The Economic Factors Squeezing Pharma

 

By Luke Sisley, Senior Business Intelligence Analyst, CSL

 

The end of 2022 is becoming a challenging period for healthcare in England. While NHS England reports record-breaking waiting lists and thousands of community pharmacies face closure, manufacturers too are feeling the squeeze of inflation, energy costs and DHSC rebate schemes. As we approach 2023, the key question will be around how well the industry can adapt to change while also continuing to innovate and deliver the same level of goods and services.

Let’s take a quick look at some of the economic pressures facing the industry.

Rebates to rise

The 2019 Voluntary Scheme for Branded Medicines Pricing and Access (VPAS) is one of two rebate schemes designed to control NHS spending on branded medicines, along with the Statutory Scheme. While each scheme offers different terms and exclusions, both grant a percentage rebate for net branded medicines sales exceeding a specified growth rate for each scheme, with VPAS offering 2% compared to 1.1% for the Statutory Scheme.

VPAS rates are expected to rise sharply in 2023 due to a significant increase in spend on branded medicines caused by COVID-19. In 2022 the Department for Health and Social Care reached an agreement with the Association of the British Pharmaceutical Industry to cap the VPAS rebate percentage at 15%, avoiding a 19.1% rebate percentage.

However, recent scheme updates from the government have the percentage rising to 23.7% in 2023, with the Statutory Scheme also rising to 24.4% to prevent manufacturers from “gaming the system” by switching between the two schemes. While these are the proposed rates, industry bodies and experts predict that the actual rates could be much higher as spend on branded medicines continues to increase throughout 2022.

 

 

 

Analysis of the proposed VPAS rate increase paints a stark picture, with various sources highlighting the potential negative impact that this sharp rate increase will have on the pharmaceuticals industry, particularly for branded generics and biosimilars. Industry bodies such as the British Generics Manufacturers Association have been outspoken in the risks posed by the proposed increase, citing an independent report from the Office of Health Economics. The report indicates that long term rate increases risk costing the NHS money by driving manufacturers out of the market, reducing the competitiveness of the generics industry, and therefore costing the NHS more in procurement than is made via the rebate.

We will be keeping a close eye on developments to see if industry bodies can convince the DHSE to change tack on the rebate.

 

Production costs up

Aside from rebates, manufacturers are also feeling the squeeze of rising production costs caused by inflation, energy supply, and the weak pound. Industry bodies are predicting shortages in supply, citing a 300% increase of in the cost of raw materials, 600% increase in shipping costs, and a 230% increase in the cost of energy – all hitting generics manufacturers over the past year.

Energy prices are far from a local issue; earlier in the year manufacturers across Europe indicated that energy costs may cause them to cut production, with a recent global survey finding that 77% of manufacturers are having to adapt business models to counter rising costs.

 

 

Going forward, the industry may get a reprieve from spiralling production costs, with the pound’s rebound against the Dollar and the Euro in late October potentially signalling an easing of material and shipping costs.

Previously Liz Truss’ government had offered an energy support package to businesses, although this had been scaled back by the new chancellor Jeremy Hunt. Business leaders are now asking the new government headed by Rishi Sunak to provide a fully costed energy support package to protect British businesses. It will be interesting to see the level of support that is offered, and the impact on the industry.

 

Conclusion

With a confluence of economic factors impacting the pharma industry as we go into the end of the year, the industry will have to prepare itself for uncertainty and disruption. Manufacturers will have to make some tough choices, potentially scaling back their businesses. Likewise, all eyes will be on the government to see how they support the industry to avoid the same catastrophic shortages that we have seen with fuel in recent months.

If you would like to discuss how the current economic environment might impact your business or brands, please do not hesitate to get in touch at info@csl-uk.com or call 01483 528302.