The polarized debate over drug pricing has generated cartoonish, sometimes colorful caricatures of the biopharmaceutical industry and its leaders. Critics of the industry have portrayed pharmaceutical leaders as ruthless, rapacious leaders who gouge patients to gratify greedy shareholders. While one might expect industry trade organizations to defend their leaders, their responses have sometimes portrayed leaders as powerless proxies of their shareholders whose product portfolios and profits would collapse if forced to negotiate a “maximum fair price” with Medicare, their largest customer. Neither characterization depicts the industry leaders I have worked with in my career or their long record of accomplishment.
Pharmaceutical leaders face competing pressures. Their companies are expected to develop products that reduce the burden of disease and make the enjoyment of the highest attainable standard of health “one of the fundamental rights of every human being.” At the same time, they were trained in the Friedman doctrine, which dictates that they are employees of the shareholders and that their main responsibility is to “conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society,” a principle that remains central to economics and finance despite its disavowal by many business schools, faculties, and even the Business Roundtable.
These competing pressures are evident, for example, in the famous Johnson & Johnson credo, which begins “We believe our first responsibility is to the patients, doctors and nurses, to mothers and fathers and all others…” and concludes “Our final responsibility is to our stockholders. Business must make a sound profit.”
The pharmaceutical industry has generally proved adept at navigating these conflicting pressures. Studies performed with my colleagues in the Center for Integration of Science and Industry at Bentley University have shown that newly public biotechnology companies generated more than $100 billion in shareholder value after initial public offerings between 1997 and 2016, despite the compound risks of drug development and entrepreneurship. We have also shown that the earnings of 35 large pharmaceutical companies were significantly higher than those of other S&P 500 companies between 2000 and 2018 and that they distributed more than $1.7 trillion to shareholders through dividends or stock buybacks during that period. At the same time, the industry has successfully incorporated waves of innovation in biotechnology and business and launched products that have contributed to extending human life expectancy and reducing the burden of diseases. Many of these new drugs are now classified as essential medicines by the World Health Organization.
The industry has, however, failed to address high drug prices, drug shortages, and inequities in disease outcomes, and continues to neglect diseases of poverty, which are the biggest contributors to the global burden of disease. The industry faces intense criticism for these shortcomings, which has led to new policies designed to restrain drug prices, patent extensions, and mergers and acquisitions.
Industry advocates contend that these policies pose an existential threat to both their profits and product pipelines. They portray the industry and its leaders as being incapable of strategically managing the anticipated changes in the market for pharmaceutical products and hidebound to business practices that could further compromise innovation and the availability of essential medicines.
My colleagues and I disagree.
Our research suggests that established management and investment practices of the industry are sufficiently robust to preserve both corporate profits and a pipeline of new products. Our new paper in the journal Clinical Trials characterized the finances of 1,378 biopharmaceutical companies from 2000 to 2018. The analysis showed that approximately 5% of these companies were large, profitable pharmaceutical manufacturers that collectively accounted for most product sales, revenue, and R&D spending. These companies historically prioritize profits (earnings) and are likely to reduce R&D spending in proportion to any decrease in drug prices or revenue.
In contrast, 95% of the companies we studied were smaller biotechnology firms that typically had no products, little revenue, and negative earnings — but which sponsored the majority of clinical trials from 2013 to 2018. In these companies, R&D spending is more strongly associated with investments in equity offerings and there was no evidence for an association between R&D and revenue.
In a working paper published by the Institute for New Economic Thinking, we also found that investment in biotechnology companies was not associated with indices of drug prices, suggesting that anticipated reductions in drug prices would not have a significant impact on the availability of capital for innovation in smaller companies.
Our team has also modeled the impact of reducing drug prices on the pipeline of new products, taking into account the distinct contributions and finances of large and small companies. This analysis suggests that the pipeline of new products could be maintained at its current level in response to decreases in global sales up to 10% through established management practices in which large companies strategically allocate their reduced R&D spending to late-stage development and continue to replenish their pipelines with products that originated and are validated through early-stage clinical trials in smaller companies. Our models further suggest this can be achieved without any negative impact on returns to shareholders or investment.
I expect that the pharmaceutical industry can develop products that are affordable, universally available, and effective at reducing inequities in health outcomes and the global burden of disease without compromising their profits. To achieve that, industry leaders must be held accountable for doing the work that is required, for executing effective strategic management and investment practices, and for implementing the innovations in science and business that will enable them to fulfill both their stated mission of advancing health and their responsibilities to shareholders. The pharmaceutical leaders I know are up to the task and need to be given the benefit of doubt; their track record suggests that these multiplex expectations can be achieved.
Fred D. Ledley, M.D., is a professor of natural and applied sciences and management at Bentley University in Waltham, Mass., and director of the Center for Integration of Science and Industry.