As a former pharma sell-side analyst for over two decades, a two year stint as a medical sales representative for Dista Products (a UK subsidiary of Eli Lilly), and having worked as a consultant for the last 15 years and participating in all five phases of PharmaFutures, the investor lobby group, I have always given the industry the benefit of the doubt. I have met literally hundreds of caring and empathetic pharmaceutical employees; however, I am not blind to behaviour that is unethical, immoral and occasionally illegal.
Sell-side analysts will call out corporate behaviour which is illegal or financially dubious if they are aware of it and their compliance teams allow it. But, being arbiters of bigger picture issues, and in particular matters of morality or ethics, is not generally part of the job description. Buy-side analysts and investors, on the other hand, have a stewardship role that goes beyond the financials and have a duty to challenge the management of the companies they own. The analogy between the Covid pandemic and climate change should be considered. What began as a search for outperformance amongst obvious participants in the climate change scenario has shifted to much larger concerns about systemic risk; the cold hard statistics about the economic effect of Covid is surely transforming in the same way.
With climate change, investors have had decades. On this occasion, investors should act within months.
‘Investors know that the pharmaceutical industry has form when it comes to putting profit above patients, and this is not just the occasional “bad apple”’
The reconciliation of intellectual property and access to medicines has always been a contested space. The link between the two is price, the key determinant of profit. Pharma executives and investors know that the vast majority of profit is made in the US, Europe and other high income countries where the objective is to set a “global” price, minimising price differences between markets and reducing the need for invidious comparisons. In middle income countries there is usually some form of pragmatic price adjustment. However, citizens of low income countries have had to rely on generics or, in the case of vaccines, special programmes coordinated by the WHO, UNICEF, GAVI and similar organisations, delivered by NGOs and paid for by wealthy donors e.g. Gates Foundation, and government foreign aid budgets.
With respect to Covid vaccines, the trade-off between price and IP protection has never been more important. But should middle/low income countries have to rely on the paternalism of well-meaning NGOs and donors when the pharmaceutical industry has it within its power to play a pivotal role in ending this global scourge? The temporary waiver of IP is not the cure-all that some claim it to be and it certainly won’t work in weeks or even months, but it is one part of the picture. The vigorous defence of the status quo by Big Pharma and its political allies – that IP in this case is irrelevant to greater vaccine production, while its waiver is potentially dangerous – is predicated on assumptions which are hugely overstated. But in my opinion, investors need to challenge other sacred cows for more immediate impact.
Investors know that the pharmaceutical industry has form when it comes to putting profit above patients, and this is not just the occasional “bad apple”. Readers who are looking for a summary of settled lawsuits might find the Public Citizen 2018 report eye-opening: it details an aggregate sum of $38.6bn paid out in civil and criminal penalties from 1991-2017. In fact, investors know that putting profit above access to medicine is commonplace, even in high income countries, often walking the fine line between price gouging and value for money. But withholding the ability to help shorten a global pandemic that is not only claiming the lives of millions of people – including the employees and family members of pharma’s foreign subsidiaries and its investors – but which is also threatening the health of the global economy upon which its well-diversified investors depend, is a calculated risk that could leave reputational scar tissue visible for many years to come.
‘Now is not the time for buy-side analysts to take management statements at face value without critical exploration’
Investors have a significant role to play in persuading the leaders of the pharmaceutical industry that sticking with the old playbook is no longer viable. Here are three threads of inquiry that all investors could follow.
1. Is pharma’s rejection of the possibility of working with established manufacturers to repurpose existing facilities valid? Investors should challenge this blanket refusal. Why have Teva, Biolyse, and others not been allowed to explore the possibility of putting their production facilities to use in order to boost vaccine production even further?
2. The traditional argument about IP protection at all costs – especially during a pandemic where vaccines have been developed from the public purse – is simply not credible. It could result in blowback which is really damaging (i.e. which challenges IP on high value products).
In 2001 the industry dropped its lawsuit against Nelson Mandela’s South African government over compulsory licensing of anti-retrovirals and the world did not end. In fact Gilead and ViiV (a GSK,Pfizer and Shionogi jv) have gone on to great clinical and commercial success subsequently, contradicting dire warnings of an end to innovation as a result of a patent waiver.
3. Why is the industry not making full use of the crisis to set up manufacturing partnerships in geographic hubs that can serve middle and low income countries? Not only could these provide more immediate Covid vaccine help to middle and low income countries than the COVAX arrangement seems likely to but they could offer long term flexible production facilities for future vaccines and other medicines for which there is a pressing clinical need. Many such fill-and-finish facilities exist but they need help to move further upstream in the manufacturing process.
In summary, now is not the time for buy-side analysts to take management statements at face value without critical exploration. There is simply too much at stake economically and reputationally, and the industry, sadly, has too long a history of making mistakes. Analysts have a professional responsibility to pursue the issues above until they are fully persuaded by the answers. Buy-side investors and asset owners – especially if they have made ESG commitments – must bear in mind that profit cannot be the only objective in a world where the West may be post-Covid but the rest of the world is still very much in its grips.
Just read the account of Purdue Pharma’s methods of marketing Oxycontin (allegedly responsible for a big share of almost 500,000 opioid overdoses in the US over 20 years) to be reminded that we cannot take anything for granted. At the earliest opportunity investors should engage pharma management constructively but assertively and ask about each of the three issues above. Given gridlock within the G7, the most rapid solution to this pandemic lies in the hands of Big Pharma. Neither the sector, nor its investors, can afford to be on the wrong side of history again. At first glance, investors may fear they are biting the hand that feeds them but deep down they should know that now is the time to bare their teeth.
Stewart Adkins was a sell-side pharmaceutical analyst with Lehman Brothers from 1983-2006. The article was written with support from Dr Raj Thamotheram, Founder & Executive Chair of Preventable Surprises
Footnotes for this article are available on request.