The COVID-19 pandemic, followed by the Ukraine war, has led to an economic crisis that has resulted in supply difficulties and a sharp increase in the cost of raw materials.
The causes of this include the disorganization and slowing down of production chains, the increase of transport costs, as well as the increase of energy prices.
As a result, the price of raw materials is soaring. This surge in raw material prices has become a major source of concern reflected in all industries, with prices of finished products necessarily higher.
The health crisis has highlighted structural supply difficulties that are complex to quantify and are mainly due to the existence of fragmented and vulnerable production chains.
In the pharmaceutical industry, this phenomenon is reinforced by an increased dependence on foreign suppliers, most of which are Asia-based. According to a recent report by the European Parliament [1], 40% of medicines marketed in the European Union (“EU”) come from countries outside the EU; 60 to 80% of active pharmaceutical ingredients (“API”) are manufactured in India or China. For instance, India and China produce 60% of paracetamol, 90% of penicillin and 50% of ibuprofen marketed worldwide.
This sharp increase in raw material prices is therefore a major issue for suppliers of intermediate products, such as APIs who are directly impacted by the prices imposed by their raw material suppliers and cannot fully pass on this increase on their sales prices, which considerably reduces their margins. As the French Court of Auditors states in its 2022 annual public report: “[t]o maintain their margins, pharmaceutical companies have also sought to reduce their costs, in particular by separating themselves from a growing proportion of their production, which is now increasingly subcontracted and just-in-time. The smallest grain of sand has chain repercussions [2]“.
It is essential to consider this sharp increase of prices as well as a likely shortage of raw material when negotiating contracts.
Thus, specific attention must be paid to the drafting of price revision provision. Indeed, although the increase in raw materials may in certain cases [3] allow for the renegotiation of the selling price of the drug, this negotiation takes time, is not certain to lead to a satisfactory solution and only concerns certain situations.
Based on publicly-available information and our own experience, we note a tendency for suppliers to negotiate specific price revision provisions in light of the current raw materials price inflation. Furthermore, certain authorities (for instance, the French Ministry of the Economy in the context of public procurement contracts) as well as private actors (such as consulting firms) very recently recommended stakeholders to negotiate these clauses with particular scrutiny due to the current inflationary situation[4]. It is likely that the authorities will soon adopt guidelines in this regard to support businesses in the context of this crisis which, if it lasts, will certainly have a direct impact on public finances.
The health crisis has also brought back to light concerns that had been developing for several years regarding the unavailability of health products, as shown by the increasing number of declarations made by pharmaceutical manufacturers to the ANSM regarding products shortage.
In its annual public report for 2022, the Court of Auditors highlighted the inadequacy of the measures in place and made several recommendations to remedy the dysfunctions observed. For the latter issue; to carry out an in-depth analysis of the risks of disruption and to implement the types of measures (reinforcement of safety stocks, price increases, industrial policy actions) that appear to be the most appropriate to prevent supply tensions, if necessary with the support at the European level [5].
The stakes are high, as can be seen in the press release from the European Federation of Pharmaceutical Industries and Associations (“EFPIA“), which (in light of the crisis between Ukraine and Russia) is calling on the parties to the conflict to exclude medicines, active pharmaceutical ingredients and any other raw materials needed to manufacture diagnostics, treatments and vaccines from the scope of sanctions [6].
This raw materials crisis also comes at a time when France is promoting investment, with the French government multiplying its annual plans and actions to make France the leading European nation in innovation and sovereignty in healthcare. To achieve this, it seems paramount to overcome such dependence on raw materials and to strengthen production in France, an objective that is at the heart of the Strategic Committee for Healthcare Industries (Conseil stratégique des industries de santé – “CSIS”) 2020 announcements that promote investment in France by offering particularly favorable conditions to pharmaceutical companies. This strategy seems to be working, as the Pharmaceutical Companies Investment Observatory estimates that more than 9 billion euros will be injected into France for R&D and industrial manufacturing in 2020 [7].
In 2022, this upward trend in investment is continuing, with more than 800 million euros of investment announced at the end of the Choose France summit [8].
[2]2022 annual public report, French Court of Auditors, p. 199 (Free translation).
[5]2022 annual public report, French Court of Auditors, p. 209 (Free translation).
