THE FIVE DIMENSIONAL CHALLENGE OF THE PHARMA INDUSTRY
The pharmaceutical industry, one of the most profitable industries in the world, is currently under a tsunami of pressure, and 2022/2023 is looking to bring more disruption and more uncertainty than ever before.
Here are the 5 key challenges that are facing the pharma industry in 2022:
1. Disruption of the SUPPLY CHAIN
2. Increasing COSTS in all parts of the value chain.
3. Demand for LOWER PRICES.
4. Increasing REGULATORY DEMANDS.
5. Decreasing availability of CAPITAL.
1. Disruption of the SUPPLY CHAIN
Supply chains have witnessed an unprecedented disruption all around the world and emerged as one of the pharmaceutical industry’s biggest challenges.
A heavy reliance on China for raw materials, and on India for generic drug production, have caused huge supply shortages. China and India – countries among the hardest hit by COVID-19 - account for appr. 31% of FDA-registered facilities around the globe according to the FDA. Over reliance on single-sourced materials from a few markets and vulnerabilities caused by the industry’s products containing multiple ingredients, and that missing any one individual ingredient can ultimately lead to a critical drug shortage, is not necessarily unique to the pharmaceutical industry but magnified due to the high quality and regulatory standards to which the industry must abide.
Since the financial crisis, the pharma industry has tried to optimize supply chains by cutting costs and making production lines viable, but it has relied on legacy technologies.
Since the financial crisis, the pharma industry has tried to optimize supply chains by cutting costs and making production lines viable, but it has relied on legacy technologies and been slow to embrace new technologies. However, recently new advancements in biomanufacturing and synthetic biology, has reduced lead times significantly.
In addition to product shortages and technology challenges, rising shipping rates, port congestion, geopolitical tensions and increasing energy costs are now adding to the pot of supply chain challenges and making it more difficult than ever for pharmaceutical companies to maintain reliable supply chains. The pharmaceutical industry spends more than $1 billion per year on energy expenses – significantly more than most other industries. This is due to pharmaceutical products having to be produced, transported, and stored in exacting temperature, pressure, humidity, cleanliness, and containment conditions – all requiring a lot of energy. With energy costs soaring, shouldering the burden of this supply chain expense is now more challenging than ever.
2. Increasing COSTS
Pharmaceutical companies across the board are being seriously impacted by spiraling inflation rising to more than eight percent across Europe. Inflation triggers that are driving up costs for drug manufacturers include energy prices (increasing up to 65 percent for gas and 30 percent for electricity), transportation costs (increasing up to 500 percent) and manufacturing input costs (up 50 to 160 percent). Consequentially, the industry is experiencing declining profit margins in 2022. The dilemma facing pharma manufacturers engulfs operating in an environment combining rampant cost inflation with policies that demand continuously lower prices.
Additionally, we are seeing clear first signs of salary increases that are driving up costs as the supply of skilled workers is unable to meet the demand. Moreover, the so called “Great Resignation” is over us – a trend magnified by the pandemic, whereby workers are quitting their jobs in pursuit of better opportunities. This has again driven up salaries and sparked a record-breaking number of vacancies causing drug development and manufacturing bottlenecks. Moreover, the pandemic didn’t just open the floodgates to the Great Resignation, it also seems to have created a boom in early retirement.
Perhaps the most critical challenge facing the pharma industry is the skills gap that have emerged over the past few years and which can expect to haunt the industry for at least a decade.
Perhaps the most critical challenge facing the pharma industry is the skills gap that have emerged over the past few years and which can expect to haunt the industry for at least a decade. 87% of executives say they either are experiencing skill gaps now or expect to within the next few years. But less than half of respondents had a clear sense of how to address the problem (McKinsey study). Specifically in the pharmaceutical industry, we see a growing talent gap as the skills of the pharma workforce have not yet aligned with the new world of biopharma that are currently struggling to find much needed talent within automation, digital transformation, computer science, and process analytical technology (PAT) etc. However, a surprising trend from 2021 has been the rapid adoption of digital technologies in clinical trials, enabling the decentralization of readouts in clinical trials through mobile phone applications.
Essentially, reskilling or upskilling employees have now become a survival strategy for pharma.
3. Demand for LOWER PRICES
Pricing pressures will accelerate as governments attempt to pay for increasing healthcare costs with very limited resources. In consequence, companies will need to simplify and reduce costs or watch margins evaporate. Moreover, governments will expectedly increase pressure on sustainability issues as the pharma industry leaves a surprisingly large carbon emission footprint, significantly higher than that of even the automobile sector. So, sustainability and cost-containment policies remain a key threat to pharmaceutical companies in spite of drugs forming only a small proportion of overall healthcare costs (around 12% in Denmark and 9% in the US). The high profitability of pharmaceutical companies make them subject for targeting by healthcare providers trying to reduce costs. Hence, government funding restrictions has already and will impact drug reimbursement prices significantly.
A study conducted by Tufts University found that it cost $2.6 billion dollars to develop a new drug, taking into account the costs of unsuccessful research and lost investment opportunity. So, developing new drugs is a high risk and costly affair, yet this fact is often overlooked by governments seeking to cut costs. Much like during the financial crisis, a recession will most probably cause states to collect less tax revenue while spending large sums to save failing industries – e.g. banks. A toxic cocktail that in turn will reduce payers’ ability and willingness to pay for products and make them less willing to give funding unless the products are truly innovative.
4. Increasing REGULATORY DEMANDS
Over the past few years, the pharma industry has seen a proliferation of regulatory changes, with a multitude of new regulations including the imminent overhaul of the pharmaceutical legislation for Europe by the end of 2022.
The average time to reimbursement for innovative treatments across EU and European Economic Area (EEA) countries continues to be as long as 500+ days.
The average time to reimbursement for innovative treatments across EU and European Economic Area (EEA) countries continues to be as long as 500+ days, and the industry is voicing concerns about these delays as they impact access to novel medicines. EFPIA has investigated the root cause of unavailability and found there are 10 interrelated factors that explain unavailability and delays. Several of these are rooted in the regulatory domain – hereunder the processes in the EU member states ranging from slow regulatory processes to late initiation of market access assessments, to duplicative evidence requirements, to reimbursement delays etc.
Compliance pressures in pharma have never been higher. From October 2020 to September 2021, the FDA issued more than 200 warning letters containing 1,120 citations to drug companies. In the face of rapidly evolving regulatory and marketplace demands, compliance teams are under constant pressure to do more with less, requiring a fundamental shift that involves the use of technological accelerators.
Regulators need to become more directly involved in how to secure patient centricity and empowerment. Especially for rare diseases, where a patient’s appetite for risk might differ from those of the regulators and prescribers.
Going forward, regulatory processes across the EU need to be modernized to keep pace with the new development of medicines including improving measures to fast-track new vaccines and therapies in the event of future pandemics and reducing bureaucracy to make the EU more attractive for investment. Moreover, national authorities across the EU needs to implement EU legislation faster and more clearly, in order to avoid the long and ambiguous transition period we see today. Essentially, regulators need to become more directly involved in how to secure patient centricity and empowerment. Especially for rare diseases, where a patient’s appetite for risk might differ from those of the regulators and prescribers.
Finally, and as we have recently seen with LEO Pharma’s broad withdrawal of marketing authorizations across numerous markets, the non-harmonized reimbursement procedures are not fit for purpose and forming part of the underlying reasons as to why production is forced out of certain regions.
5. Decreasing availability of CAPITAL
In 2021 and 2020, new capital invested in IPOs and funding innovation reached an all-time high of $105 billion with record biotech valuations in February 2021. Essentially, a restructuring of Big Pharma took place in those years, in the guise of acquisitions and partnerships to support biotech business growth and driven by the high demand for medicines to treat diseases in specialist therapeutic areas, such as oncology, autoimmune, metabolic, hormonal, cardiovascular, neurological, inflammation and infectious diseases.
Ongoing volatility in biotech public markets along with a lack of big pharma acquisitions has fueled a rotation by investors out of expensive growth sectors like biotech.
In spite of the biotech industry performing strongly during the COVID-19 pandemic, it now faces challenges to valuations and access to capital. Ongoing volatility in biotech public markets along with a lack of big pharma acquisitions has fueled a rotation by investors out of expensive growth sectors like biotech. Moreover, a rapid acceleration in economic growth as well as a rapid rise in interest rates and inflation have sent biotech valuations plunging and access to new capital in the public markets became virtually non-existent in 2022. In the first three months of 2022, for example, the amount of funding going to private European biotech companies fell steadily compared to the end of 2021.
Even though industry valuations are currently experiencing a significant downfall, especially when it comes to early-stage companies, its fundamentals remain strong, with biotech innovation projected to remain a major driver of pharma revenues in the coming years. A potential recession is expected to further support this trend driving cash rich pharma companies to dial up acquisition appetite and acquire struggling biotech companies with a dried-up cash base. So, as valuations goes through the floor and financing becomes more challenging, a buyer’s market may emerge, with big pharma reconsidering targets that proved too expensive to justify in the past.
The challenges facing the pharmaceutical industry in 2022 are varied, from pricing, regulatory and delivery challenges to skilled labour shortages and shortened timelines. Uncertain times ahead will require a greater commitment to enterprise agility, ESG, supply chain resilience and the adoption of innovative technologies to improve efficiency. Moreover, the new world of virtual and hybrid work demands flexibility, and most life sciences companies will still be adjusting to the new norms as they diligently navigate the seemingly unavoidable cocktail of more disruptions and added uncertainty.