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The inflation crisis shakes up the pharmaceutical industry

Pharmaceutical companies are now dealing with inflation, a problem that used to be considered long gone. With rising rent and food prices, consumers have less money to afford brand-name drugs or cover their insurance copayments. But how did we end up here?

Market inflation starts when oil prices rise

For the past three (almost four) decades, the US maintained low interest rates. The last time the market had over 4% of inflation was in 1991. This stability was crushed by the rising energy and prices, which affect production, shipment, and even the use of consumer products. The conflict in Ukraine has only helped to deepen the inflation crisis. Combined with the massive monetary expansion by central banks to offset the financial impacts of the pandemic, these shocks have created the perfect storm for inflation - and this inflationary cycle will have significant consequences for both the pharmaceutical supply chain and individual health.

Between filling a prescription or filling the tank to drive to work, most buyers opt for the second option. According to Jeff Lagasse, editor of Healthcare Finance, wages have not kept up with these rising costs:

“Overall hourly earnings have increased 28% since 2014 compared to an increase of 35% for prescription drugs, though wages have increased at a faster rate in recent years,” he writes.

It is hard to forecast how long inflation will last, although it has lasted longer than the summer 2008 crisis. Hopefully, the market will not repeat the 1973-1982 decade-long economic debacle which was also caused by rising energy costs. A White House report, written by Chair Cecilia Rouse, Jeffery Zhang, and Ernie Tedeschi, offers an optimistic analysis of the matter:

“The inflationary period after World War II is likely a better comparison for the current economic situation than the 1970s and suggests that inflation could quickly decline once supply chains are fully online and pent-up demand levels off,” state the authors.

A broken system means broken pricing and shortages

A recent NiceRx report states that the out-of-pocket prescription costs will reach $6.2 trillion by 2028. The report also explains that drug prices have rose across all categories:

“Humulin, a brand of insulin, had the biggest price hike over the last ten years, rising by an average of 1,070.1% from $67 in 2012 to $1,512 in 2022,” it explains.

Some of the rising costs can be attributed to hospital markups, which were not evident until the implementation of the Hospital Price Transparency Final Rule in January 2021. A recent study published in JAMA Internal Medicine, discusses the high markups on cancer therapeuticals:

“Of 61 NCI-designated cancer centers, 27 (44.3%) disclosed private payer–specific prices for at least 1 top-selling cancer therapy as required by federal regulations. Median drug price markups across all centers and payers ranged between 118.4% (sipuleucel-T) and 633.6% (leuprolide),” concludes the study.

This does not only impact consumers. With increasing costs in labor, energy-dependent APIs, and transport, the margins for manufacturers are also decreasing and might have two direct effects:

  • If manufacturers try to cut costs, quality could be compromised and affect patient safety.

  • Driving down margins can force manufacturers to choose to discontinue products or exit markets. This could result in more fragile supply chains for drugs and an increase in drug shortages.

As Americans have recently seen with the shortage of infant formula, small shocks to the system are more challenging to respond to when supply chains are fragile and supply is concentrated. As reported on 60 Minutes in late May, 2022, 40% of generic drugs in the US have only one manufacturer - and any quality, regulatory, or market decisions could severely limit the availability of these core treatments for patients. Get ready - a shock is coming to a pharmacy near you.

Is there light at the end of the tunnel?

Recently, US President Joe Biden has expressed interest in capping the cost of insulin to $35, taxing pharmaceutical companies with exorbitant prices, allowing Medicare to negotiate drug prices and limiting how much Medicare-enrolled seniors can spend on prescriptions to $2,000.

“Imagine what it’s like if you don’t have insurance and you don’t have the cash, to look at your child knowing what they need, and knowing there’s not a damn thing you can do about it. You’re deprived of your dignity, how do you look at your child?” said Biden back in April. But it's uncertain that these 'top-down' fixes will actually come to pass nor that they will resolve the underlying issues of supply in the industry.

As the crisis continues, pharma companies need to face inflation head-on, by planning and executing marketing and development strategies in a more efficient and agile manner. It is now critical to position the brand on the minds of consumers, ease the way in which consumers can purchase or access pharmaceutical products and look for ways to make formulations that are more affordable without compromising quality. But let’s be clear - this current inflationary cycle is going to impact the cost structure of drug manufacturers, reduce margins, and most likely result in increasing pressure on supply chains. And with our current regulatory structure, which has increased the cost of market entry, the dynamic market entry that has historically addressed the issue of supply seems anemic at best.

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