Looming tariffs: What would they mean for compounding?

<< This briefing represents a cobbling together of what information I could glean online and from certain knowledgeable industry leaders. It is informational but not definitive. Do not act or rely on this information without first verifying it with your attorney. >>

Maybe you’re wondering about the possible effects on cost of and access to API used in compounding if President Trump’s promised new tariffs are implemented. Admittedly, it’s not an issue on which I have great expertise or insight, and no one really seems to be able to say just yet what those impacts, if any, might be. ?

What is knowable is what law and trade agreements and presidential authority allow. That’s what follows here, thanks to Google, AI, and a few living, breathing experts I consulted. Read it carefully – there are twists and turns to be aware of, it’s a lot to absorb, and – again – there are no definitive answers just yet. Also, kindly correct me if I've gotten anything wrong.

APIs are typically exempt from tariffs …

Most pharmaceuticals, including active pharmaceutical ingredients, are typically exempt from tariffs under international trade agreements and U.S. trade policies. The exemption exists because governments prioritize access to essential medicines and healthcare-related products, recognizing their critical role in public health.

The World Trade Organization Agreement on Trade in Pharmaceutical Products, to which the U.S. is a party, eliminates tariffs on many finished pharmaceutical products and key APIs. We’ll get back to “key APIs” in a sec.

However, not all APIs are included in such agreements. If an API is newly developed, niche, or specialized (e.g., for rare diseases), it might not fall under the "key APIs" exemption and could be subject to tariffs. Additionally, the Harmonized Tariff Schedule of the United States often categorizes pharmaceuticals under tariff-free or reduced-tariff classifications.

However, there are exceptions. Tariffs may apply to:

1. Raw materials?not classified explicitly as pharmaceutical-grade.
2. Packaging materials?used in the production of medicines.
3. Certain?pharmaceutical precursors?or niche ingredients.
4. Pharmaceuticals or APIs imported from countries without trade agreements or special tariff exemptions.

Okay, then what are “key APIs”?

“Key APIs" refers to active pharmaceutical ingredients that are widely used in the manufacturing of essential medicines and are specifically listed under international trade agreements or regulations for tariff exemptions. These APIs are considered critical to the production of a broad range of pharmaceutical products, including both brand-name and generic drugs – and by extension, compounded drugs.

For example, under the WTO Pharmaceutical Agreement, a list of APIs and intermediates are designated for duty-free treatment among participating countries. These APIs are selected based on their importance to the pharmaceutical industry and their widespread use in drug formulations. They include ingredients for common medications such as antibiotics, antivirals, and drugs for chronic conditions like diabetes and hypertension. Some of these APIs are indeed used in pharmacy compounding, depending on therapeutic need and pharmacy practice.

Examples of Tariff-Exempt APIs (not an exhaustive list, mind you):

1. Antibiotics: Penicillin derivatives Cephalosporins Erythromycin Tetracyclines
2. Antivirals: Acyclovir Oseltamivir (Tamiflu) Lamivudine
3. Cardiovascular Agents: Atenolol Losartan Amiodarone
4. Anti-Inflammatory & Analgesics: Ibuprofen Paracetamol (Acetaminophen) Diclofenac
5. Chronic Disease Medications: Metformin (for diabetes) Levothyroxine (for thyroid issues) Salbutamol (for asthma)
6. Hormones & Steroids: Estradiol Testosterone Prednisolone Hydrocortisone

Use in Pharmacy Compounding

Many of the above APIs are used in compounding. In tailoring medications for individual patient needs, such as providing alternative dosages, formulations, or combinations that aren't commercially available, APIs like testosterone, estradiol, hydrocortisone, metformin, and acyclovir are regularly used in compounded preparations.

For example:

• Estradiol is used in hormone replacement therapy.
• Hydrocortisone is compounded for topical creams or suppositories.
• Acyclovir might be compounded for unique dosage forms in antiviral treatments.

?… Except when they aren’t exempt.

Indeed, some API sourced from China and certain other nations are already subject to tariffs imposed in President Trump’s first term and maintained under President Biden. Gabapentin and baclofen are just two examples. Given the WTO and trade agreements just discussed, how can that be?

A president can impose tariffs on active pharmaceutical ingredients from certain other countries despite the exemptions typically granted to pharmaceuticals under international trade agreements for the following reasons:

1. National Security and Emergency Provisions

• WTO Flexibility: The World Trade Organization allows its member states to impose tariffs or trade restrictions in certain circumstances, such as when a country cites national security, public health, or emergency needs. The U.S. could argue that tariffs on APIs are necessary to reduce dependence on China for critical medical supplies, framing it as a national security issue.
• Trade Act of 1974 (Section 301): The U.S. Trade Representative can impose tariffs in response to unfair trade practices, even if the products are normally exempt under trade agreements. The Trump Administration invoked this act to justify earlier tariffs on Chinese imports.

2. Excluded APIs or Gaps in Agreement Coverage

• WTO Agreement Scope: While the WTO Agreement on Trade in Pharmaceutical Products covers many finished products and APIs, it does not include every single pharmaceutical input or raw material. If a specific API is not explicitly listed in the agreement, it could be subject to tariffs.
• Non-Covered Products: The exemptions might not extend to certain new or specialized APIs developed after the original agreement. Governments may classify these items differently, allowing tariffs to be imposed.

3. Policy Discretion and Domestic Manufacturing Goals

• Focus on Domestic Production: Imposing tariffs could be part of a strategy to incentivize domestic manufacturing of APIs. The U.S. might justify tariffs as a means to strengthen its pharmaceutical supply chain, especially in light of vulnerabilities highlighted by the COVID-19 pandemic.
• Retaliatory Measures: Tariffs on APIs could also be a response to broader trade disputes, used as leverage in negotiations with a particular nation.

4. Temporary Measures vs. Permanent Rules

• Tariffs could be applied temporarily, sidestepping international obligations. Governments sometimes introduce “temporary” duties in response to crises, claiming they are consistent with WTO rules while addressing short-term challenges.

Bear in mind: While the U.S. may impose such tariffs, they could face legal challenges both domestically and internationally. Affected companies or trade partners might argue that these tariffs violate existing trade agreements or international obligations.

Why it matters

Compounding pharmacies – and by extension the patients they serve – rely heavily on APIs that are accessible and affordable. Tariff exemptions are critical because they help keep the costs of these essential ingredients low, directly impacting the price and availability of compounded medications. If APIs lose their tariff-exempt status, pharmacies and patients might face increased costs.

In addition, trade disputes like those encountered in President Trump's first term or now anticipated in his new term may create indirect effects, such as delays in supply chains or cost increases for non-exempt materials.

This underscores the importance of trade agreements that include tariff-free access to APIs and the need for vigilance by pharmacy organizations to advocate for continued affordability and accessibility of essential ingredients.

In short:

The Trump Administration has demonstrated already that it may not be bound by the usual norms. As one industry expert recently told me: Just because certain APIs appear to be exempt right now doesn’t mean they won’t be swept up in new tariffs.

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Scott Brunner, CAE, is chief executive officer with the Alliance for Pharmacy Compounding. The views expressed here are his. This column is not a statement by or position of APC.

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