COVID-19’s Impact on the Pharma Industry

All industries have been affected by COVID-19; in this blog post, Prescient’s Senior Director explores what Q1 2020 economic figures could mean for the pharma industry in H2 2020 and beyond.

July 2020

Dr. Nick Turner, Senior Director

As the world looks to the pharma industry for preventative and curative solutions to the COVID-19 pandemic, the grim global economic outlook can be expected to impact healthcare spending.

The COVID-19 pandemic poses the greatest public health emergency witnessed in the past 100 years and couples the high infectivity with a case mortality rate at least five times that of seasonal influenza. With asymptomatic transmission in the mix, the world is battling a perfect storm of infectivity.

With a vaccine or antiviral therapy at least 12-18 months away, control of infection rates has proven to be a fire-fighting exercise for many countries, achievable only by rapid testing and contact tracing, social quarantines and shutdown of large tracts of social and economic activity.

The resources being poured into vaccine research mask a greater crisis for healthcare — while there have been considerable efforts to mobilize healthcare resources, all but emergency non-COVID-19 healthcare has been sidelined, with profound consequences on population morbidity and mortality that are already beginning to be felt.

Cost and contraction

The economic fallout from the protracted lockdown combined with the monetary cost of the pandemic response measures could be dire.

The pharma industry’s core markets of the US and western Europe are entering a severe economic downturn, and the growth markets of Latin America are on the verge of crisis following the dual impact of the COVID-19 pandemic and collapse in oil prices.

According to Bloomberg, the pandemic is expected to wipe $8.5 trillion off the global output, while the IMF has warned that estimates for a 3% contraction in the global GDP look optimistic.

World Economic Output growth projections from the IMF published in April 2020 indicate the burden will fall heavily on advanced economies, which are expected to contract by 6% in 2020, a significantly greater drop than that felt during the 2007-2008 global financial crisis.

Q1 2020 GDP numbers show significant contractions in economies of countries around the world. Given that the lockdown only began in earnest in the second and third weeks of March, Q2 2020 figures will be worse, with GDP contractions in the world’s leading economies potentially at high teen or even 20%+ rates.

What a broader economic recovery means for the pharma industry

There is consensus of an economic recovery beginning in Q3 2020 and many commentators are projecting a rapid return to growth in 2021.

Caution is more advisable than optimism. The anticipated global growth outcomes are unlikely if there are recurring waves of infections. Overall, the GDP growth forecasts are expected to be revised after Q2 2020 and expectations for a rapid return to growth may be tempered by government debt overhang, increase in business insolvencies and rising unemployment.

The pandemic has exposed significant shortfalls in healthcare provision that will have to be addressed

Any increase in healthcare spending is anticipated to be directed toward greater capital expenditure on fixed healthcare costs, telehealth, diagnostics and patient monitoring. In the context of budget shortfalls, this may have a negative follow-through for drug pricing. With discretionary healthcare spending effectively limited to drug spending, government payers can be expected to exert pressure on pharmaceutical pricing and potentially restrict reimbursement on non-innovative drugs.

How rising US unemployment could affect drug prices

A sustained increase in unemployment levels in the US could create a marked shift in payer mix with negative consequences for the pharma industry.

According to a Kaiser Family Foundation analysis, 26.8 million people in US households with a job loss are at risk of losing their health insurance, highlighting the dysfunction in the US healthcare system. Prolonged double-digit percentage levels of unemployment will shift significant numbers of families from employment-linked commercial insurance coverage into Medicare exchanges or Medicaid, which may prompt the federal government to seek to further squeeze pharmaceutical pricing.

More aggressive targeting of the ASP and WAC reporting to ensure Medicare and Medicaid pricing is based on the net of rebates and discounts to commercial plans could be one approach. Enabling Medicare to negotiate on pricing, particularly if rolled into the rebating scheme that ensures Medicaid pays the lowest price in the market, would be particularly damaging, forcing significant price reductions (a >23% discount to AMP) on $100 billion in Medicare part D drug sales. An expansion of the 340B drug pricing program and covered entities would also be an additional threat to the industry topline and margins.

The pharma industry faces existential challenges. Adopting the right strategy for the post-pandemic “new normal” will be crucial to the industry’s performance in 2021 and beyond.

For the latest analysis of how pharma companies are reacting to this crisis, read our next blog post:

Pharma Companies’ Response to the COVID-19 Pandemic

Want to know more?

The impact of COVID-19 and the pharma industry’s response to it are explored further in an exclusive Prescient white paper: