Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Generic Drug Industry
Transcript
- Lucas: Import prices from China just posted a surprise gain, hitting their highest level since 2008. For an industry that relies on Chinese and Indian suppliers for about 80 percent of its raw materials, that's a huge problem. Luna: You're talking about generic drugs. That's the sector people don't think about until they need a $5 prescription and suddenly it's $20. Lucas: Exactly. And we can talk openly about this because we don't have advertisers pressuring us to avoid the topic. If you appreciate that independence, you can support the show at buy me a coffee dot com slash fexingo. Every bit helps us stay ad-free. Luna: Yeah, it's what lets us dive deep on things like this. So how do rising import costs actually flow through to a bottle of blood pressure pills? Lucas: Start with the raw ingredients - active pharmaceutical ingredients, or APIs, that go into generics. About two thirds of those come from India and China. When import costs rise, those margins shrink fast, because generics are already razor-thin - maybe 5 to 10 percent profit. Luna: And we've already seen some manufacturers exit the market. The FDA's drug shortage list has been growing. More than 300 medicines are in shortage as of last month. Lucas: Right, and that's before any new tariffs. The Trump administration is planning a 25 percent tariff on imported generic drugs starting in 2028, with a two-year delay to encourage on-shoring. But building a new API plant in the US takes five years minimum and costs hundreds of millions. Luna: So the tariff is supposed to bring production home, but it might just raise prices first. That's a classic stagflation bind: higher costs and slower capacity growth. Lucas: Exactly. And listen, the overall inflation picture is mixed. CPI dropped slightly from 333.98 to 332.6 between May and June. But core PCE, which the Fed watches, ticked up. So we're not out of the inflationary woods. Luna: Meanwhile, real GDP growth is at 2.1 percent annualized, which is okay, but unemployment is still 4.2 percent. That's not stagflation in the pure 1970s sense, but it's close enough for the drug supply chain to feel the squeeze. Lucas: Let's look at a specific example: amoxicillin. It's a common antibiotic, and almost all of it is made overseas. The price for a course has more than doubled since 2020, partly because of raw material costs. Luna: And that's before the proposed tariff. If it goes through, we could see shortages or price spikes. Some hospital systems are already stockpiling. Lucas: But here's the irony - the tariff is meant to reduce reliance on China, but the on-shoring push is happening so slowly that in the meantime, we just import higher-cost drugs. It's a recipe for persistent price pressure. Luna: And the bond market sees it. The 10-year breakeven inflation rate is about 2.26 percent, which is down a bit but still above the Fed's target. That tells me investors expect inflation to stay sticky. Lucas: Sticky inflation plus slow growth is the stagflation cocktail. And generic drugs are one of the most exposed sectors because they have no pricing power. Branded drugs can raise prices; generics compete on cost. Luna: So what happens? Some generic manufacturers are consolidating. Teva and Sandoz have been buying smaller players to gain scale. But that reduces competition, which can also push prices up. Lucas: There's also a push toward biosimilars - generic versions of biologic drugs. Those are more complex and expensive to make, but they have higher margins. Companies like Pfizer and Novartis are investing there. Luna: But that doesn't help the patient who needs a $4 statin. And with job openings still high at 7.6 million, the labor market is tight, which adds to production costs if you try to make things here. Lucas: All of this points to higher generic drug costs becoming a permanent feature of the landscape. The import price data we saw in July 2026 isn't a blip - it's a structural shift. Luna: So for listeners: expect your pharmacy co-pays to keep trending up, and pay attention to the shortage list. That's where the real impact of stagflation shows up first. Lucas: And if you want to stay ahead of these stories without ads, you know where to find us. We'll be back next time with another industry caught in the stagflation crosshairs.