As the saying goes, it’s an ill wind that blows nobody any good, and the pharma industry appears to be at least a partial beneficiary of the current coronavirus pandemic. No longer do the newspaper headlines focus on excessive drug prices: all the attention now is on the industry’s efforts to develop a vaccine and to trial new and old medications that could have some impact on the progress of the disease. Innovator companies are the most obvious beneficiaries of this, of course, but generics companies, too, are doing their bit by donating medicines and increasing supply of crucial hospital drugs. And all pharma companies are likely to be experiencing at least a short-term increase in demand for products, both from governments and from wholesalers trying to buffer supply.
Functionally, companies have unexpectedly had the chance to stress test elements of their disaster recovery plans, as overnight they have had to enable all their office-based employees to work at home and to take measures to ensure the safety of those that do need to enter the workplace. While this has certainly kept management, IT and HR departments very busy, and necessitated the rapid purchase of additional laptop computers and software, there is a corresponding saving on the company travel budget, which should currently be standing at close to zero.
It would be wrong, however, to believe that the pharma industry will be totally unscathed by the coronavirus crisis. On the contrary, problems are already becoming apparent. One is the cessation of an active in-person inspection regime. The FDA, for instance, has announced that it will not be carrying out overseas inspections for the time being and we assume that local regulators in countries currently under lock-down are also not going to sites. While this is not an issue for most companies, it will make life difficult for those that really need an inspection, either because they want to launch their first product in the US or Europe, or because they have had production restricted or suspended while manufacturing deficiencies were remedied and need sign-off from the regulators in order to return to full capacity.
Another potential problem relates to supply chains. Many APIs come out of China or India (and even Indian APIs frequently use Chinese intermediates) so may be subject to supply constraints due to factory shut-downs or export bans (the Indian government, for instance, is preventing substances that it deems to be particularly important from leaving the country). Since most finished dosage form (FDF) manufacturers usually carry reasonable levels of API stock, some delays are manageable, but there could be a squeeze on some products, particularly high-volume drugs requiring a lot of API, where sourcing is usually on a just-in-time basis (paracetamol being a case in point). Meanwhile, FDF facilities in Europe, many of which were already struggling with back orders thanks to the mandatory introduction of pack serialisation as part of the EU Falsified Medicines Directive, are now seeing increasing levels of staff sickness or self-isolation. This is likely to lead eventually to lower output and hence to shortages of some products. Shipping may also be a challenge, as closed national borders and driver shortages make road movement harder and air freight also comes under pressure.
At the same time, we expect to see changes in levels of demand for many drugs. Medications used in intensive care are obviously seeing demand rising sharply and some governments are also undertaking more general stockpiling exercises, but not every molecule will benefit. The cancellation of all routine surgery and sharply reduced access to GPs will mean that diagnoses that could lead to new prescriptions for, e.g. blood pressure medication will be delayed, while some hospital medicines will be used less. The closure of many retailers is also likely to hit demand for OTC products, particularly those at the ‘lifestyle’ end of the spectrum.
COVID-19 will also inevitably impact clinical trials. Trials that are already under way will presumably mostly be completed, but it will be very hard to start new ones as long as doctors are focusing on front line duties and minimising contact with non-coronavirus patients (who themselves are currently likely to be subject to enforced movement restrictions). This will delay the introduction of innovative therapies but may also affect the development of those generics that require efficacy data to be generated, most notably biosimilars. Even more straightforward generics could be impacted by the closure of bioequivalence testing centres and the difficulty of bringing healthy volunteers together (not to mention the need to pre-test them for possible coronavirus infection).
Newly-approved products will face further hurdles if any level of promotion is required. Since sales reps can’t visit doctors, detailing will have to be done electronically, with seminars and conferences replaced by webinars and on-line meetings. All the technology for this exists, but even physicians whose day jobs keep them away from mainstream hospitals where coronavirus victims are being treated will be seeing fewer patients than usual (and most of those virtually rather than in person) – hardly the ideal environment in which to start using a novel therapy.
The picture is even worse for inorganic sales growth, as M&A activity is expected to slump near term. The extreme volatility of the equity market and the effective closure of the debt market mean that the only viable deals are ones that can be cash financed or else are pure stock-based. Even then, agreeing a valuation may be difficult amidst uncertainty over short-term earnings and against a backdrop of sharply lower values for quoted companies, which potential buyers are likely to feel should be reflected in the unquoted part of the market. Where there are distressed sellers, there may be bargains to be had, but most transactions will simply be delayed until later this year or perhaps even 2021.
Over the longer term, once this crisis is over, it will be interesting to see what lessons are learned and whether the industry fully reverts back to the status quo ante. An obvious area for change concerns pharmaceutical procurement, particularly in hospitals. Most countries do this via tenders and in recent years, pressure on hospital budgets has fed through into lower and lower prices. In theory (but frequently not in practice), quality and supplier reliability are taken into consideration when awarding contracts, but price is almost always the deciding factor. As a result, many companies have dropped products that became unprofitable and the number of suppliers in the market has diminished. Consequently, as governments scramble to stockpile essential medicines and to source higher volumes of ICU and other drugs, they are seeing for themselves the downside of a system that concentrates supply in the hands of a small number of companies, many of which will be juggling demand from multiple countries and will hence have to make tough decisions about allocating their available stock. The logical answer to this is to structure tenders in a way that allows for multiple winners and slightly higher prices, in order to support a larger number of players, but it will take far-sighted healthcare authorities to do this at exactly the same time as governments grapple with the consequences of the massive debts that they have taken on to try to shore up the global economy.
Supply chains are another area for consideration, albeit one that is likely to take longer to change significantly. Adding additional API suppliers to dossiers would be a simple starting point for industry-led initiatives, followed by setting up dual sourcing for important products where this does not already exist, ideally based in the same continent in which the product is going to be sold. Governments may wish to go further, forcing companies to manufacture more drugs locally and hence accelerating the reversal of historic off-shoring of much capacity to India and other low-cost locations. This would be a fairly drastic move and would take years to accomplish, even in part, but it cannot be ruled out, particularly in the US.
At the human level, COVID-19 is a catastrophe of epic proportions and few people are likely to emerge without someone close to them having been, at best, seriously ill. In these circumstances, the welfare of the pharma industry itself is of secondary importance, other than insofar as it provides secure employment in an environment in which millions are being thrown out of work with little or no safety net. None the less, the coronavirus pandemic has shone a welcome light on the contribution that pharmaceutical companies make to the health of nations as well as pointing to some actions that governments could take to make the industry more robust. Overall, a small silver lining in a very large cloud.