Could Investors Overdose on Pharmaceuticals?

Michael McTague  |


Image: Pawel Czerwinski | Unsplash

Pharmaceutical companies have weathered the recent stock market slump far better than most sectors. It’s worth reminding ourselves why this is the case  — while also taking note of some clouds on the horizon. But first the indisputable facts: The giants – Pfizer (PFE) with a market cap of $254 billion, Johnson & Johnson (JNJ) coming in at $424 billion and all the others – are rolling in money. Regeneron (REGN) tallied over $16 billion in 2021 revenue; Gilead (GILD) raked in $27 billion. 

Everybody loves these corporate monoliths because they create miracle cures. Consider just these three recent, spectacular breakthroughs:

  • New Treatment for Type 2 Diabetes: Roughly 10% of Americans suffer from diabetes and many more are at risk The breakthrough involves receptors that stimulate the pancreas to release insulin and reduce blood sugar spikes after eating. This opens the door to weight loss and cuts down the probability of obesity. Developed by Eli Lilly and Co (LLY), the market for this miracle is enormous. The company’s share price is not far from its 52-week high.

  • Radiopharmaceuticals for Prostate Cancer: Each year, about 200,000 Americans are diagnosed with  prostate cancer,the most common cancer among men. No longer seen as a death sentence, prostate cancer has a wide range of treatments, and their quality and focus rises continually. The latest is radiopharmaceutical therapy, in which  doctors perform scans that attach radioactive tracers that  more effectively track  and kill  cancer cells. The drug is manufactured by Novartis (NVS), which also funded the successful VISION Phase III  trial.

  • Coronavirus vaccines: The initial breakthroughs – Moderna (MRNA) and Pfizer got to the finish line at about the same time – generated euphoria. Shortly after the lab work was done, investors were delighted as production, shipping and injections got underway. The  companies made billions. Vaccinations and boosters are still taking place worldwide and, while they may not be perfect, the shots  are responsible for protecting millions from a deadly disease. People outside the pharmaceutical industry can only marvel at the speed with which these products were developed.

But here’s another consideration for investors: All of the winners in the vaccine race achieve an effectiveness rating of 95% or above. More than 12 billion doses have been administered worldwide. There are, however, alternatives — demonstrating roughly 50% effectiveness, according to initial reports. Notable among them are China’s Sinopharm and Iran’s Shifa Pharmed Industrial Group. Meanwhile,  their reported effectiveness has slowly edged up toward 90%. Before dismissing these contenders, consider that in the early days of the pandemic, a 50% effective vaccine would likely have been approved by the Food and Drug Administration  and embraced worldwide. In addition, many millions of people are using the lesser alternatives, with Iran claiming to have administered  150 million doses.

Meanwhile, the mighty pharma industry is far from universally admired. Now that the crisis has subsided, Big Pharma’s enemies are back in action. Many in Washington are suspicious of the cash-laden corporations, particularly because they were involved in lockdowns and mandates. As recession and inflation threats and realities persist, political backlash is likely to advance. The drug price controls that ultimately made it into the final version of the Inflation Reduction Act — though subject to much negative commentary by industry and free market advocates — may prove to only be the beginning. 

At the same time, these companies’ massive research and development budgets include a great deal of taxpayer money. Johnson & Johnson spends about $15 billion annually on R&D. Moderna, Sanofi (SNY), Johnson & Johnson and Astra Zeneca (AZN) together collected $2.7 billion to fund human trials. The National Institutes of Health has doled out nearly $5 billion for testing, vaccines and treatments. Recently, Moderna, which has collected $1 billion for research, signed an order for $1.5 billion to supply vaccines. All of these events mean that politicians are okay giving money, but now they want a great deal back. Watch for the mood to change and for tension to rise.

Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.    

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