Why Major Pharmaceutical Stocks Tumbled on Tuesday

Many investor eyes were on the pharmaceutical industry on Tuesday, and not necessarily for the right reasons. The Trump administration's promised tariffs were set to go into effect the following day, and the sector has been mentioned as a key area of focus for these.

So despite scattered items of good news throughout the industry that day, the market was generally wary of pharma titles and stayed away. Major stocks in the sector took notable hits, including but not at all limited to Pfizer (NYSE: PFE), Merck (NYSE: MRK), and Eli Lilly (NYSE: LLY). The trio closed the day down a respective 3.2%, 2.9%, and 2.7% in price.

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Call the lobbyists!

The market might have been better able to swallow the looming tariffs if there weren't so much uncertainty about them. As of late afternoon Tuesday, it was still unclear how much the U.S. would levy foreign manufacturers of medicines. While speculation has been rife and the president has said these would be 25%, a giant question mark was hanging over the matter.

Naturally, some of the most determined pharma industry lobbyists were campaigning for at least a ramp-up to those 25% charges. According to a report from Reuters published that morning, the industry's collective lobbying effort is centered on phasing in those tariffs incrementally, rather than imposing the full amounts straight away.

The pharmaceutical industry is particularly vulnerable to levies on foreign manufacturers. Both drug development and fabrication are complex endeavors, and in our globalized world, many elements of the two have shifted to lower-cost markets outside our borders. Even drug production that is located in the U.S. often relies on components made in foreign countries.

Perhaps the Tuesday pharma sell-off was mitigated by indications Trump and his team might be amenable to either a softer or more gradual approach to industry tariffs.

Some good news got buried

That bearishness about the current international trade situation obscured numerous pieces of good news announced by industry players, both large and small.

Pfizer, for one, announced well before market open that the European Commission (EC) has expanded the indication for the company's Abrysvo respiratory syncytial virus (RSV) vaccine. The shot can now be taken in the 27-member European Union for the prevention of lower respiratory tract disease caused by RSV in patients aged 18 to 59. Previously, it was approved only for those over 60.

As for Eli Lilly, on a sunnier market day, investors might have been cheered by the news that the company's hottest product has found a new outlet. On Tuesday, up-and-coming telehealth specialist Hims & Hers Health announced it aims to be a retailer selling branded versions of tirzepatide. This is the key ingredient in Eli Lilly's highly popular Zepbound obesity drug.

As weight-loss drugs are still rare birds on the market, it's entirely within reason to believe that the opening of a new distribution outlet will easily benefit the company behind tirzepatide. The pharma giant issued a statement saying that it currently has no affiliation with Hims & Hers; however, unofficially, we shouldn't be surprised if they're pleased with this development.

The uncertainty principle

If there's one thing investors dislike, it's uncertainty. Tariffs are scary enough, but they can be doubly so in instances like this, when close to (apparent) launch we still don't have concrete information about their scope and scale. There's also no telling how the resulting trade fight could play out, and whether it'll last for a long time.

On a brighter note, the Trump team has shown a willingness to be flexible and to back down a bit from some of its more forceful trade threats. I wouldn't be shocked if those tariffs indeed roll out in phases and are lower than expected -- or even delayed. Let's not abandon hope for the pharma sector just yet.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck and Pfizer. The Motley Fool has a disclosure policy.