As the high inflation threat is on the subsiding verge, the second-round effects may not go away quickly. Pharma may have to go through a difficult path with slowly falling inflation in regions apart from the US.
Inflation, which has not been addressed, is a growing concern for the global pharma sector in 2023. Although its effect is going to be less severe with time, there are reasons which suggest that the pressure of inflation is going to be more consistent in certain markets than what was previously assumed. This may be related to pharma firms dealing with higher input costs, which are semi-permanent, and also other challenges that are interlinked for longer than currently predicted. The level of the sales growth hindrance as well as profitability are bound to impact companies from various angles. To an extent, the pharma sector is more resilient to challenges than many other sectors.
That said, the companies should brace themselves for a possibility of more higher continuous inflationary pressures than what was earlier assumed. This may be related to new supply chain disruptions, prices of raw materials that are not fixed, healthcare spending that is more tight, constraints on pharma expenditure, manufacturing activity stress, and demand that has turned weak.
Notably, the policymakers are looking to respond to the inflation crises by way of bringing new regulation of drug prices framework. In this context, the United States Reduction Act is going to get prominent attention in 2023.
The act has numerous provisions that lower the costs of prescription drugs, which include letting Medicare bargain on the selected cost of medicines. These negotiated prices are not going to be applied until 2026, but the medicines that are selected for Medicare price negotiations will be launched in September this year. The negotiations with regards to these products are expected from October 2023 through August 2024.
In this act, the pharma companies that are operational in the US will have to content with the inflation rebate imposition for utilization of medicare in 2023. Compliance with the highly complex law will ensure that the manufacturers will have to pay rebates to Medicare in cases where drug prices are raised at a faster and higher rate than the rate of inflation.
Similar possibilities are heard across Europe as well, where the priority will be to curb price growth. The European pricing rigidity and reimbursement system means that there happens to be a limited scope for facilitation of significant hike in the prices. Countries like Denmark are all set to embark on price cap negotiations that are multiyear due to the innovative pharma industry, in which the present inflationary landscape is going to have a complex influence on the finalised deal.
An enhanced global environment for increase in the drug prices may take effect friom Q3. Currently, the cost controls that are derived from the economic forces that are inflationary-driven are going to weigh on the strategies of drug pricing. The reduced profit margins could further lead to more constraints in the supply chain of products that are loss-making across certain markets. The pharma sector is expected to be affected dearly by the fallout. Nevertheless, biosimilar and low cost generic manufacturers are likely to be exposed to economic pressures.
The issues that are inflation-driven and are faced by the global pharma industry will be particularly influenced by China. The COVID-zero policies’ dramatic changes and reopening of the borders have also brought opportunities but also short-term risks. Without a shred of doubt, manufacturing sector in China has struggled since the COVID-zer policies have been lifted. Although supply chain issues have been relatively moderate, there have been signs that new orders and production are contracted for Q1. This situation might as well begin to take a u-turn across major manufacturing centres considering infections related to COVID-19 peak in the upcoming months. There is, however, a risk that is looming of economic pain that may reduce the downstream effect on the global pharma supply chain networks.
Because of an adverse impact on the availability of the workforce and also because of delays that are witnessed in the export hubs, the scale of new infections and the questionable ability of Chinese hospitals to deal with the current infection wave may lead to supply chain disruptions. There could be some pharmaceutical manufacturing in China that is diverted to domestic use in the early half of 2023. It is predicted that Q1 and Q2 may have the worst impact on a potential worldwide supply chain bottleneck. That said, the situation that is unfolding could stabilise before mid-year this year. The suggestion states that this could elevate some API prices across the world and thereby make it extremely hard to get certain products in the near term.
The strategies that are put in place by the pharma companies to face this year of uncertainties appear to be around reducing administrative expenses, general expenses and sales. It might happen that some companies will reform their R&D to keep costs in check. Having said that, there are reasons to think that companies which are looking to invest more in this are likely to be in a stronger position and hence could reap the benefits of worldwide economic rebound as well as cost driver stabilization from next year.