tariff burdens. This could reshape the global pharmaceutical landscape, potentially leading to higher drug prices for consumers if costs are passed on, or increased innovation in domestic manufacturing processes. The legal interpretation of existing licensing agreements regarding duty deductibility will likely become a point of contention, potentially leading to disputes and renegotiations. This policy also highlights the ongoing tension between trade protectionism and globalized supply chains in critical sectors like healthcare.
