Bernstein Assesses U.S. Biopharma Stocks Amid Tariff Risks

Bernstein analyst Courtney Breen examines the complexities of tariff risk in the biopharma sector and its impact on leading companies.

The analyst commented: "This report is part of a global series in which our analysts highlight a coverage company or group of companies in which some aspect of de-globalization, and the company’s strategic response, has become an important investment controversy. We explain that response and quantify the investment opportunity. In this note we aim to help clients digest the complexity of tariff risk for the biopharma sector & identify the relative risk across leading biopharma companies - this tariff risk is highly complicated due to low transparency, global manufacturing networks, tax-optimization & transfer-pricing.

Historically, it’s been desirable to have high transfer prices, as while this doesn’t impact COGS, it can reduce the burden of profit & associated tax in higher-tax end markets like the US. However, high transfer prices may now expose companies to higher tariffs as these tariffs are applied “ad valorem” to the value of the imported goods. There is very limited visibility to be able to thread from company financials to tariff risk, and so in this note, we connect the dots between manufacturing locations, revenue, COGS, bill of lading (ocean shipping importation data), tax-rate guidance and Senate Finance investigations in an attempt to compare relative risk across companies. Given the murkiness, we strongly recommend readers to review the data limitations section. In this note, while we focus on our coverage companies (LLY, GILD, AMGN, ABBV, MRK, PFE, BMY, MRNA), we also compare and contrast their situation with key other names (JNJ - covered by Hambright, NOVO, SNY, GSK, AZN, NVS, ROG - covered by Cespedes & Smith)

We identify the highest risk from tariffs for MRK, ABBV, +(NOVO, SNY, GSK) due to the magnitude of imports, along with the exposure to ex-US internal manufacturing - increasing the likelihood for transfer-pricing to raise the cost-base that tariffs are applied to. We identify AMGN, PFE, +(AZN) as high risk - these companies have meaningful exposure to US revenue & HS30 imports. However, the majority of imports for each of these companies appear to be from external suppliers, where there is an incentive (historically and with tariffs) to minimize the costs paid for imports, as these go through COGS. We identify LLY, GILD, BMY, MRNA, +(JNJ, NVS, ROG) as having a more moderate risk from the tariffs. Being in this category doesn’t mean that these companies won’t be hit with tariffs however, given the available information, it seems that these companies may be in a better position to manage the tariffs than those in the other two categories.

So, how are these companies likely to respond to tariffs? Assuming they can’t wriggle out of the tariffs, we identify four main categories for action (that all arguably reduce globalization): 1) Renegotiating & optimizing external supplier network; 2) Adjusting costbasis for transfer-pricing & evaluating trade-off on taxes (perhaps easier said than done); 3) Adjusting current internal manufacturing network, through reallocating sourcing to lower tariff or local locations (relies on regulatory approval) or shuttering sites to reopen them in another location (long term -5+years); 4) Making different decisions about new manufacturing expansion - strategies oriented towards localization for certain regions may become more dominant."

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