Striking the Right Balance in the Pharma and Life Sciences Industry

Businesses are facing up to the consequences of rising inflation and will need to reassess their cost base as a result. Certainly, costs will need to be closely managed, but cost cutting in isolation is not the right strategy. Indeed, excessive cost cutting can harm the chances of survival.?

In our series of reports titled, Striking the Right Balance, we discuss the threats and opportunities presented by rising inflation and recommend three ‘no regret’ actions:

• Revisit strategic priorities?
• Look for differentiation across the value chain to reset your cost structure?
• Bring your people with you and drive operational agility.

In this sector-specific analysis, we explore the impact of inflation on the pharmaceuticals and life sciences (PLS) industry and consider what firms should do next.??

The PLS industry is not immune to the global effect of rising costs. Leaders are facing 65+% increases in energy prices on the back of a 500+% hike in transportation costs and rising raw materials costs.

Striking the Right Balance in the Pharmaceutical and Life Sciences Industry

1. Pharmaceutical R&D.?

As pharmaceutical companies focus on advanced cell, gene and CAR T-cell therapy, research and development expenditure continues to rise. Increased complexity is coupled with additional regulatory demands and inflationary pressures. In a joint report with ABPI “Transforming Lives Raising Productivity” , PwC estimated that the cost of bringing a medicine to market rose from ￡250 million in the early 1990s to over ￡600 million a decade later.

Escalating costs not only impact pharmaceutical R&D – they affect the contract research organisation (CRO) industry, too. CROs face growing pressure to reduce clinical development expenditure. To gain competitive advantage, CROs will need to invest in infrastructure, including data analytics, trial data management platforms and patient monitoring services.

2. Supply chain.?

Given the challenging market outlook, supply chain leaders must look at strategies to maintain business continuity in the event of yet more unfamiliar risks. ? Optimising spend is crucial in a post-COVID-19 life sciences market where demand exceeds supply. Two-thirds of companies report operational supply issues, driving higher cost of goods and lower margins.? Supply chain leaders must manage procurement to control those costs in an inflationary environment.???

3. Drug commercialisation.?

To successfully commercialise a drug firms must unlock local access, evaluate optimal pricing, and establish appropriate reimbursements. Tightening healthcare spending in the aftermath of COVID-19 means local and national health authorities are looking increasingly to control drug expenditure through procurement policies and budget control measures.?

Furthermore, pharmaceutical companies typically negotiate multi-year contracts and tenders that fix drug prices over a specified time period. In such instances, it may not be possible to offset the costs of inflation through reimbursement negotiations.?

What pharmaceuticals and life sciences firms should do next

In the face of continued economic headwinds pharmaceuticals and life sciences companies must revisit their spending priorities and identify areas for cost optimisation.

Pharmaceutical R&D optimisation

- Focus on portfolio size and shape. Firms should take a “fast track to failure” stage-gate approach to help avoid costly late-stage failures. At the same time they can maximise asset value by improving commercial strategy integration. This should ensure that insights from payers and patients are captured, and relayed back to the R&D team.?

- Accentuate operational agility. Given clinical research is mostly outsourced, pharmaceutical companies need to focus on strategic partnerships with CROs. A hybrid approach encompassing the best of both full-service outsourcing and functional-service partnership models can help optimise costs and resources, offering competitive advantage through access to specialised capabilities and expertise.?

- Review spending and priorities. Invest in areas with growing return, such as digital assets. The use of data analytics platforms, telemedicine, and remote patient monitoring can significantly reduce clinical development costs. Furthermore, pharmaceutical organisations should leverage decentralised or hybrid designs to make clinical trials more patient-centric.?

Supply chain optimisation?

?- Re-evaluate critical spend. Focus investment on big bets that will drive the most value. For example, many leading organisations are looking at reducing safety stock levels, in order to free up cash to support other investment projects.?

- Benchmark major cost drivers and rationalise trade-offs. For example, assess inventory risk profiles for non-strategic products, identifying cost reductions across the end-to-end supply chain. Focus on in-market safety stock where the inventory costs are highest.?

- Collaborate with suppliers and customers to review payment and delivery terms. Segment customers and suppliers using a risk framework based on business criticality in order to determine the impact of deferred payments and longer lead times.

- Leverage spend analysis to improve supplier cost transparency. Use this visibility to take informed decisions that will help secure critical products across all tiers of supply. Target unspent and uncommitted expenses that offer immediate impact.

- Review supplier contracts. Contain mutual costs to strengthen combined supply channels. Focus on holistic costs and total spend and, where possible, renegotiate terms that allow for flexibility in line with market volatility.

- Ensure open supplier and customer communication channels. Frequent and honest dialogue will nurture mutual trust and deepen ties in the face of economic headwinds.??

Optimise Drug Commercialisation

- Work closely with local budget holders. As we explored in a recent PwC report ,”Reimagining Market Access” gathering evidence on local treatment trends along with non-traditional data (such as customer preferences) can help shape personalised strategies that address local ecosystem needs. Reframing the value narrative away from traditional metrics of cost effectiveness and towards inclusive measures such as reduced societal burden, supports a more holistic assessment of a drug and inflation-resistant market access policies.?

- Optimise pricing and reimbursement strategies. When renegotiating local contracts, good commercial hygiene should feature terms that account for inflation, such as an annual increment pegged to an external index. For instance, in the UK’s voluntary scheme for branded medicines pricing and access (VPAS), there are provisions that allow some pharmaceutical companies, particularly those with slimmer margins, to make a case for an inflation-based price increase. Similarly, in Canada, the Patented Medicine Prices Review Board publishes a CPI-Adjustment Factor which sets a ceiling on patented medicine price increases. Additionally, firms should identify regressive price discount mechanisms to help pinpoint opportunities for appealing prices. Notably, in Germany price caps are present across generic medicines, prohibiting reference price increases in line with inflation.

In Summary

Inflationary conditions, with broad ranging impacts for the economy are likely to be with us for some time. For pharmaceutical and life science organisations, cost pressures will persist alongside a continued focus to maintain productivity and deliver life-saving treatments.? It is a challenge that the industry is ready to face along with its partners and requires a robust approach. Leaders need to continuously evaluate the impact of inflation and manage costs flexibly across the value chain. In short, it means striking the right balance.

Authors and Contacts

Lisa Callinan

Partner, Strategy&, PwC UK

[email protected]

Stephen Aherne

Partner, Pharma & Life Sciences Leader, PwC UK

[email protected]

Thalita Marinho

Partner, Strategy&, PwC UK

[email protected]