The global economy has a significant impact on the pharma industry, particularly when it comes to finance. Economic trends such as inflation, exchange rates, and interest rates can all have an impact on the financial health of pharma companies. In this blog post, we’ll take a closer look at some of the key global economic trends affecting pharma finance, and explore how pharma companies can adapt to these trends to stay financially healthy.
Inflation is a key economic trend that can have a major impact on pharma finance. Inflation refers to the rate at which the general price level of goods and services is increasing over time. Inflation can lead to higher costs for raw materials and other inputs, which can have a direct impact on the financial performance of pharma companies. Some examples of how inflation has affected the pharma industry in particularly in recent years are:
Drug Prices: According to a report by healthcare consulting firm 46brooklyn, the average price of brand-name prescription drugs increased by 2.9% in 2020. While this is a lower rate of inflation than in previous years, it still represents a significant increase in drug prices.
Raw Material Costs: Raw material costs have also increased in recent years. For example, according to a report by Informa Pharma Intelligence, the price of some raw materials used in drug production, such as certain solvents and reagents, increased by up to 30% in 2020 due to supply chain disruptions caused by the COVID-19 pandemic.
Labor Costs: Labor costs have also been increasing in the pharma industry. According to a report by HR consulting firm Mercer, the average salary increase for pharmaceutical and life sciences employees in the US was 2.8% in 2020. This represents a slight increase from the 2.7% increase in 2019, and is consistent with the trend of rising labor costs in recent years.
Regulatory Costs: Compliance costs have also been increasing in the pharma industry. According to a report by Deloitte, the cost of compliance with regulatory requirements increased by 6% in 2020. This is consistent with the trend of rising compliance costs in recent years, as regulatory requirements become more complex and stringent.
Research and Development Costs: The cost of drug development has also been increasing in recent years. According to a report by the Tufts Center for the Study of Drug Development, the average cost of developing a new drug increased by 9.4% in 2020, which is higher than the rate of inflation during that period.
To mitigate the impact of inflation, pharma companies can take a number of steps. For example, they can implement cost-saving measures such as improving supply chain efficiency or negotiating better prices with suppliers. They can also explore alternative sourcing options to reduce their exposure to inflation in specific markets.
Exchange rates are another key economic trend that can impact pharma finance. Exchange rates refer to the value of one currency relative to another. Fluctuations in exchange rates can have a major impact on the financial performance of pharma companies, particularly those with a global presence. Some of the biggest influences that have affected both exchange rates, and the pharma industry simultaneously in recent years include:
Brexit: The decision of the United Kingdom to leave the European Union in 2016 led to significant fluctuations in the value of the British pound. This had a major impact on the financial performance of pharma companies with operations in the UK, as the value of their revenues and assets denominated in pounds were affected by the exchange rate fluctuations.
The US Dollar: In the past 2 years, the strength of the US dollar has impacted various aspects of the pharma industry, including revenues, international expansion, research and development costs, import costs, and stock market performance. For example, in early 2021, the US dollar strengthened against a range of currencies, which impacted the revenues of pharma companies that generate a significant portion of their revenue in other currencies..
Emerging Markets: Exchange rate fluctuations can also have a significant impact on pharma companies operating in emerging markets. For example, in 2018, the Turkish lira experienced a sharp decline in value, leading to increased costs for pharma companies importing drugs and raw materials into Turkey.
Certain mergers and Acquisitions: Exchange rates can also have a major impact on the valuation of pharma companies involved in mergers and acquisitions. For example, in 2019, the value of the Swiss franc led to a significant increase in the cost of a proposed merger between two pharma companies, as the exchange rate affected the value of the transaction.
To mitigate the impact of exchange rate fluctuations, pharma companies can take a number of steps. For example, they can implement hedging strategies to minimize the impact of currency fluctuations on their financial performance. They can also explore alternative sourcing options to reduce their exposure to currency fluctuations in specific markets.
Interest rates are another important economic trend that can impact pharma finance. Interest rates refer to the cost of borrowing money. Changes in interest rates can have a major impact on the financial performance of pharma companies, particularly those with a high level of debt. Some examples of how interest rates can affect the pharma industry can be seen below
- Financing Costs: Fluctuating interest rates can impact the cost of financing for pharma companies. For example, when interest rates are low, it may be cheaper for pharma companies to borrow money to fund research and development, while high interest rates may make borrowing more expensive and impact investment decisions.
- Investment Decisions: Interest rates can also impact investment decisions by pharma companies. When interest rates are low, it may be more attractive for pharma companies to invest in capital projects, such as new production facilities or equipment, which can be funded at a lower cost. Conversely, when interest rates are high, it may be more attractive for pharma companies to focus on paying down debt rather than investing in new projects.
- Foreign Exchange Rates: Interest rate fluctuations can also impact foreign exchange rates, which can have a significant impact on the pharma industry. For example, when interest rates in a foreign country are high, it may attract foreign investment in the country, which can impact the value of the local currency and impact the cost of importing or exporting drugs.
- Stock Market Performance: Interest rate fluctuations can also impact the performance of the stock market, which can impact the financial performance of pharma companies. For example, when interest rates are low, it may stimulate economic growth and increase investor confidence, which can lead to increased investment in the stock market and drive up the value of pharma stocks.
To mitigate the impact of interest rate fluctuations, pharma companies can take a number of steps. For example, they can explore alternative financing options to reduce their reliance on debt financing. They can also implement cost-saving measures to reduce their overall debt burden.
Trade policies are another important economic trend that can impact pharma finance. Changes in trade policies, such as tariffs or trade agreements, can have a major impact on the financial performance of pharma companies.
- Tariffs and Trade Barriers: Tariffs and other trade barriers can impact the cost of importing and exporting drugs and raw materials. For example, in 2018, the US imposed tariffs on a range of Chinese goods, including pharmaceutical ingredients, which led to increased costs for US pharma companies importing these ingredients from China.
- Intellectual Property: Trade policies can also impact the protection of intellectual property rights for pharma companies. For example, in some countries, there may be weaker patent protection laws or regulatory frameworks that do not provide sufficient incentives for pharma companies to invest in research and development.
- Free Trade Agreements: Free trade agreements can have both positive and negative impacts on the pharma industry. On the one hand, they can help to reduce trade barriers and increase market access for pharma companies. On the other hand, they can also lead to increased competition from foreign firms and impact the profitability of domestic pharma companies.
- Export Restrictions: Export restrictions can impact the ability of pharma companies to export drugs and raw materials to other countries. For example, during the COVID-19 pandemic, some countries imposed export restrictions on medical supplies and drugs, which led to disruptions in the global supply chain and impacted the availability of certain drugs in certain markets.
- Regulatory Harmonization: Trade policies can also impact regulatory harmonization, which can impact the ability of pharma companies to operate in different markets. For example, in some markets, there may be different regulatory requirements or approval processes for drugs, which can impact the ability of pharma companies to launch their products in these markets.
To mitigate the impact of changes in trade policies, pharma companies can take a number of steps. For example, they can explore alternative sourcing options to reduce their exposure to specific markets. They can also engage in advocacy efforts to influence trade policy decisions that impact the pharma industry.
In summary, global economic trends have a significant impact on pharma finance. Inflation, exchange rates, interest rates, and trade policies are just a few of the economic trends that can impact the financial performance of pharma companies. To stay financially healthy, pharma companies must be proactive in adapting to these trends. By implementing cost-saving measures, exploring alternative sourcing options, and engaging in advocacy efforts, pharma companies can mitigate the impact of economic trends and ensure their long-term financial health.