The U.S. pharmaceuticals market is predicted to reach a volume of nearly $800 billion by 2028, with an annual growth rate of over 5%. However, dynamic developments outside of their control mean a mixed outlook for many pharmaceutical manufacturers as they navigate talent shortages, cybersecurity risks and cost pressures.
Longer term, manufacturers are likely to also encounter new regulatory challenges and shrinking profit margins in an increasingly competitive landscape.
To tackle these obstacles, it is important to understand what they are, how they are evolving, and what the industry can expect in 2024 and beyond.
Challenge #1: Regulations and directives
Pharma manufacturing is already highly regulated, with manufacturers continually refining their processes to overcome substantial compliance obligations and costs. Unfortunately, compliance will become even more challenging in the coming years. The U.S. Food and Drug Administration (FDA) recently issued pharma industry guidance documents that impact how organizations collect, manage and submit quality data.
One example is the Reporting Amount of Listed Drugs and Biological Products Under Section 510(j)(3) of the FD&C Act Guidance for Industry. The CARES Act added this section, which requires registrants of drug establishments or their agents to submit annual reports on the amount of drug manufactured, prepared, propagated, compounded or processed for commercial distribution. This is part of a larger trend of growing legislative and regulatory efforts that could significantly increase business and financial risk profiles, as well as compliance challenges.
The most significant challenges, however, are being driven by the Inflation Reduction Act of 2022 (IRA). The IRA allows Medicare to negotiate prices on select drugs and requires pharma companies to rebate price increases that exceed the rate of inflation. Experts anticipate that the number of drugs eligible for price negotiation under Medicare will increase substantially in the next few years. This has the potential to negatively impact the industry by reducing margins for profitable products, potentially reducing growth initiatives and investments in R&D, and lowering operating costs.
The ever-evolving nature of regulations requires organizations to stay vigilant and flexible, but on the other hand, compliance with regulatory standards also presents some opportunities. For instance, adhering to 21 CFR Part 11 and ISO 27001 can help boost operational efficiency, lower costs, improve quality control measures, and adopt more robust cybersecurity and data integrity measures.
Part 11 provides a framework for the secure use of electronic systems — for example, in data capture and document management — and the integrity and authenticity of electronic records and signatures. Meanwhile, ISO 27001 is a globally recognized information security standard designed to ensure the confidentiality, availability, and integrity of data with appropriate security policies and controls. So, complying with both Part 11 and ISO 27001 standards can help organizations ensure that there are adequate measures in place to safeguard their digital systems and information.
Challenge #2: Government relations
Given the Biden administration’s efforts to reduce drug pricing, the industry’s relationship with the government is somewhat strained. The IRA will arguably have the largest impact by creating new challenges for manufacturers, like reduced profit margins and a decrease in innovation.
In December 2023, the administration announced perhaps the most aggressive measure to date — threatening to cancel patent protection and allow rivals to make their own versions of drugs if prices are not reduced.
And then there is the administration’s increased targeting of mergers and acquisitions between large drug companies based on anticompetitive business practices. The Federal Trade Commission (FTC) recently sued to block the merger of drugmakers Amgen and Horizon Therapeutics, arguing that the deal would enable Amgen to leverage the monopoly power of two top Horizon drugs that have no rivals.
Exactly where the relationship goes from here is hard to predict, and largely depends on the outcome of the 2024 election, with a new administration potentially backing off some of these regulation efforts.
Challenge #3: Talent shortage
As with all sectors, pharma manufacturers are struggling to attract the right talent. According to McKinsey, 80% of facilities are having difficulty finding candidates with the right skills.
It would be easy to attribute this to the pandemic and ‘the great resignation,’ which is undoubtedly a contributing factor. However, the industry’s labor challenges are far more complex and not easily fixed. Pharma manufacturers are rapidly introducing new technologies, automating processes, and applying advanced analytics to data. Disruptions such as new business models and entirely new product modalities are contributing to the current landscape.
Workers, even experienced ones, simply do not have the skills that manufacturers need to support their operations. Occupational profiles are also changing, with some jobs being replaced entirely by automation while new positions are emerging.
Given the rate of innovation, it is difficult for both organizations and workers to anticipate what skills will be most in need to support future manufacturing operations. This may help explain why only one-third of companies surveyed by McKinsey reported that they have launched reskilling efforts. For those that have, investments have been relatively minimal, with programs covering less than 10% of the workforce at a total investment of less than $5 million.
There is no single solution to the ongoing labor shortage. Rather, manufacturers will need to rely on a mix of approaches, such as improving recruiting programs, upskilling workers and offering hybrid work opportunities.
Challenge #4: Cybersecurity and data protection
Cybersecurity threats are a major concern for nearly every industry, but according to IBM’s latest report, pharma ranks among the top three industry verticals for the highest average cost of a data breach. In 2023, the global average cost of a data breach in the pharma industry was an eyewatering $4.82 million.
There are several reasons why cybercriminals frequently target the pharma industry. First, the industry secures some of the most sensitive data — about patients, patented drugs, clinical trials, research projects, and proprietary information — and highly valuable technology. Second, the increased use of automation tools and reliance on third-party vendors create vulnerabilities. Third, pharma companies use many devices to collect data that is stored online, such as IoT devices. Both the transfer and storage of data can become targets for cybercriminals to exploit.
Data breaches, however, are not the only concern. Other threats include ransomware and phishing attempts. And, despite being so vulnerable to attacks, the industry has lagged behind others in adopting cutting-edge cybersecurity measures.
Technology alone will not protect pharma manufacturers from threats. Organizations also need to implement strict processes and security protocols. For instance, by conducting regular assessments of third-party networks to review the protocols that they have in place, adhering to applicable data protection regulations, and establishing policies around access control.
Challenge #5: Cost and inflationary pressures
Inflation is still nearly triple what it was pre-pandemic, and it will continue to play a role in 2024. According to Deloitte’s 2024 Health Care and Life Sciences Outlook, 36% of survey respondents indicated that the economy and inflation would continue to influence their strategy.
This is seemingly at odds with the commonly held belief that pharma is one of the few industries that is ‘recession-proof,’ and can better withstand economic downturns and pressure than other industries. While there may be some truth to this with respect to demand — given that people still need to take their medications — macroeconomic factors impact manufacturers in other ways. For instance, through rising operational costs, disruptions in supply chains, having less capital for investments in technology and R&D, and increased competition. In addition, the passage of the Inflation Reduction Act stands to further erode profit margins.
Pharma manufacturers will need to find new ways to reduce costs and improve the customer experience. For many, this will involve adopting new digital technologies to automate processes, improving data analytics capabilities to enable better decision-making, and finding ways to overcome new regulatory challenges.
Is better organizational visibility the solution?
Pharma manufacturers will face significant challenges in the coming months, including inflation, new regulations, and increased cybersecurity threats. While there are no quick fixes to these issues, there are some steps that can help mitigate their impact.
For instance, a document management solution can help manufacturers to protect sensitive data, improve compliance, enable knowledge sharing across the organization, and create a single source of truth for data-driven organizations.
Energy management plays an important role, too. With rising costs and falling prices directly impacting profit margins, reducing waste can help the bottom line. Better energy management can improve process efficiency, product quality and production rates, contributing to significant savings and helping manufacturers to meet sustainability goals.
Operating expenses can also be reduced through proactive maintenance strategies like preventive and predictive maintenance, effective resource allocation, and cutting down on unplanned downtime. This brings costs down, increases reliability, and helps improve production availability.
Deploying these solutions will help manufacturers navigate current and future challenges by streamlining their operations, accessing information faster and maximizing their investments to achieve more with less.
