Trump’s Pharma tariff threat: Analysing the implications for European CLOs

Last week, US President Trump announced a sweeping investigation into possible tariffs on pharmaceuticals – a sector that, until now, had largely escaped the trade measures levied on automobiles, copper, and other industries. The duties under consideration, pencilled to take effect in 12 to 18 months, would apply across the entire drug-development chain, from active ingredients to finished products and, in characteristically hyperbolic fashion, could be set as high as 200%.

The subsequent sell-off in pharmaceutical shares was brief, suggesting that markets have largely looked through the news. Although some observers view the announcement as a negotiating tactic aimed at pharmaceutical companies outside of US, as active CLO investors, we see it as a prompt to undertake a thorough review of the exposure to pharmaceutical borrowers within the loan collateral backing European CLO investments.

Healthcare: the largest sector in the European CLO universe

An examination of the underlying loans in European CLOs shows that roughly 16.5% of collateral comes from healthcare companies (Figure 1). Within that headline figure, the healthcare sector is highly diverse. Of this healthcare exposure in European CLO collateral, approximately 9.1% is tied to Healthcare Services & Products, 6.4% to Pharmaceuticals, and the remaining 1% to Biotechnology.

Not every subsector would be affected to the same degree by a potential global tariff dispute. Healthcare-services businesses, such as care-home operators and hospital groups, are largely domestic in focus, deriving most revenue locally rather than from the US. They also benefit from structurally growing demand as populations age in Europe.

More broadly, many European healthcare companies have already taken steps to prepare for possible tariff-related disruption. The sector’s sophisticated supply chains provide the flexibility to adapt to shifting trade dynamics, whether by sourcing inputs from alternative regions or by re-engineering manufacturing and distribution networks to mitigate tariff impact.

Figure 1: Sector weights in CLO universe

Source: Janus Henderson Investors, as at 18 July 2025.

Spotlight on pharmaceuticals

Because the US investigation is currently aimed squarely at pharmaceuticals, we have taken a closer look at this exposure within the European CLO collateral universe.

The pharmaceutical bucket is itself well diversified: more than 25 mostly European issuers account for the circa 6.4% pharmaceuticals share, with no individual name above 1% and the top five together representing around 3%.

Leveraging our global healthcare credit expertise, our analysts note the following about the largest pharma exposures in CLO collateral:

Limited tariff exposure due to geographic mix
• Several sizeable borrowers are European-centric manufacturers whose sales are concentrated in the European Union and, to a lesser extent, emerging markets.
• Given their modest US revenue contribution, any new tariffs would have only a muted impact on revenue performance.

Insulation through product focus
• Several borrowers operate largely outside the scope of the proposed US measures, which currently target human pharmaceuticals.
• Examples include borrowers focused on veterinary services and animal-health products, segments that may remain exempt from human-drug import duties.

Building resilient portfolios through an active approach

AAA-rated CLO tranches have shown themselves to be one of the most resilient asset classes in global credit markets. Thanks to multiple layers of structural protection and robust collateral coverage, they have recorded virtually zero defaults through several economic and business cycles, spanning decades, and through market volatility.

While lingering uncertainty over global tariff disputes could introduce episodic price volatility in corporate loans – and by extension in CLO bonds – such moves are typically technical rather than fundamental. Indeed, periods of dislocation often create attractive entry points for well-researched AAA CLOs.

In this environment, the skill of the CLO manager is paramount, given they are responsible for selecting and managing the pool of loans that make up a CLO.  Rigorous credit analysis and disciplined risk assessment within the underlying loan pools are key to preserving capital and capturing upside.

As active CLO investors, we pair our in-house fundamental research on every loan and bond in a portfolio with a thorough appraisal of each CLO manager’s investment decisions and risk-management framework. This comprehensive underwriting process allows us to identify those managers who consistently anticipate and mitigate risks, and to express those views by constructing diversified, high-quality CLO portfolios designed to deliver more stable returns even through elevated market uncertainty.