The key threats to the global pharma industry

Inflation, energy shortages, geopolitical crises and supply chain dependency, especially on Asian API’s …

In the Conference Board C-Suite Outlook 2022, more than half of CEOs worldwide (55 percent) expect increased price pressures to continue through mid-2023 or beyond. Inflation has risen to become the second-largest external threat. Most respondents, including 95 percent of manufacturing industry CEOs, said they currently face input price pressures (e. g. raw materials and wages) due to supply chain bottlenecks, labor shortages and volatile energy prices. To cope, they are planning compensatory measures such as cutting costs and passing on price increases to consumers and end users where possible.

But how to cope when there are no or very limited opportunities to pass on costs to the end consumer, such as in a regulated environment like pharmaceuticals?

Recent price increases:

German pharmaceutical industry is stressed

Since 2010, the pricing moratorium has limited price increases for Rx drugs that must be reimbursed by public health insurances. Although this only applies to older drugs, especially generics, a large part of the German pharmaceutical market is affected by this regulation. And what the industry predicted is coming to pass: German manufacturers are closing their business or are outsourcing the production of drugs and active ingredients to low-cost countries, which can lead to uncontrollable shortages due to high dependence on Indian or Chinese suppliers of active ingredients.

A new study by the Institute of the German Economy (IW) and the Healthcare Supply Chain Institute from Heilbronn, commissioned by the VFA, shows that the USA and Europe are heavily dependent on Asian active ingredient manufacturers.

For example, 68 percent of the production sites for active ingredients destined for Europe are located in lower-cost Asia. In the USA, the figure is 46 percent. Since the beginning of the year, tamoxifen – one of the most widely used drugs to treat breast cancer – has been in short supply. With the shortage affecting about 85 percent of the market, tamoxifen was no longer available for about 120,000 patients. When the bottleneck occurred, there were essentially four generic manufacturers supplying tamoxifen to patients in Germany. One manufacturer withdrew from the market because it was no longer economically viable for it to produce the drug.

For a three-month pack of Tamoxifen, the generic manufacturer receives 8.82 euros from the health insurance companies (unchanged since 2010). (Price reductions from rebate contracts have not yet been deducted). This is the price that has been set by law and cannot be increased. And it is the price for which a manufacturer must produce economically. Hardly any other European country spends as little money on this drug. That is why there was a supply bottleneck in Germany in particular.
If production costs now rise – for example, because a supplier increases its prices by 50 percent, or the loss of a supplier makes it necessary to make a costly switch to a new supplier – this is not covered by the German healthcare system. Unlike in other markets, the manufacturer cannot add the additional costs to the price. If he does not want to produce at a loss, he must withdraw from the supply.

According to experts, drug prices in Germany are misallocated. Generic manufacturers are responsible for almost 80 percent of the supply and only account for about eight percent of the costs that the statutory health insurance companies pay for drugs. In 2011, they accounted for only 70 percent of supply and more than 15 percent of costs. The gap between supply and costs has widened further since then.

Dealing with delivery bottlenecks has become part of everyday life

At the beginning of May, the list of drugs in shortages reviewed by the German drug authority BfArM contained 268 products. An average pharmacy has about 100 out-of-stock items on the list. Managing these costs an average of ten percent of working time. That’s because supply shortages usually mean one thing above all: discussions with patients, doctors, wholesalers, and health insurers. The real issue is with merged supply chains where one key active ingredient used in different generic brands comes from only two sources in the world. This makes the market vulnerable to supply chain related disruptions.

„The main problem with generics is that the production of preliminary products and end products is increasingly being merged worldwide. We may have 40 different generic brands for one active ingredient, but if half of them come from the same factory or a key precursor comes from only two sources in the world, the market is very vulnerable to supply issues.“

Prof. Dr. re. pole. Wolfgang Greiner

In an expert report by Pro Generika, Dr. Martin Schwarz, managing director of the consulting firm Sarticon, explains the complex supply chains of generics (Chart 1)

Chart 1 – Based on the graphic depicting an example supply chain –

and also the vulnerabilities the system faces (Chart 2).

Chart 2 – based on the graphic depicting vulnerabilities of the drug delivery system –

In addition, it must be considered that if a market-relevant company experiences a supply bottleneck, the other market participants must also compensate for its volumes and thus generally also develop supply problems. It usually takes some time for the market to settle down again, as the lead times in drug production are very long. Four to nine months can easily pass here, sometimes more than a year. This is a circumstance that plays a particularly important role in the case of Tamoxifen, as the hormonal effect means that production involves extensive protective measures for the manufacturing workforce as well as physically separate production areas. Such requirements cannot be met in the short term.

Anja Fürbach, Market Intelligence Senior Expert