July 05, 2022 | Pharma and Life Sciences
Around the world, rising inflation is having a significant impact on the pharmaceutical industry. The majority of pharmaceutical companies are seeing high costs for raw materials and are expecting a decline in profit margins in the subsequent quarters of 2022.
The pharmaceutical market is highly regulated when it comes to the pricing of drugs, both generic as well as prescription. However, pharma companies are facing increasing pressure on drug pricing. The major reason for this increasing pricing pressure is the high rate of inflation.
Reasons for the steep increase in inflation include high energy and food costs, along with supply chain constraints. The Russia-Ukraine war and the subsequent rise in energy prices have driven up the prices of almost all commodities. Additionally, the strict lockdowns imposed in several cities in China to combat the COVID-19 pandemic have created numerous logistical disruptions, leading to an increase in freight prices. All these factors are significantly driving inflation.
As drug prices are highly regulated, the rise in costs puts pressure on pharmaceutical companies to keep prices under control.
In the European Union, drug prices are set by national pricing and reimbursement authorities. These prices are further subject to automatic and additional price reductions, which is a major cause of concern during the current situation.
According to GlobalData research, except for the U.S., the prices of branded drugs in larger pharmaceutical markets such as Japan, Germany, Australia, Spain and France have fallen by an average of 2%-9% between 2017 and 2021.
To ease high pressure of drug pricing, the pharmaceutical industry in Europe is seeking support from the European Union (EU) ministers for health. The Medicines for Europe’s Executive Committee is seeking support, as restrictive pricing measures and inflation could undermine the availability of medicines.
The committee explained in a letter that due to the high inflation rate of over 7% throughout Europe, there are significant concerns around the cost for manufacturing drugs. For instance, there is an increase of 30%-65% in energy prices, about 500% increase in logistics as well as an increase of 50%-160% in the input cost of raw materials. The committee further wrote that it is difficult for manufacturers to operate in an environment combining rampant cost inflation with policies that continuously lower prices. They asked European health ministers and EU commissioners for support in creating more sustainable policies to assist the industry in mitigating the impact of rising costs and reform EU drug pricing models.
Companies such as Viatris, Johnson & Johnson, Bayer and GlaxoSmithKline are also focusing on higher prices faced by their businesses. The effect of higher costs due to inflation had a major role in Viatris’s lower-than-expected profits for 2022. Similarly, in Bayer’s fourth-quarter conference in March, CEO Werner Baumann said that the company is noticing "increasing inflationary pressure and volatility of global supply chains across industries."
Even with ongoing supply-chain delays, shortages and an all-time high inflation rate, there are still opportunities for companies to optimize spend.
Pharmaceutical companies can share best practices and optimize resource use across the business and focus beyond basic spend KPIs to drive business value.
Additionally, they can also leverage indirect procurement as an internal crisis response resource as well as look at data beyond spend analytics.
By taking advantage of these opportunities, pharmaceutical companies can work toward mitigating the impacts of inflation and keep drug costs and pricing under control.
Learn more about how GEP can help pharma companies manage the inflation.