UBS has warned that drugmakers such as AstraZeneca PLC (LSE:AZN) and GSK PLC (LSE:GSK, NYSE:GSK) could be among the most exposed in Europe’s pharmaceuticals sector should President Trump follow through on threats to impose new levies on the industry, despite medicine currently being exempt from trade tariffs.
In a detailed report analysing potential flashpoints for investors, the Swiss bank argues that while the European sector as a whole remains a defensive play in a possible global downturn, key companies could face pressure from changes to US tax policy and regulatory disruption.
European pharma is not immune from the current trade turmoil, the bank wrote, noting that Trump has raised the prospect of levies and the sector is already grappling with heavy job cuts at the US Food and Drug Administration that may delay drug approvals.
AZ 'most exposed'
The bank flagged AstraZeneca as the most exposed among large European drugmakers.
Roughly 43 % of its sales come from the US, and a significant chunk of its future growth is pinned to new treatments still moving through the pipeline, which rely on timely US Food & Drug Administration approvals.
UBS also highlighted that the company benefits from the UK’s so-called “patent box” tax regime, which offers a lower rate on profits derived from intellectual property.
AZ booked a $561 million benefit from such IP incentives last year, indicating it might be a target if Washington moves to clamp down on what it sees as tax avoidance.
GSK also uses IP incentives, with $777 million (£602 million) attributed to such schemes in the UK and Belgium in 2024.
GSK could be in the cross-hairs too
While UBS sees GSK’s future growth as less dependent on pipeline approvals than AstraZeneca’s, the group’s US revenue exposure is even higher at 52%, making it potentially vulnerable to a shift in US tax rules, especially if changes target royalty payments to low-tax jurisdictions.
The bank laid out three main structures companies use to book profits: simple exports taxed in the US; “transfer pricing” where production is marked up in low-tax countries; and licensing arrangements where US units pay fees to patent holders overseas. It suggested AZ and GSK likely lean towards the latter two.
UBS also examined how companies might fare in a recession. In general, the sector is seen as relatively insulated, since governments are unlikely to cut health budgets drastically.
Long-term attraction
However, Galderma, the maker of aesthetic treatments, stands out as an exception, with sales closely tied to discretionary spending. At the other end of the spectrum, Sandoz could benefit, as demand for cheaper generics tends to rise in tougher economic times.
In valuation terms, UBS argues the sector looks attractive, trading below long-term averages.
It pointed to companies like Sanofi and GSK as particularly cheap compared with peers. The analysts also cautioned that companies cannot rely on raising prices in the US to offset potential cost pressures, due to recent legislation that penalises drugmakers if prices rise faster than inflation.
Overall, the report concluded that while the broader European pharma sector offers investors some shelter from current market volatility, company-specific exposures (especially to tax structures and regulatory risk) need to be scrutinised. The next moves from Washington could significantly alter the landscape.