Inflation in the world is off the charts. Since the impact of the COVID-19 pandemic, there have been various factors that have contributed to rising prices for many goods and services.
As of February 2023, the U.S. inflation rate was estimated at 6%, down from a peak of 9% in June 2022 and the lowest since September 2021. The Federal Reserve estimates that inflation peaked in 2022, but does not expect it to return to the 2% target until 2025. The situation is becoming more unpredictable coupled with the current banking crisis that has affected the biotech industry .
Many companies and industries are facing higher costs as product prices rise and lagging global supply chains lead to increased competition for needed raw materials. In addition, as high inflation increases the cost of living, governments around the world are seeking to either control inflation or minimize its impact on society.
Price pressure
This is causing some friction between some industries and governments, which extends to the US, where the Inflation Mitigation Act mandates that pharmaceutical companies pay Medicare rebates if they raise prices faster than inflation. in March, the US government said it would levy inflation penalties on pharmaceutical companies that raised the prices of their drugs above the rate of inflation, and named 27 products against which it would take action. The drugs listed included AbbVie’s Humira (adalimumab) and Gilead’s Yescarta (axicabtagene ciloleucel). As for the action to be taken, the White House stated that prescription drug companies would be required to reimburse Medicare for the additional costs, and added that such action would discourage other companies from acting in the same manner. The press release also stated that the specific actions against the 27 drugs could result in savings to seniors of between $2 and $390 per dose, beginning April 1.
Annual drug price increases are common in the United States at the beginning of each year, but can also occur in the middle of the year. According to statistics released by the U.S. government, price increases seen in previous years have averaged well above the rate of inflation . In 2022, the prices of 3,239 items were raised in January and another 601 items were raised in July. The average increase amounted to an additional $150 per product, and the average price increased by about 10%.
The administration also cited its broader efforts to crack down on those companies that consistently raise prices on certain products. The White House has already targeted major insulin manufacturers, which have been under scrutiny for years for rising prices of the drug, and called on them to reduce the cost of insulin to $35 a month . By naming specific drugs that have been priced above the rate of inflation, the U.S. government hopes to be able to apply the same pressure that has been achieved with the major insulin manufacturers.
Essential Medicines
Despite being hounded by the U.S. administration over pricing, the pharmaceutical industry, like many other industries, is struggling with the impact of inflation on its business. In early 2023, a GlobalData Healthcare survey found that respondents cited inflation as the top challenge facing the pharmaceutical industry. In Europe, Medicines for Europe, an organization representing the generics and biosimilars industry, published an open letter.to the European Commission about the impact of the current inflationary situation. In the letter, the organization mentioned four key issues that the situation has created or contributed to: energy and supply costs, logistics, resources and raw materials, and skilled human resources. In particular, Medicines for Europe cited the war in Ukraine, which has led to energy price increases of 65% for gas and 30% for electricity. It also noted that transportation costs had risen dramatically, in some cases by up to 500%, due to bottlenecks created by the pandemic and war in Ukraine.
In a statement, the organization concluded, “Our sector has a moral and legal obligation to support the supply of essential medicines to Europe, and we are fully committed to doing so. However, our industry cannot operate in an environment that combines rampant cost inflation with a policy of constant price cuts. We therefore call on the EU to help us manage this difficult situation with sustainable policies consistent with European strategic autonomy.”
In terms of the kind of help he was calling for, this extended to recognizing the prescription drug sector as critical in the European Union and therefore requiring it to be classified as such in order to access limited energy sources. He also called on Member States to take measures to reduce inflation and allow companies to adjust prices in line with inflation. This last point emerges as a problem for the pharmaceutical industry – globally it faces price pressures related to the cost of medicines. This to some extent limits its ability to partially alleviate inflationary pressures by adjusting prices accordingly.
I’m starting to bite
The warning from Medicines for Europe about the impact of inflation came as a number of companies in the industry noted the effects during financial updates. In recent fourth-quarter financial reports, Sanjeev Narula, chief financial officer of Viatris, cited inflation restraints as the reason for the decline in gross margins. Novartis also noted in its fourth-quarter reports that Sandoz’s results suffered from “higher-than-expected inflationary pressures on input costs,” said Harry Kirsch, Novartis’ chief financial officer.
This is to be expected given that Viatris and Sandoz, as large generics manufacturers, are highly dependent on the global raw material supply chain and consume large amounts of energy in the manufacturing process. When this is combined with a business model with high volumes and low margins, the impact can be huge compared to other pharmaceutical companies. However, that hasn’t stopped other pharma companies from suggesting that inflation will continue to hamper operations in 2023. Merck KGaA released its financial results.in early March and said that “high inflation” will lead to a “challenging year” in 2023, along with lower demand related to COVID-19 and a slowing semiconductor market. Novartis also said in its financials for its core business that it expects inflationary headwinds to persist in 2023, and the impact of inflation will be “slightly higher” in 2023 compared to the previous year, underscoring the current challenges.
The difficulty lies in how the industry prepares for the possibility of continued inflation. Given the pressure from governments to keep prices low and costs high, this could prove challenging for the industry. While inflation is forecast to continue to decline, the current instability in the banking sector has the potential to destabilize efforts to contain high levels of inflation. The strategies adopted by the pharmaceutical industry are similar to those adopted by many industries today: cutting costs, modifying R&D to reduce costs, and waiting to see what happens in the short term. In the long term, the hope is that inflation will continue to fall, otherwise the outcome could be painful.
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