Hi, I’m Eve. Many have explained why big pharma, despite claiming to be R&D-driven, is largely in the innovation business. They have long spent more on marketing than on research. And, overall, they spend more on stock buybacks than on research. Moreover, for decades, the overwhelming majority of new drug applications are actually small improvements to extend the life of a patent. The massive levels of patent-driven “research” and other creative accounting have1 This contributes to the dominance of big pharmaceutical companies in reported R&D spending, as opposed to other measures of true new drug research.
The paper usefully points out that smaller biotech companies, not affected by drug price suppression, carry out the majority of clinical trials, which is a good indicator of innovation.
Article by Fred Ledley, professor of natural and applied sciences and business administration and director of the Center for Science and Industry Integration at Bentley University; Henry Dao, research associate and vice president for portfolio management at Bentley University; and Cody Hyman, assistant professor of accounting at Bentley University. Institute for New Economic Thinking website
Two years after Congress passed the Inflation Control Act (IRA), there has been a flurry of commentary from both public advocates and industry about its impact on drug prices and development. Some analysts celebrate the beginning of public representation in drug price negotiations, while others lament the loss of shareholder control over the pharmaceutical market. But all sides are stepping up efforts to gain political influence.
But while the past two years have been a bonanza for critics, lobbyists and lawyers, the academic world has suffered from a dearth of publicly available data on the details essential to making judgements on all the allegations: drug prices, the costs of pharmaceutical innovation, the fundamentals that drive biotech and pharmaceutical companies, and the emergence of conflicts of interest between authors and publishing venues.
The two papers this week are Science and Industry Integration Center in Bentley University We show how basic research can reframe the debate around the IRA. paperpublished in the journal Clinical Trialsexamined the financials of 1,378 publicly traded biopharmaceutical companies to understand the pharmaceutical industry’s contribution to innovation, the main sources of innovation capital, and how R&D spending has changed with changes in revenue and new investments from 2000 to 2018. INET Working Paperinvestigates the relationship between pharmaceutical price indexes (consumer or producer) and investment in the biotechnology industry.
According to these studies, about 5% of publicly traded biopharmaceutical companies are large, profitable drug manufacturers, accounting for about 90% of global pharmaceutical sales, revenues, and R&D expenses. These companies also distribute more cash to shareholders through dividends and share buybacks than they receive from stock sales. For these companies, revenues are the primary source of innovation capital, and R&D expenses scale linearly with revenues.
In contrast, 95% of publicly traded biopharmaceutical companies are small biotechnology companies that typically have no product, low revenues, or negative profits, but sponsor approximately 60% of clinical trials. These companies raise much of their capital for innovation through equity issuance rather than revenue. Importantly, the analysis shows no association between consumer or manufacturer drug price indexes and investments in or valuations of biotechnology companies.
These results suggest that analysis of the impact of IRAs on the pharmaceutical industry cannot be based on the assumption that valuation and strategy can be predicted from discounted cash flows, revenues, or profits. These principles may be applicable to large, profitable pharmaceutical companies, but they do not describe smaller, science-based biotechnology companies or the biopharmaceutical sector as a whole. However, as we explain in the INET paper, most of the studies that have influenced the debate on IRAs are based on analyses of the largest pharmaceutical manufacturers and ignore the idiosyncrasies of most biotechnology companies.
Reframing the debate based on empirical evidence suggests that the biopharmaceutical industry and investors should not be adversely affected by IRA drug pricing provisions, but may actually benefit. Our model suggests that large pharmaceutical companies could maintain their profits and number of new drug approvals at current levels by reallocating R&D spending to later stages of clinical development and replenishing their pipelines through licensing or acquiring clinical-stage products from smaller biotech companies. One direct impact of such a strategy would be to increase the asset value of these large companies relative to their R&D spending, which would likely improve fundamentals under traditional asset-based valuation models.
For smaller biotech companies, our analysis suggests that changes in drug prices are unlikely to negatively impact investments or valuations. At the same time, increased demand from large pharmaceutical companies to license or acquire clinical-stage products could increase competition for these assets, driving up transaction prices and improving returns for investors.
Lowering drug prices in itself can have a positive impact on the market. Higher medical costs are known to have a negative impact on the market. effect This will have a major impact on consumer spending and debt. Healthcare costs are also a major drag on corporate finances, with employers paying 73-83% of healthcare costs. Employee medical expenses The average cost per person is $8,435 ($23,968 per family). Approximately 9% of the total Lower health care costs would benefit companies and their investors across the economy.
Diversified institutional investors Substantial Investors who hold shares in big pharmaceutical companies could potentially create value in their broader portfolios by advocating for price reductions on the drugs they own, rather than fighting expected price cuts in their IRAs.
While our study may not justify blind optimism about the impact of the IRA on the biopharmaceutical industry or the stock market, it should quell unwarranted industry claims that the IRA’s drug pricing provisions pose a significant threat to them, their shareholders, or pharmaceutical innovation. In fact, the bigger threat is the continued industry claims that the IRA will have a negative impact, which could cascade into negative investor sentiment and negative market movements.
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1 This bit of trivia is old, but easy to understand and represents something I’m confident in. Long ago, Bristol Myers owned Clairol. Hair color is an incredibly profitable business (there are real barriers to entry and a lot of chemistry involved). Products made for cents a box sell for dollars a box. Years ago, an executive told me about the many ploys Bristol used to shift as many expenses as possible from its pharmaceutical business to Clairol, both to boost reported pharmaceutical profits (which Wall Street gave higher multiples than color and OTC drugs) and, likewise, to classify as many pharmaceutical expenses as possible as research-related.
