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All signs point to a pricey winter in Europe — and pharmas are preparing for the worst. Energy costs are expected to soar 200% over 2021 levels on average across the continent, according to a recent Goldman Sachs report, and as heat and electricity prices rise, some in the industry have raised the alarm that added manufacturing costs could hurt their bottom line.

The long-term impacts could be even worse. Over the last two decades, rising costs in Europe and looser regulatory requirements abroad have led many drug companies to move production of active pharmaceutical ingredients — the manufacturing of which is often energy intensive — to countries like India and China. Now, some industry leaders argue that the increasing energy costs due to supply chain disruptions from the COVID-19 pandemic and the war in Ukraine have led to a tipping point that could expedite that transition over the next five to 10 years.

And in a report published last week, Israel-based Teva Pharmaceuticals, which is also represented by Medicines for Europe, echoed a similar sentiment, arguing that the EU’s “onerous and archaic regulatory framework” has allowed “increasingly vital manufacturing assets for essential medicines to migrate from Europe eastwards” — a situation that is now being “exacerbated by a European-wide energy and economic crisis.”

Both Medicines for Europe and Teva urged the EU to consider measures to lower energy costs for pharmaceutical companies, particularly generics manufacturers, and to adopt new pricing policies to help minimize the impacts of rising operation costs.

Heightened need for reform

Their urgent call comes as the EU is overhauling its pharmaceutical legislation, dubbed the Pharmaceutical Strategy for Europe, aimed at bolstering the resilience and competitiveness of the life sciences industry there and ensuring that all EU citizens have access to medicine.

In Teva’s report, the company said the proposal represents “a once in a generation opportunity to review the policies, regulations and incentives that attract investments into Europe’s pharmaceutical sector and take action that safeguards a vital sector and limits the continent’s dependencies on other countries and regions.”

However, the details of the legislative proposal, which Catherine Drew, a partner at the international law firm Pinsent Masons, described as “the biggest review that has been undertaken since 2001” of the pharma policies, still remain unknown. The proposed legislative amendments were anticipated to be published by the end of this year, but the process was delayed when an impact assessment of the changes was rejected in August for undisclosed reasons. The commission has yet to update the proposed timeline for the legislation, and whether it plans to go back to the drawing board or simply revamp several policies in the proposal is unclear.

Either way, pharma groups warned that the European energy crisis has intensified and made the need for robust changes as soon as possible even more apparent.

“The Member States and the European Union must shift the balance of legislation before it is too late in order to create a regulatory and an economic level playing field,” Teva’s report said, and urged EU officials to consider key policy changes to alleviate pricing pressures.

For instance, it contends that because generics companies are subject to negotiated drug prices in the EU, and therefore cannot increase the price of their products relative to rising manufacturing costs, they will have no choice but to increasingly move production of these products to more affordable countries.

To halt this movement away from Europe and better secure the continent’s drug supply chain, Teva recommended that the European Commission reform the way it pays for generic drugs by shifting “from cost-based economic models to value-based economic models,” where they would pay for a medication based on the demonstrated benefit it provides to patients.

But if the inflation and energy crisis becomes dire, and the government doesn’t move swiftly enough, companies are more likely to move their operations to Asia, Mario Subramaniam, a life sciences lawyer and legal director at Pinsent Masons said.

“If they can’t offset that cost by either raising their prices or getting some sort of other government help to assist them with those increased prices to meet that gap of energy pricing increases, then they have no choice — it’s no longer viable to manufacture it in that market and I can see those products potentially being offshored,” Subramaniam said.

So far, many generics manufacturers have been able to weather the storm. On a recent third-quarter earnings call, the chief financial officer for the German injectable generics manufacturer Fresenius Kabi noted the company has largely been “shielded from increases in energy costs” because of existing contracts running until the end of 2022 and partially into 2023.

But if high energy costs continue to persist “past the winter of 2023, potentially where (companies are) looking into 2024 and being in similar or worse conditions” Subramaniam said, “decisions may start to be made” about whether to relocate manufacturing facilities.