Much as I like Michael Hodin’s remarks on the government response to the Pfizer-Astrzeneca deal:
On both sides of the Atlantic, exactly the wrong questions are being asked. Nor is Read, however convenient a scapegoat, the right person to be interrogating.
Instead, they should be asking what could be done to ensure that the R&D pharmaceutical sector remains vibrant, ambitious, and well-funded. In the coming decades, with over two billion people growing into old age, and health care costs still rising ahead of inflation, the “miracles†of the 20th century that contributed mightily to our current longevity will be essential. These are not questions for a CEO, but for policymakers who create the conditions that enable or discourage investment that leads to jobs, innovation and economic growth.Instead of asking Ian Read about Pfizer’s plans to hire or fire, government leaders should be asking their health, science and finance ministers what kinds of R&D programs could be put in place to enable the British population to age with more vitality.
I don’t think he “gets it”, either. Pharmaceutical companies don’t view R&D as a profit center but as overhead. From their point of view it should be minimized.
IMO among the questions that should be asked is whether the regulatory framework that’s in place is encouraging or discouraging more R&D and developing new pharmaceuticals. I think you need to look beyond single companies and at the industry as a whole.
Do we really want/need new pharmaceuticals? Do we really want to preserve the lives of billions of old people (call it over 70 or 75 to put a number on it) in order to get them an extra few years at any and all expense?
Intellectual property laws and corporate governance answer in the affirmative for both questions, the pseudo-market forces at work in healthcare in notional democracies answer yes to the second question.
The obvious answer is we need new antibiotics or alternatives to antibiotics. The primary beneficiaries of those aren’t the elderly but the young.
Among many topics that I wish I had a better understanding of, is how government funded basic research translates into use by pharmaceutical companies. There’s clearly a subsidization there, no? And an area ripe for policy intervention, if we had leaders with any desire to create good public health policy.
Profit margins for the big pharma companies have run around 18%. They wont do more research and develop new drugs unless they dont have to pay taxes on that 18%. Sure.
Cstanley- I have read on that topic many times. It gets complicated. Angell, former editor of the New England Journal has written on it many times. In short, the drug companies try to get the universities to do their research when they can. Researchers try to make money from the drug companies and the potential conflicts of interest get tricky. It may or may not be a great area for policy intervention. I think we would get more bang for our buck if we just let Medicare bid on prices.
Dave- We need new antibiotics but the pipeline looks bad. Not sure more money would make the difference.
Steve
“Pharmaceutical companies don’t view R&D as a profit center but as overhead. From their point of view it should be minimized.”
I strongly suspect that, rather, no matter how it is accounted for, its looked upon as capex, and demands an adequate return.
They don’t seem to. I’ve looked at a decade’s worth of quite a number of large pharmaceutical companies’ annual reports. R&D expenses vary with inflation; marketing expenses vary with revenues.
My tentative interpretation of that is that marketing and lobbying are seen as profit centers while R&D is simply overhead.
Dave
No business, pharma or not, intends or believes they can grow by minimizing their growth capex. None. They may put some of the cash flow on a P&L, some in the cash flow statement (for tax considerations). But to view it as simple overhead is to cast your fate……….well, to fate. You only hold the dollars back if you don’t think you can get a return on their expenditure, for whatever reason. 18 years on the principal side allow me to make that statement unequivocally.
Now, as to pharma, its dangerous to get too anecdotal. But my brother is an IT guy involved in security wrt molecule research at a certain well known pharma in Indianapolis. My sister in law coordinates clinical trials. At least in the case of this particular company, they view these expenditures not as something to be minimized, but the lifeblood of the firm. I took the liberty of running the question at hand by them and they laughed out loud. Maybe their firm is an outlier.
And for steve – if you are following this. Don’t make the classic rookie mistake. For heavy reinvestment industries/businesses you must look at profit less capex, (sometimes, with various tweaks, called “free cash flow”) not just profit margins. What do you think funds the capex??