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Government May Have No Conscience. But Sometimes It Has a Policy.

In pharma, the future heuristic will be: blockbuster or nothing!
Michael McTague, Ph.D., is executive vice president at private equity firm Able Global Partners in New York.
Michael McTague, Ph.D., is executive vice president at private equity firm Able Global Partners in New York.

Following the election, the opioid crisis is likely to gain more public and legal attention. If this happens, the major pharmaceutical companies, including distributors, may be in for a difficult time.

It’s estimated that more than 100 people die every day in the U.S. from opioid overdoses. Settlements have been mounting and are likely to continue. It’s not just the well-known Purdue Pharma ( PAC ) decision. But also Johnson & Johnson ( JNJ ), which is supposed to pay over $550 million for promoting opioids in Oklahoma alone. And McKesson Corp. ( MCK ), Cardinal Health Inc. ( CAH ) and AmerisourceBergen Corp. ( ABC ) are part of a deal to pay billions for many years into the future. More are surely on the way.

Investors will note that this trend puts the pharmaceutical industry in a serious financial bind. On the front end, the cost of producing new drugs soars. And on the back end, lawsuits await. The future heuristic will be: blockbuster or nothing!

Two peculiar trends are at work. On one hand, is the federal government’s increasing rate of participation – specifically through cash grants – in the creation and oversight of new pharmaceutical products. (Perhaps this is a good moment to acknowledge my headline’s debt to Albert Camus, who wrote: “By definition, a government has no conscience. Sometimes it has a policy, but nothing more.” ) On the other hand, because of legal challenges, major companies are shying away from research projects that have only limited financial value. The future heuristic will be: blockbuster or nothing!

While the total is difficult to measure, something on the order of $300 billion a year is spent by the government to support pharmaceutical research. So, the same federal government that bellyaches over the price of drugs shells out tons of money in the creation process. It has been argued that every major pharmaceutical breakthrough has been funded in large measure by the U.S. government.

A good question for investors is, What are the most profitable drug patents? Here are a few answers with the focus on revenue rather than undisputed ownership of the patent:

* Pfizer and BioNTech (BNTX) share the patent. Others have disputed its ownership.

Many other patents reveal great monetary success. Investors will note that the major drug makers have been enormously profitable and hold the patents or at least a share of the patents on almost every breakthrough. Despite industry grumbling that patent durations are too short, the system allows patent-holders to reap substantial profits. According to America’s Health Insurance Plans (AHIP), pharma giants took in an average of $18.6 billion in total global revenues for a new drug – ten times more than the average $1.8 billion cost of creating the product. If the government contribution is not counted, profits would be even higher.

The massive government vaccine funding came about because everyone wanted to stop a deadly disease. No one wanted a repeat of the Spanish influenza. A question for investors is, How much good did the vaccines really do?

At some point, there will be a good estimate of how the coronavirus vaccines affected life expectancy in the U.S. Assuming that the virus itself shortened life expectancy, it naturally follows that the vaccines extended life expectancy. A study reported by PNAS (Proceedings of the National Academy of Sciences) states that life expectancy in the U.S. dropped by 1.13 years because of the pandemic. The next study should define how the vaccines restored life expectancy.

Unlike the vaccines, the opioid crisis has no upside. That situation suggests that expenses and profits sometimes outweigh the most basic purpose of the pharmaceutical industry – to improve health and extend life. In fact, over a long span of years, life expectancy has moved up slightly in the U.S. and other industrialized countries.

The pharmaceutical industry deserves some of the credit. For 2022, the official life expectancy in the U.S. is 79 years. In 1950, it was 68 years. Of course, pure statistics may not mean a great deal. War, disease and other factors come into play. Also, curiously, quite a few countries have life expectancies higher than the United States, where so many miracle cures are created.