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US Drug Tariff Threat: Potential Impact on UK Pensions and AstraZeneca & GSK
A potential threat from the US President to impose tariffs on pharmaceutical companies this week has raised concerns regarding the health of UK pensions and could significantly impact Britain’s prominent life sciences sector. This development centers around proposed drug tariffs and their possible repercussions for major UK firms like AstraZeneca and GSK.
Stock Market Reaction: AstraZeneca & GSK Share Prices Decline
Should the US leader proceed with these tariff proposals, AstraZeneca, the UK stock market’s most valuable entity, and GSK, another cornerstone of the FTSE 100, will be directly affected. Even before any tariffs are implemented, both companies have seen a decline in their share values. AstraZeneca shares have decreased by nearly 10% this month, while GSK‘s share price has also fallen by 9%. This market reaction underscores the sensitivity of these pharmaceutical stocks to potential trade policy changes.
Pensioner Concerns: Impact on UK Savings and Investments
This situation presents a worrying outlook for numerous British savers who have investments in these leading pharmaceutical companies, recognized as two of the UK stock market’s most respected businesses. Millions more Britons also have indirect stakes in these firms through their pension funds. The potential negative impact on these investments is a significant concern for those relying on pension income.
Industry Response: AstraZeneca and GSK Executives Respond to Tariff Risks
Sir Pascal Soriot, CEO of AstraZeneca, and Dame Emma Walmsley, his counterpart at GSK, are actively working to address the impending threat of US tariffs. While medicines were not included in the initial measures announced by the US President two weeks prior, this week saw the launch of a US investigation into pharmaceutical imports – a move widely interpreted as the first step towards imposing tariffs.
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Tariff Details and Potential Damage to UK Life Sciences
The US President suggested a potential tariff level of 25%, possibly taking effect in the ‘near future.’ Beyond concerns for AstraZeneca and GSK shareholders, this move poses a risk of serious damage to the UK’s life sciences industry. This sector is a crucial asset to the UK economy, supporting over 200,000 high-value jobs both directly and indirectly.
Job Relocation and Investment Shifts: US vs. UK
The proposed tariffs could encourage drug companies to shift manufacturing and research & development operations towards the US. Such a shift might allow these giants to avoid tariffs but potentially at the expense of jobs and innovation within the UK. The UK government is reportedly prioritizing the matter of pharmaceutical tariffs in ongoing negotiations for a broader trade agreement with the US, highlighting the gravity of the situation for the UK economy.
US Perspective: Addressing Drug Pricing Discrepancies
The move regarding drug tariffs is not entirely unexpected. The prevalent view within the US administration appears to be that Americans are being overcharged compared to foreign nations. According to this perspective, patients in other countries benefit from lower medicine prices, effectively subsidized by the US, which has the highest global expenditure on pharmaceutical research. Drug prices are indeed often significantly higher in the US than in other developed nations.
WTO Agreement and the Fragility of Global Trade Pacts
Regardless of the validity of this argument, the US President apparently views the pharmaceutical sector as a potentially lucrative area for generating revenue through tariffs. This sector was previously exempt under a 1994 agreement within the World Trade Organisation (WTO), the global body governing international trade regulations. This pact involved the US, UK, EU, Japan, Canada, Norway, and Switzerland, all agreeing to refrain from imposing tariffs on pharmaceuticals and related ingredients. However, this WTO agreement now appears fragile in the face of increasing US tariff actions.
Ethical Concerns and Impact on UK Exports
Many consider tariffs on essential medicines to be ethically questionable due to the potential to increase drug costs for patients. If the WTO agreement weakens, the UK will be particularly severely impacted. Pharmaceuticals are the UK’s second-largest export to the US after automobiles. In 2023, medicinal and pharmaceutical exports to America totaled £8.8 billion, almost 15% of all UK exports to the US.
AstraZeneca and GSK: Key UK Companies at Risk
Cambridge-based AstraZeneca is the UK’s most highly valued listed company, worth approximately £160 billion, employing around 10,000 people in Britain. London-based GSK is valued at £55 billion and employs 11,000 UK staff. Both companies heavily rely on the extensive US drug market for substantial sales. AstraZeneca generated 44% of its sales from the US market last year, and for GSK, the figure was even higher at 52%. While both firms have significant operations and manufacturing within the US, they remain exposed to potential tariffs on imports.
US Drug Pricing and Investment Strategies
American drug prices are the highest globally. Unlike the UK’s NHS, where treatment is largely free at the point of use, US patients may bear significant costs if their health insurance doesn’t cover it. Health insurance policies in the US can cost individuals thousands of dollars annually in premiums. Drug prices are typically lower in the UK because of price controls imposed on pharmaceutical companies by the publicly funded National Health Service. In contrast, drug pricing in the US is mainly determined by market forces, often leading to considerably higher prices.
Potential Impact of Tariffs on US Drug Prices and Company Profits
It’s not certain that tariffs would result in lower medicine prices in the US. Critics argue tariffs could actually increase drug prices for US patients, potentially making essential medications unaffordable for some. Tariffs could also elevate the cost of bringing drugs to market and negatively impact pharmaceutical company profits if they absorb some of the tariff costs.
Company Actions: Investment in US Manufacturing to Mitigate Tariffs
Regarding investors, GSK and AstraZeneca are endeavoring to reassure shareholders about their strategies to adapt to potential tariffs. Both companies are increasing investment in US-based manufacturing to produce drugs locally, thereby avoiding import tariffs. AstraZeneca has recently announced plans for $3.5 billion in US investment. GSK stated last autumn it would invest an additional $800 million in a Pennsylvania factory. Conversely, GSK recently cancelled a planned £450 million UK vaccine factory expansion following a dispute with the Labour government over the level of state support.
Analyst Views: Tariff Uncertainty and Investment Shifts
Dame Emma Walmsley of GSK stated last week that the US is a ‘priority for investment’. Sean Conroy, an analyst at Shore Capital, noted that uncertainty surrounding tariffs is ‘accelerating’ pharmaceutical companies’ decisions to increase US investment. He also suggested the recent dispute between AstraZeneca and the UK government has not fostered positive industry relations with Labour ministers. Mr Conroy added: ‘The UK Government obviously hasn’t been creating that environment to incentivize investment, which is disappointing. This tariff discussion is also encouraging companies to move manufacturing to the US.’
Ireland’s Vulnerability and Investor Advice
While pharmaceutical tariffs would be detrimental to Britain, they could be even more damaging to Ireland, whose low corporate tax rate has made it a major hub for international drug manufacturing. The US President recently accused Ireland of ‘stealing’ the US pharmaceutical industry and diverting tax revenue from the US Treasury. This has sparked fears that US drug manufacturers with Irish operations, like Pfizer, might leave Ireland if tariffs are imposed. Richard Hunter, Head of Markets at Interactive Investor, advises that it’s ‘too early’ to fully assess the tariff impact. He notes that the tariff considerations have heightened investor anxiety, leading some to sell shares pending more clarity on US intentions.
Market Sentiment and Analyst Ratings for AstraZeneca and GSK
‘Everyone – from management to staff, politicians, patients, doctors, and investors – is waiting to see the form and scale US ‘sector-specific tariffs’ on the pharmaceutical industry may or may not take,’ stated Mr. Hunter. Russ Mould, AJ Bell Investment Director, commented: ‘Investors are taking no chances, which is why shares in GSK and AstraZeneca are both trading near one-year lows.’ Despite recent share price declines, market analysts remain optimistic about AstraZeneca‘s prospects. Of 26 analysts covering the company, 21 rate the shares a ‘buy,’ compared to just one ‘sell’ and four ‘hold’ ratings, indicating a positive overall outlook. For GSK, the assessment is more muted, with 15 out of 24 experts rating it a ‘hold,’ versus 5 ‘buy’ and 4 ‘sell’ ratings. Many are awaiting the upcoming results announcements from both AstraZeneca and GSK later this month, anticipated to provide further details on their strategies to address the tariff threat. AstraZeneca is scheduled to release its first-quarter results on April 29, followed by GSK a day later.