Costs Continue to Pressure Food & Beverage, Biotech, Pharma

After two years of relatively flat food prices, the food and beverage industry saw a return to inflationary food prices in 2011, notes Brian Todd, president and CEO of The Food Institute (www.foodinstitute.com), a nonprofit information organization in Upper Saddle River, N.J.

Aw 8283 Filet Mignon

Retail prices rose nearly 5 percent in 2011, after advancing less than 1 percent in 2009 and 2010, he adds. “The recessionary economy affected retail prices considerably during the past three years—and 2011 marked the first time in nearly two years that food retailers successfully passed along a good portion of the higher costs they had been experiencing.”

During 2009 and 2010, the wholesale costs retailers paid for products rose over 5 percent annually, Todd says. “They passed along little of those costs to consumers, however.” By early 2011, though, he says The Food Institute began reporting increases in retail prices. “By the end of the year, retail food prices were more closely tracking wholesale food cost gains.”

For 2012, The Food Institute and others see food price inflation continuing, perhaps at about 3.5 to 4 percent, Todd remarks. He bases his forecast on early January 2012 conditions and notes 2012’s projected inflation would be less than 2011’s, but still slightly above the previous five-year average. “The driving forces will be center-of-the-plate items such as beef, pork and seafood,” he said.

With pharma, “the outlook is still very strong but some dark clouds remain. The larger firms are pretty economically strong. But smaller firms don’t have stable cash flow from some of their products,” according to Glenn Restivo, industry manager for pharmaceuticals with automation vendor Siemens Industry Inc. (www.sea.siemens.com), Springhouse, Pa.

Overall, though, pharma also has a lot of pressure on costs, says Jamie Hintlian, pharma vice president for process manufacturing software vendor Aspen Technology Inc. (www.aspentech.com), Burlington, Mass.  To respond, pharma companies are embracing Lean manufacturing and Six Sigma. “No longer [are these topics] three-ring-binder recommendations that sit on the shelf because they are not implementable. Lean and Six Sigma are finally making their way to the plant floor,” Hintlian says. In particular, Lean is helping eliminate the “hidden factory,” which is comprised of the costs and workers throughout plant operations that are not typically attached to any specific product.

But pharma does more now to manage costs. “There’s a strong push to find the right value for the right operating model, with the focus on managing value versus managing assets,” Hintlian says. “And particularly from a cost perspective, supply chain integrity and drug pedigree are the new challenges for pharma.”

Regulatory certainty needed
Restivo agrees about the pressures. “There’s a lot to lower drug costs. Industry is very dependent on economy, but with unemployment [at current levels], people may be not buying the drugs they should. Industry is also cutting some jobs. But it will weather this storm,” he says. “With Obamacare [Patient Protection and Affordable Care Act of 2010], though, I’m not sure where all this will go.”

Biotechnology also seeks regulatory certainty “While the [biotechnology] science is strong, success in bringing new biotech innovations to market would be aided and accelerated by stable policies at the federal level,” says James C. Greenwood, president and CEO of the Washington, D.C.-headquartered Biotechnology Industry Organization (www.bio.org).

The innovations of which Greenwood speaks could come in healthcare, agricultural, industrial and environmental products. “In each, the science of biotechnology advanced in 2011, and we expect strong developments to continue in 2012,” he says. Recent key drug approvals highlight the scientific progress biotechnology is making and, in particular, show cancer treatments becoming more personalized and specific.

But commercialization faces enormous challenges, Greenwood says. “Venture capitalists are seeking shorter-term investments with less risk. And venture capital financing is still down 25 percent from its 2007 peak. We continue to see fewer deals being done, while the IPO [initial public offering] window remains tough and selective.” He adds that, as of mid-January 2012, it has been almost two months without a biotech IPO. “But even the last few IPOs back in November 2011 continued the theme: ‘You can get out, but with a minus-30-percent haircut.’”

In 2012, the overall biotech challenge is clear, Greenwood emphasizes. “We must continue to look for ways to reduce risk, enhance reward, reduce uncertainty and reinforce biotech’s position as a major contributor resolving society’s most pressing needs.” And for production specifically, “we will also continue ongoing discussions with policymakers about the next renewal of the Prescription Drug User Fee Act (PDUFA V) to get back to basics for patients, based on science-based and transparent principles.”

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