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“Few economists expect the third quarter’s growth to persist.”1

“11.4 million jobs replaced, of the 22 million lost in March and April.”2 

“Many of those who lost jobs are struggling to find other work.”3 

“Record gains aren’t enough to get us out of the hole Covid left us in.”4 

Quotes from articles about the struggling US economic and job market recovery, and the record gain in Q3 2020 GDP growth in the October 2, 3-4, and 30, 2020 issues of The Wall Street Journal

Long-Term Economic Challenges Facing the US Pharma Industry

October 2020 saw a wealth of economic news about the state of the country’s progress to get out of the COVID-19 induced recession. The beginning of October 2020 saw a plethora of mixed national economic data come out that overall portrayed a US economy recovering from the COVID-19 induced recession, but with distinct challenges ahead. The end of the month heard about a record 7.4% GDP percentage increase from the previous quarter for Q3 2020, after a record 9.0% drop for Q2 2020.4 Increases in consumer spending on service and goods were the dominant factors driving the record growth, caused by pent up demand and $3 trillion in government deficit-spending stimulus. Traditional Keynesian economics is still valid!

However, significant uncertainty remains regarding the long-term economic health of the country, and with it, various future adverse effects on drug demand through changes in market access, patient affordability, managed market plan control design (public and private plans), and Medicaid. Below is a list of key takeaways from the recent releases of economic data on the current and future state of the US economy (the initial points present the more positive news, followed by a litany of negative news):

    1. The US unemployment rate fell to 7.8% for September 2020, down from the previous month of 8.4% for August.2
    2. The latest unemployment rate is significantly lower than the peak of just under 15% in April 2020.2
    3. While the economy added 661,000 jobs in September, the pace of job growth has significantly slowed.2
    4. Growing signs are emerging that a significant proportion of unemployed workers will join the ranks of the “permanently” (long-term) unemployed, rising to 3.8 million workers in September versus 2.0 million in April.2-3 The drop in the September 2020 unemployment mainly reflected people leaving the workforce and joining the ranks of the permanently unemployed, not because of robust job growth.2
    5. The weak job market caused household personal income to drop by 2.7% in August 2020, reflecting reduced unemployment checks from the government.1
    6. Weekly unemployment claims are still at recession levels at over 800,000 where almost 12 million workers are still receiving unemployment compensation from state programs.1
    7. The failure between the Trump administration and the House Speaker Nancy Pelosi in extending stimulus programs will likely further weaken the job market, add to unemployment claims, and reduce future household personal income. This drop in personal income will reduce the growth of spending that drove the increase in Q3 2020 GDP.
    8. Federal Reserve Chairman Jerome Powell has warned that the US economy needs another stimulus to sustain the recovery, but more importantly, warns of an economic tragedy if the coronavirus is not controlled.5
    9. The European Union (EU), with a collective GDP about the same as the US, is experiencing a 2nd COVID-19 wave, with widespread country lockdowns beginning to occur. EU GDP growth will decrease, global GDP will be adversely affected, and thus put a drag on the US economic recovery.
    10. There will be long-term effects of the recession on large state budget shortfalls (about $434 billion in state budget shortfalls from just 2020-2022 alone according to Moody’s Analytics) and their effects on Medicaid funding, and thus on brands dependent on revenue from this payer channel. States will be raising taxes and reduce employment, all creating drag effects on the recovery, while also causing market access effects.6
    11. Likewise, similar effects at the national federal budget level, multi-trillion budget deficits ($3 trillion from the last budget year that just ended), means effects on Medicare funding, and thus on brands dependent on revenue from this payer channel. The federal government cannot sustain multi-trillion deficits per year. These multi-trillion deficits will have to be repaid, likely through borrowing (not through spending reductions or tax increases). This debt-servicing cost is currently low given the almost zero structure of interest rates as pursued by the Federal Reserve. However, the concern from economists is what happens when interest rates begin to rise? Funding large government deficits and total debt will crowd out private investment, thus putting a drag on future economic growth.
    12. About 40 million people risk being evicted because of their inability to pay rent as federal and state bans on such evictions expire.7The Great Recession (December 2007 – June 2009) showed revealed people made choices between food, rent, and between multiple medicines they took (and not always making optimal healthcare choices). Drugs for chronic asymptomatic conditions are most at risk for being discontinued by economically struggling patients.
    13. There is a pending real estate crisis in cities as workers move out of cities for more affordable locations caused by increased job flexibility in people working from home.8 Further, commercial real estate prices in cities will be adversely affected as rents and values of properties fall given the shift to working from home. Support services that cater to office workers in cities will also be affected. These shift in residential and work patterns will create greater variations in the economic recovery, with large central city areas experiencing a drop in residents, workers, and economic activity, while suburban areas feeling an increase in these trends.
    14. Economists have used multiple letters (V, U, L, W) to characterize the shape of the economic recovery. Now, the “K” uneven economic recovery is emerging, where some people, like those in the professions that can work from home remain largely unaffected, versus those who require to meet or gather people (e.g., restaurants, movie theaters, etc.), are being adversely affected. This means drug demand will vary according to their reliance on payer channels like Medicaid, which will increase in enrollments as those on the bottom part of the “K” are forced into lower economic conditions. These Medicaid enrollment increases come at a time when state budgets can ill-afford spending more, thus expect more managed market controls on branded/biologic drug spending.
    15. Finally, the biggest boost to economic stimulus of the global economy is finding an effective vaccine. But even here, estimates point to a 50% probability of a safe and effective vaccine by April 2021, and an 85% probability available by the end of 2021.9 However, it is unlikely enough doses of an effective vaccine will cover the world’s population before September 2023.9 This means an uneven economic recovery around the globe depending on what countries can secure enough vaccine doses versus those that do not.

foreign-linkLearn More - Are Pharma Companies Prepared To Improve Dramatically How Economic Dynamics Are Incorporated Into Commercial Analytics?

The preceding negative economic news will place further weakness on future drug demand through market access (adverse unemployment conditions) and affordability (drop in household personal income) effects. Further, increases in the long-term unemployed will shift people from third party commercial (private) insurance coverage to Medicaid. Thus, the lengthening time of the trajectory back to economic normalcy for the US should concern pharma executives given how the path of recovery will affect drug demand. There has been numerous pieces written and published by Axtria about the effects of the COVID-19 induced recession on the pharma industry (see various posts on the Axtria Research Hub and Axtria Blogs.

Concluding Remarks – What Do These Economic Challenges Mean for Pharma Clients?

The COVID-19 induced recession has created economic and related societal effects not seen since the Great Depression. The unemployment rate peaked far higher during this current recession (14.7% in April 2020) versus the Great Recession (9.5% in June 2009) according the US Bureau of Labor Statistics, thus has a greater recovery gap. Moreover, this recession is virus-induced as opposed to a more traditional economic-induced event, so the dynamics around the recovery will be different. Also, recovery from this recession will likely take much longer than originally thought. Pharma company executives should not be complacent in thinking the need for continued economic analysis has dissipated. Axtria has the expertise in all aspects of pharma analytics applications, changes in commercial model design caused and accelerated by COVID-19, effects on commercial operations, economic analysis, and business information management to address all issues related to prolonged economic distress.

Axtria’s think tank has created innovative solutions to help clients make better decisions over the subsequent year or two as the US battles and recovers from the pandemic. The solutions have been designed by industry-leading experts like David Wood, PhD (Advanced Analytics), George Chressanthis, PhD (Pharmaceutical/Healthcare Economics), Uday Shah, MBA (Market Access), and Razek Karnoub, PhD (Forecasting).

Furthermore, the continued COVID-19 induced effects illustrate the need for advanced economic analysis to measure and mitigate its effects on brand utilization, patient health, and economic outcomes. Tech companies like Amazon, Google, and Microsoft have been hiring dozens of PhD economists to solve an array of business problems, issues that are very similar to those faced by the pharma industry.10 Axtria has pharma industry-experienced PhD economists to help clients with their business problems using advanced economic analysis.

If you are worried about accurately measuring the effects of continued long-term economic challenges brought about by COVID-19 on brand performance, please contact us (directly below). Axtria would be delighted to help and ensure that your measurement estimates of effects, forecasts required for accurate future decision-making, and resource plans are properly optimized. This will allow us to ensure that potentially life-saving medications continue to get to the appropriate patients and help mitigate the negative societal health outcomes triggered by this pandemic-induced continued economic uncertainty.

Given the dynamic nature of this pandemic, please read articles on the Axtria Research Hub and Axtria Blogs for updates.

References

  1. Mitchell J. Income drop, layoffs slow U.S. recovery. The Wall Street Journal 2020; 2 October: A1, A2.
  1. Chaney S. Job gains slow as layoffs persist. The Wall Street Journal 2020; 3-4 October: A1, A2.
  1. Morath E. Long-term jobless hint at slow rebound. The Wall Street Journal 2020; 3-4 October: A2.
  1. Torry H. U.S. growth erases much of slide. The Wall Street Journal 2020; 30 October : A1, A2.
  1. Tappe A. Fed chair warns of economic tragedy if America can’t control the coronavirus. CNN Business, published online 6 October 2020, available at https://www.cnn.com/2020/10/06/economy/fed-powell-coronavirus-stimulus/index.html.
  1. Gillers H and Banerji G. US states face biggest cash crisis since the Great Depression. Fox Business (from The Wall Street Journal), published online 29 October 2020, available at https://www.foxbusiness.com/markets/us-states-face-biggest-cash-crisis-since-the-great-depression.
  1. Parker W. Mounting unpaid rent risks U.S. tidal wave of evictions. The Wall Street Journal 2020; 28 October: A1, A2.
  1. De Lea B. Millions of Americans plan to move to more affordable areas amid pandemic. Fox Business, published online 29 October 2020, available at https://www.foxbusiness.com/luxury/millions-americans-move-affordable-areas-pandemic.
  1. Hannon J. Economies await a shot in the arm. The Wall Street Journal 2020; 5 October: A2.
  1. Athey S and Luca M. Why tech companies hire so many economists. Harvard Business Review, published online 12 February 2019, available at https://hbr.org/2019/02/why-tech-companies-hire-so-many-economists.

George-A.-Chressanthis
Written By:
George A. Chressanthis
Dr. George A. Chressanthis is currently Principal Scientist at Axtria, a big data and analytics company, in a newly-defined position held since his arrival in July 2016. He brings a unique combination of professional experiences into the analysis of strategic and operational issues affecting the biopharmaceutical industry. He is a former executive in the pharmaceutical industry with achievements in academia holding senior professorships in healthcare management, marketing, economics, clinical sciences, and political science.

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