Is the pharma industry particularly vulnerable to inflation?

Sales & Marketing

The pharma industry is often thought of as one that does not struggle in difficult economic periods – even when times are hard, everyone still values their health. However, Ben Hargreaves finds that greater pressure over drug pricing has emerged alongside inflation, effectively limiting the industry’s ability to price away the pain.

Inflation is running high globally. Following the impact of the COVID-19 pandemic, there have been various factors contributing to rising prices on many goods and services. As of February 2023, the inflation rate in the US was gauged to be at 6%, having dropped from highs of 9% in June 2022 and marking the lowest figure since September 2021. The US Federal Reserve calculates that inflation peaked in 2022, but does not expect to see it return to target levels of 2% until 2025. Combining to make the situation more unpredictable is the current banking crisis that has had an impact on the biotech industry.

Many companies and industries are facing higher costs, as the price of products increase and the backlogs experienced in global supply chains lead to more competition for necessary raw materials. In addition, as high inflation leads to a higher cost of living for people, governments globally are seeking to act to either get inflation levels under control or to minimise the impact on society.

Pricing pressures

This is causing some friction between certain industries and governments, which extends to the US, where the Inflation Reduction Act ordered pharma companies to pay rebates to Medicare if they raised prices faster than inflation. In March, the US government stated that it would levy inflation fines against pharma companies who had raised prices of their medicine beyond inflation, and named 27 products that it would take action against. The drugs listed included AbbVie’s Humira (adalimumab) and Gilead’s Yescarta (axicabtagene ciloleucel). In terms of what measures will be taken, the White House stated that prescription drug companies will have to pay back Medicare the additional cost, and added that such action would discourage other companies from acting in the same way. The release also outlined that the specific action against the 27 drugs could lead to out-of-pocket savings for seniors of between $2 and $390 per dose, starting 1st April.

Annual drug list price increases are common at the beginning of each year in the US, but can also occur during the middle of the year. The price increases seen in previous years have been largely above rates of inflation, on average, according to statistics published by the US government. In 2022, 3,239 products had their prices increased in January, and a further 601 had hikes in July. The average cost increase came to an additional $150 per product, and averaged an approximate price increase of 10%.

The administration also mentioned its broader efforts to target those companies that are increasing prices consistently on certain products. The White House already targeted the major insulin manufacturers, which have been in the spotlight over rising prices of the medicine for a number of years, and encouraged them to reduce the cost of insulin to $35 per month. By naming the particular drug products that exceeded inflation rates, the US government will be hoping it can place a similar pressure to that achieved with the major manufacturers of insulin.

Essential medicines

Despite being targeted by the US administration over pricing, the pharma industry is, like many other sectors, struggling with the impact of inflation on its business. At the beginning of 2023, a GlobalData Healthcare survey found that respondents named the main challenge facing the pharma industry as being inflation. In Europe, Medicines for Europe, an organisation representing the generics and biosimilar industries, published an open letter to the European Commission on the impact the current inflation situation was causing. In the letter, the organisation cited four key issues that the situation had created or contributed to: energy costs and supply, logistics, inputs and raw materials, and skilled human resources. In particular, Medicines for Europe cited the war in Ukraine as having increasing energy prices by 65% for gas and 30% for electricity. Transportation costs were also noted to have risen dramatically, up to 500% in certain cases, due to the bottlenecks created by the pandemic and the war in Ukraine.

In a statement, the organisation concluded, “Our sector has a moral and a legal obligation to maintain the supply of essential medicines to Europe and we are fully committed to do so. However, our industry cannot operate in an environment combining rampant cost inflation with policies that continuously lower prices. We therefore call on the EU to help us tackle this challenging situation with sustainable policies that are aligned with European strategic autonomy.”

In terms of what help it was calling for, this extended to recognising the prescription medicine sector as critical in the European Union and therefore asked for it to be classified as such in order to gain access to constrained energy supplies. It also called on member states to take action to reduce inflation, and to allow companies to adjust prices to the level of inflation. The latter point is one which is arising as an issue for the pharma industry – globally, it is facing pricing pressures related to drug cost. This limits, to a degree, its ability to relieve some of the inflationary pressure by adjusting prices accordingly.

Beginning to bite

The warning from Medicines for Europe over the impact of inflation arrives as a number of companies in the industry noted the repercussions during financial updates. In recent fourth quarter financials, Sanjeev Narula, CFO of Viatris, cited inflationary headwinds as a reason behind lowered gross margins. In Q4 results, Novartis also noted that Sandoz’ results had suffered from “higher-than-expected inflationary pressures on input costs,” Harry Kirsch, Novartis’ CFO, said.

This could be expected, given that Viatris and Sandoz, as high-volume generics manufacturers, are both heavily reliant on the global supply chain for raw materials, and consume high amounts of energy in the manufacturing process. When this is combined with a high-volume, low-margin business model, the impact could be outsized when compared against other companies in the pharma space. However, this has not stopped other pharma businesses from suggesting that inflation will continue to make operations difficult in 2023. Merck KGaA released financial results at the beginning of March, and stated that ‘high inflation’ will lead to a ‘challenging year’ in 2023, alongside decreasing COVID-19-related demand and a slowing semiconductor market. Novartis also stated during its financials on its core business that it expects inflationary headwinds to continue in 2023, and for the inflation impact to be ‘slightly higher’ in 2023, compared to the previous year, highlighting the ongoing challenges.

The difficulty arrives in how the industry prepares for the possibility of continued inflation. With pressure coming from governments to keep prices low, but costs remaining high, this may prove challenging to the industry. Although inflation is projected to continue to fall, the current instability of the banking sector could potentially destabilise efforts to rein in high levels of inflation. The strategies being adopted by the pharma industry are similar to those adopted across many industries at this time: cutting expenditures, modifying R&D to reduce costs, and sitting tight to see what happens in the short-term. In the long-term, the hope will be that inflation continues to fall, the outcome otherwise could be painful.