Pharmaceutical industry proves itself through the coronavirus pandemic

In fact, throughout the largest peacetime disruption in modern history, the pharmaceutical industry has proved quietly robust. Resilient supply chains, designed to be crisis proof, kept the industry running while other sectors scrambled to readjust.

However, the disruption has brought changes, some of which could be here to stay. Below, we’ve summarised some of the key impacts, using expertise from Investec’s respected healthcare team alongside feedback from our clients.
 

“The biggest impact of the COVID-19 pandemic has been on demand”, explains Jens Lindqvist, an Investec healthcare analyst and former medical doctor with 20 years of experience tracking the sector.

“Demand for what we call ’non-essential’ medicine and treatments – in particular elective surgery – has plummeted, as healthcare providers around the world redirected care efforts to treating COVID patients and warned patients to keep away from hospitals where possible”.

Companies involved in clinical trials have also suffered. Because of concerns around the safety of patients and staff, a large number of companies (GSK, Boehringer Ingelheim, Pfizer, Eli Lilly and BMS to name just a few) have announced that they have postponed or suspended enrolment for many planned trials. This affects a whole ecosystem of companies providing related services, ranging from contract research organisations to providers of more specialised services. Our clients have backed this up, noting that the impact is likely to be keenly felt over the next few months.

Of course there have been winners too: companies with an existing and credible presence in the antiviral space, for example AstraZeneca, Moderna and Gilead Sciences. We have also seen smaller companies benefit from increased demand for diagnostic testing related to the pandemic, such as Novacyt, EKF Holdings and Renalytix AI.

There is one other silver lining that bears mentioning: consumers have embraced digital healthcare solutions. Digital services were already a focus for healthcare providers globally, and in the UK, tech-enabled services like the NHS App and NHS111 online have proven very effective in taking pressure off the healthcare system by helping patients to make informed decisions about their own health – including when to seek hospital treatment. It is very likely that the increased awareness of digital health services will have created a permanent shift in demand in favour of remote healthcare.

Contrary to some of the political rhetoric, pharmaceutical supply chains are being vindicated as they emerge from this crisis.

“Millions of patients depend on regular supply of drugs, meaning that pharmaceutical supply chains are designed to be particularly robust, with back-up manufacturing and inventory in place to act as a buffer”, explains Jens. As a result, the COVID pandemic did not seriously impede the production and shipment of pharmaceuticals in Europe and the US during the first quarter of 2020.

We know this for certain, because medicine shortages must be reported to the Department of Health and Social Care in the UK and so far, we have not seen a major increase in reported prescription medicine shortages.

On top of this, alternative sourcing arrangements meant that disruption from outsourced manufacturing in China during the early phase of the pandemic proved manageable – and in any case, China API (active pharmaceutical ingredient) production is now back up and running. In Europe and the US, we have not seen a drastic reduction in the output of API supply. COVID-19 has really put supply chains to the test and on the whole, the system has held up well.

PPE is a different matter though – one supplier of gloves to the NHS reported that it was able to source goods from Malaysia instead of China while production was interrupted, but this was not straightforward. And while the supply chains for pharmaceuticals themselves proved robust, there were still reports of issues with companies’ internal supply chains for day-to-day equipment such as reagents and laboratory equipment.
 

The source of our medicines has proven to be political dynamite. On-shoring is actively promoted by manufacturing organisations in Europe and the US and, over the longer term, we may see more of it, but pharma is an inflexible industry and the associated regulatory barriers make on-shoring an expensive and time consuming undertaking.

For example, the manufacturing process forms part of the marketing authorisation for drugs and devices, and a change of manufacturer requires regulatory approval. Skill shortages are another issue, compounding what would already be a difficult process.

It’s also worth remembering that although India and particularly China dominate the world’s active pharmaceutical ingredient supply by volume, the majority of the world’s API manufacturers are based in the US and Europe (around 28% and 26%, respectively), with India representing just 18% and China 13%. In fact, one of the less-obvious pressure points for UK pharma companies is a drop in revenue for overseas sales. “Many UK-based firms with overseas licensing agreements will be looking at significant drops in revenue as emerging market currencies have weakened significantly,” explains Lewis Thorn, FX Dealer at Investec. “South America and South Africa are big markets for UK pharma, and currencies like the rand have fallen by as much as 20% since the start of the year, creating a large drop in revenues from these regions.”
 

As the world’s focus shifted towards COVID-19 and the desperate search for a vaccine, it seemed that all companies had diverted their efforts towards fighting the virus. Manufacturers large and small began to produce PPE, and even British American Tobacco announced a potential vaccine entering the pre-clinical testing stage.

Behind the headlines, companies are not able to be so nimble: antiviral drug and vaccine development capability takes years to establish. As a result, a company not already active in this area would find it extremely difficult to pivot, and few if any appear to be changing their strategy. Assuming that government support continues, it’s possible that we could see a gradual shift towards more research and development for infectious disease drugs though – and this is an area which has suffered from woeful underinvestment for years.

The response by bigger pharma to COVID-related staffing issues has been broadly the same as in other industries, and pharmaceutical companies are still developing, producing and selling drugs; although on-site staffing levels in areas like laboratory R&D and face-to-face selling are temporarily reduced. Scientific interaction has successfully moved online, and our impression is that areas like business development, licensing activity and investor interaction have not seen a material impact.
 

In the very short term, we’ve seen mixed reports from our clients. One pharma wholesaler reported that it was banned from exporting a large proportion of its products in order to safeguard the UK’s supply, and on another told us that the approval process for the manufacture of some equipment had been streamlined by the regulator in order to speed things up.

Looking further ahead, stockpiling for the next crisis is of course impractical, since no-one knows what form it might take. Indeed, Jens concludes: “In the future, the UK government is likely to apply pressure on NHS procurement, rather than directly on individual suppliers to improve flexibility, limit the risk of shortages and reduce regional differences. Governments can take steps to ensure producers and the industry in general remain robust and ready to step up production if needed.”

Of course, as Brexit looms on the horizon, UK pharmaceutical companies will have a host of other challenges to deal with, not least ensuring that their European supply chains remain resilient