We thought it might be a useful exercise to examine the potential market effects of the proposed tariffs on imported generics, especially as it relates to companies in our microcap research universe.
At this point, the tariffs are just proposals and they might just be the proverbial shot across the bow to encourage more domestic manufacturing of generics, without actual intent of promulgation.
Regardless, the current proposal on the table calls for essentially a moratorium for the next 2 years, with the first wave of tariffs hitting in August 2028 at a clip of 100%. The second tranche would take effect in August of 2029 at a rate of 200%.
ELTP and CPIX are 2 microcaps currently with Zacks Outperform ratings.
Elite Pharmaceuticals, Inc. (ELTP), is a specialty pharmaceutical company focused on developing and manufacturing oral, controlled-release products and generic pharmaceuticals.
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Importantly, Elite Pharmaceuticals, Inc. (ELTP) is a domestic manufacturer based in New Jersey. However, some of the API’s (Active Pharmaceutical Ingredient) used in the company’s products may be sourced from abroad and could be subjected to the tariff. The company does not disclose the amount or cost levels of foreign sourced API’s.
In our opinion, however, it appears the company is well positioned to weather a tariff storm given it would not need to relocate operations to the US.
The generic drug industry is highly competitive and price sensitive. And recall that over 90% of US generics are manufactured abroad. On a relative basis, it would appear that the tariffs would disproportionately impact its competitors and thus could enable market share gains.
The other part of this equation is the possible impact on branded drug manufacturers which compete with lower priced generics. In theory, the tariffs could make the generics more expensive as the tariff cost burden would need to be passed on, thus potentially making generics less economically attractive vs. branded drugs.
Cumberland Pharmaceuticals Inc. (CPIX) is a specialty pharmaceutical company focused on the acquisition, development, and commercialization of branded prescription pharmaceuticals.
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Since four drugs within the Cumberland Pharmaceuticals Inc. (CPIX) portfolio each represent at least 20% of total sales, it is worth examining these drugs in the context of generics competition.
Three of the four drugs actually have no current FDA approved generic competition. Only Kristalose, a laxative medication, has generic competition. These are mostly foreign competitors which manufacture liquid lactulose. So it’s possible Kristalose could benefit from relative pricing if the tariffs were enacted.
While enactment of the tariffs remains speculative at this point, it’s important for investors to be cognizant of them given the large degrees of 100% and 200% and the possible impact on marketplace pricing dynamics.
Disclosure: Mark owns ELTP in his personal portfolio.
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This article originally published on Zacks Investment Research (zacks.com).
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