What will Trump’s tariffs mean for Canadian life sciences businesses?

Torys’ Canadian and New York offices will be providing regular briefs on the legal ramifications of the tariffs and other cross-border policy developments on the horizon.

Canada and the U.S. are on the verge of imposing tariffs of up to 25% on goods originating from the other country. The life sciences industry faces unique challenges in the face of this potential tariff: not only are supply chains between Canada and the United States distinctly integrated in the sector, but the regulatory nuances associated with pharmaceutical, medical device and other life sciences related products would make adapting to a new tariff regime complicated and time consuming.

In this brief we examine some preliminary considerations for life sciences companies operating in or selling into Canada.

Contracts for life sciences products and pricing compliance

If tariffs imposed apply to pharmaceuticals, medical devices and other life sciences products , life sciences companies will want to consider a range of issues, including the “country of origin” of the products; whether, if certain steps are performed (e.g., filled and finished) or ingredients sourced (e.g., excipients) in one country and imported into another country (e.g., the U.S.), whether the tariffs apply; whether supply chain contracts offer an ability to renegotiate price; and whether there are any force majeure rights that provide a mechanism for contract amendment, including vis a vis price. Contracts should be reviewed specifically for any definitions and provisions of force majeure, or other evidence suggesting that tariffs would frustrate the intent of the parties, that can lead the parties to renegotiate terms due to the imposition of tariffs (read more in our brief on tariff impacts on project agreements).

Regulatory considerations

The price of drug products in Canada is heavily regulated, and, in relation to patented medicines, the federal regulator (the Patented Medicine Prices Review Board) may be asked to reassess or refrain from enforcement, should tariffs become applicable to pharmaceuticals and impact access to drugs for Canadian patients. If tariffs are applied to pharmaceuticals sold into Canada, compliance with PMPRB pricing could be at risk if the Canadian list price is increased above PMPRB thresholds to address the tariff impact.

Other contracts

If an imposed tariff impacts price directly, or affects supply chain costs, companies should consider their ability to renegotiate price, looking closely at any mechanisms for suspending or modifying contract thresholds (such as minimum purchases, by units or by dollars). Companies should keep in mind all contracts where the price was previously negotiated based on non-tariff prices, including contracts on logistics, warehousing, importing and distributing.

Transfer pricing

If there is a transfer pricing agreement between, for example, a U.S. head office and a Canadian subsidiary, based on tax and pricing strategies, it will be important to work through the impact that tariffs may have directly on the price, or to adjust cost and revenue expectations underpinning the transfer pricing model.

RFPs and bids

Consider the impact of tariffs on upcoming RFPs/bids, ongoing negotiations and submitted RFPs/bids. Companies will want to review the terms of an RFP/bid in relation to the ability to make amendments if there is a “material change”, as well as to consider what rights, obligations and ability for parties to negotiate are available in respect of pricing. An RFP or bid can be impacted directly or indirectly by tariffs, arising out of—among other things—rebates, supply chain disruptions and costs, and access (to materials and expertise). Consideration might also be given to termination rights to disengage from an RFP process, terminate an RFP or withdraw a submitted bid, or other mechanisms to allow renegotiations in the event of tariffs affecting a particular procurement.

Changes in supply chain

Life sciences products tend to be highly regulated. This means that proposed changes in the supply chain can require amendments of regulatory approvals or notifications to regulatory authorities. Whether the product is a pharmaceutical, biologic, medical device, product of a clinical study, natural health product/dietary supplement, food or other regulated products, different regulations and policies apply to changes in the supply chain.

Drug and device shortages

If tariffs or the threat of U.S. tariffs result in drug or device shortages, market authorization holders in Canada will want to be mindful of their mandatory obligations relating to early reporting of shortages or discontinuations.

Clinical trials

For U.S. companies that were willing to continue to supply pharmaceuticals to Canadian patients after a clinical trial has ended, and who based that commitment on assumptions relating to price, such companies may be prompted by tariffs to re-examine that commitment, to assess whether the U.S. company will continue, or is obliged to continue, supplying pharmaceuticals post-trial in Canada.

Research investments

Companies and research institutes/universities conducting research that receive funding/grants from U.S. sources should confirm whether their funding/grants for research and trials are set to continue.

Intellectual property

It remains to be seen whether Canada will consider retaliating beyond its own tariffs, possibly by restricting intellectual property rights or by re-introducing compulsory licensing, as some commentators have suggested. When NAFTA, the predecessor to the current free trade agreement (USMCA), was negotiated in the late 1980s and came into effect on January 1, 1989, the United States required that compulsory licensing of pharmaceuticals be removed from Canada’s Patent Act in exchange for the benefit of free trade. As part of those free trade negotiations, Canada established the PMPRB, giving it jurisdiction via the Patent Act to review excessive pricing of patented medicines.

Industry associations

Life sciences companies will want to communicate with their industry associations (e.g., IPO, Innovative Medicines Canada, BioteCanada, Medtech Canada, etc.) to continue to keep themselves apprised of the possible business impacts of tariffs on the life sciences industry.

 
Read more Tariffs and trade briefs.