Big Pharma’s Broken Business Model
A major theme running throughout the SARS-CoV2 virus pandemic has been and especially in the early days:
NO RETURN TO NORMAL UNTIL A VACCINE IS AVAILABLE
This became a meme in the citizen’s zeitgeist. It is present everywhere from football web sites to Government mouthpieces.
“to accelerate construction of the new Vaccines Manufacturing and Innovation Centre () which, when completed, will have capacity to produce enough vaccine doses to serve the entire UK population in as little as six months.”
On the 4th of may we had this from the UK’s esteemed if somewhat partially visible leader.
“He will confirm the UK’s pledge of £388 million in UK aid funding for research into vaccines, tests and treatments – part of a larger £744 million existing UK aid commitment to help end the pandemic and support the global economy.”
That is just the UK.
In the USA as of April 1st 2020 we had this:
“Johnson & Johnson announced on Monday (March 30) a joint investment with the US government of $1 billion intended to create the capacity to manufacture more than 1 billion doses of a vaccine, reports Reuters, and the efforts will be funded in part by roughly $420 million from BARDA.”
What about this from May 21st 2020 in The Street:
“British pharmaceutical giant AstraZeneca (AZN) – Get Report has received more than $1 billion from the U.S. government to boost the manufacturing of an experimental coronavirus vaccine from the University of Oxford.”
The big picture is that a vaccine has now been accepted and reinforced in public consciousness and that billions are being spent on rushing miracle cures to the unsuspecting masses.
“It’s deja vu all over again!”
In 1976, Americans faced a sustained propaganda campaign of Vaccination against ‘swine-flu’. If you haven’t watched it then watch it now 60 minutes.
During the swine-flu ‘pandemic’ of 2009 millions of doses of swine flu vaccine had been ordered by national governments from Big Pharma. Millions of vaccine doses were subsequently destroyed: a financial bonanza for Big Pharma. They had contracted to buy the vaccine only if the WHO raised the level of the ‘pandemic’ from 5 to 6.
“On the basis of … expert assessments of the evidence, the scientific criteria for an influenza pandemic have been met. I have therefore decided to raise the level of influenza pandemic alert from Phase 5 to Phase 6. The world is now at the start of the 2009 influenza pandemic.…Margaret Chan, Director-General, World Health Organization (WHO), Press Briefing 11 June 2009)
The film by investigative reporter Lillian Frank, Trust WHO, is a must watch. It is available for free. If you have Amazon Prime!
The familiar theme running throughout these ‘pandemics’ is vaccines. From 1976 to 2009 to 2020 we have seen that vaccines can be rushed to market without proper testing. Why?
Big Pharma’s business model is broken.
Like the snake oil salesmen of yore, Big Pharma sells a dream of Health to the masses with dubious scientific claims of the beneficial effects of various chemicals.
As Frank Zappa opined in Cosmic Debris:
“With the oil of aphrodite, and the dust of the grand wazoo
He said you might not believe this, little fella
But it’ll cure your asthma too”
The most prescribed drugs in the US are opioid pain relievers
“In the late 1990s, pharmaceutical companies reassured the medical community that patients would not become addicted to prescription opioid pain relievers, and healthcare providers began to prescribe them at greater rates.” Source
An unfortunate side effect of this bold faced lie was
“that the total “economic burden” of prescription opioid misuse alone in the United States is $78.5 billion a year, including the costs of healthcare, lost productivity, addiction treatment, and criminal justice involvement.” Source
So lies told by Pharmaceutical companies in the late 90’s cause today’s opioid crisis, made worse by the ridiculously easy manufacture of Fentanyl, and spawned whole industries to deal with the crisis.
Well there’s a great economic model. Invent drugs which solve a problem, lie about the benefits of your drug, which leads to a huge problem which needs more health resources to deal with it, all of which results in huge societal costs increasing police time and resources, court time and resources and causes excess deaths.
Suspiciously, vaccines seems to fit this model with the added benefit of reduced time to market.
The figure below shows the life cycle from discovering a new drug to it’s eventual appearance on the market.
“Inefficiencies in clinical trials and significant time and cost to bring lifesaving drugs and therapies to market.”
Which really equates to “we want our money and we want it now!”
The rush to reduce time to market for new drugs is based on the declining return on investment of the established pharmaceutical business model.
There is an excellent analysis of the Big Pharma business model at ENDPOINTS. The author of the article, Kelvin Stott analyses the business model from the ROI (Return on Investment) of Research and Development costs (R&D). Bare in mind that this was written in 2017.
We have seen the huge lead time between investing capital in a new drug and when it actually gets to market to make money.
This can be between 10 to 16 years. There is no guarantee that the drug will reach market and in most cases, probably will not.
Using a simple ROI model has many limitations but avoids cashflow assumptions, interest rates, cost of capital and myriad other factors which would be used in a more complicated IRR (Internal Rate of Return) model.
“As it happens, this average investment period is relatively stable and well-defined, as it is largely driven by a fixed standard patent term of 20 years, as well as a historically stable R&D phase lasting roughly 14 years from start to finish. Thus, the average investment period is about 13 years, from the midpoint of the R&D phase after 7 years, plus another 6 years to reach peak sales before loss of exclusivity.” Source
Kelvin Stott uses the simpler ROI model to calculate the IRR on Pharma in any given year by the simpler formula:
IRR(x) = [ (EBIT(x+c) + R&D(x+c)) / R&D(x) ]^(1/c) – 1
Where c is the average investment period of 13 years.
He presents the upshot of his calculations in the rather revealing graphs below.
The dashed black line in the above graph is the Cost of Capital. The CoC is a figure used by a business often as a hurdle rate to determine if a project is worth taking forward. It is often used to analyse the benefits and risks of investing in different projects and businesses. For example, the political risk of investing in Bangladesh may drive the CoC to 12% as compared to the UK at 10%.
The graph shows clearly that IRR is below the cost of capital in ~2017.
The second graph in Kelvin’s article shows how Parma has cyclically evolved and could continue to evolve in the future:
We are already at the stage of Biopharma, Antibodies & NBE’s. This is the future. But what has not been considered in the strategy of reducing time to market
In 2018, Standish Fleming wrote an article for Forbes, which, ‘though critical of Kelvin Stott’s analysis, nevertheless managed to agree with him.
“Today multi-national pharma is optimized for late-stage clinical research and international marketing. As a result, discovery has become the limiting factor in productivity.”
“Cooperation with small companies will enable pharma to pursue two very different activities at the same time—discovery and large-scale development—one driven by the individual genius of inventors; the other by corporate infrastructure. The crazy-high failure rate of early-stage investments requires a low-cost, high-quantity strategy. Once proof-of-concept is achieved, advancing a drug to the market demands global resources and a fanatic devotion to quality. Over the course of development, the process must evolve seamlessly from a quantity to a quality strategy.”
Price Waterhouse explains it their paper Pharma 2020: Challenging business model published in 2007:
“By 2020, no pharmaceutical company will be able to “profit alone”. It will, rather, have to “profit together”, by joining forces with a wide range of organisations, from academic institutions, hospitals and technology providers to companies offering compliance programmes, nutritional advice, stress management, physiotherapy, exercise facilities, health screening and other such services.”
This is already happening. Pharma companies are investing in and partnering with Universities and Biotech start-up companies.
Changing a business model is never easy. Businesses take time to adapt to new market conditions. There will be casualties and there will be the last hurrahs of an old empire. The last company to make wheels for horse drawn carriages probably made the best wheel ever produced. And the went out of business.
Quantity over Quality
SARS-CoV2, the virus behind the corona crisis, was identified in January 2020. Here we are in June 2020 and already we have clinical trials being carried out.
“Oxford University researchers began human trials of a ‘COVID-19’ Vaccine as early as April 2020.
The phase I trial in healthy adult volunteers began in April. More than 1,000 immunisations have been completed and follow-up is currently ongoing.
The next study will enrol up to 10,260 adults and children and will involve a number of partner institutions across the country.” Source
Oxford University’s research has been backed by AstraZEneca. Human trials in 3 months!!!
“WHO chief scientist Soumya Swaminathan said Moderna’s <MRNA.O> COVID-19 vaccine candidate was “not far behind” AstraZeneca’s, among more than 200 candidates, 15 of which have entered clinical trials.
“We do know that Moderna’s vaccine is also going to go into phase three clinical trials, probably from the middle of July, and so that vaccine candidate is not far behind,” she said.”
We have already touched, and I mean ‘touched’ on the billions of Government money i.e. taxpayer money being invested in a COVID-19 vaccine but get this:
“The World Health Organization and two global health nonprofits said Friday they have an $18 billion plan to procure two billion doses of eventual coronavirus vaccines for distribution in developing nations.” Source
2 billion doses. Quality over quantity? Forget about the hugely expensive failure rate for drug R&D, clinical trials and eventual approval. Let’s see who will be the first company to produce 2 billion vaccine shots for $10 a pop. Tamiflu is $45 a shot at Walmart. A drug that doesn’t work.
Some pharma companies (Gilead) are marketing old drugs such as Remdesivir, as a treatment. An antiviral which has proven to be ineffective against the virus it was created for (Hepatitis C) and failed. It was then was abandoned as a treatment for Ebola. Despite this, it was approved by the American FDA on 1st May to treat COVID-19.
Forget Standish Fleming’s call for the quality of outcome of new treatments versus the quantity of new drugs. What we have now is a feeding frenzy created by a world-wide over-reaction to what has turned out to be, a mild viral infection.
Moderna, one of the front runners in a race to create a ‘COVID-19’ vaccine has seen it’s stock price rise from around $20 to $61 since the coronavirus crisis developed. Despite the fact that they don’t currently have any products to sell. Co-incidentally,
I am sure that this was just a fortuitous coincidence.
The global vaccine market value has been estimated to approach $60 billion by 2024. This was before the corona virus ‘crisis’ started shovelling tens of billions into finding a vaccine which would allow us to return to ‘normal’.
Given the 2009 ‘Swine Flu’ fiasco, this must seem like Deja Poo to the pharmaceutical industry. Easy money.
Imagine you were the CFO of Moderna. Would you ‘take the money and run’? David Meline, the former CFO of Amgen (AMGN) stock price of ~$255 has now taken his job.
The pharma industry has a broken business model. It spends $295 million in lobbying in the USA. More than twice that of the Electronics industry at a mere $157 million. Source
SARS-CoV2 must seem like Manna from heaven.
First posted on Principia Scientific International