Vox recently published an article on the high price of drugs, “The true story of America’s sky-high prescription drug prices.” Here are three sentences that make a claim worth considering:
What’s harder to see is that if we did lower drug prices, we would be making a trade-off. Lowering drug profits would make pharmaceuticals a less desirable industry for investors. And less investment in drugs would mean less research toward new and innovative cures.
There’s a great deal going on in these few sentences. Is there really such a “trade-off” as is breezily asserted here? That lower drug prices would result in less research? Or even that lower drug prices would result in less investment? Or even that lower drug prices would make pharmaceuticals “a less desirable industry” for “investors”? And what sort of “investors” are these that would turn away? Perhaps “a less desirable investor”?
The “trade-off” makes the claim that federal policy must subsidize an industry’s profits in order to attract a particular kind of investor who otherwise would not invest and justifies this policy with the rationalization that everything would be worse without this particular kind of investor. That is, innovation in beneficial drugs depends on just this particular kind of investor. Wow. It would be good to know who these folks are. I’m betting that these special investors are pension fund and university endowment investment managers. Those are the folks with a moralizing mandate to look out only for the money. They don’t invest for fun and they don’t invest to see something good happen in the world as a result of their investment. They don’t even invest their own money. They have a fiduciary obligation to make as much money as they can. And they can wrap that mandate around a “worthy cause”–making money for pensions and endowments. And if investing in drugs won’t make as much money as possible, then they will invest in something else.
Why not then the claim that without the money of this kind of investor, drug research would collapse into nothing? What’s your bet? Other candidates for this special investor?
It’s odd, too. Because steady profits are not the thing for making a lot of money on company stocks. What one wants is volatility. Phil Rosenzweig, in The Halo Effect, looked at the companies that Jim Collins had characterized as “great” in Good to Great. Rosenzweig found that only a couple of years after being called “great” (and mined for the proper management insights pertaining to the behaviors of their leaders), most of the companies on the list were back to merely good and some, like Circuit City, were bankrupt. What happened? It turns out that the companies that were doing so well with their stock prices over five years were operating in volatile markets. It wasn’t their management that gave them stock prices that outperformed the rest of the market–it was the condition of their areas of business and perhaps blind, random chance (for which, see Taleb’s Fooled by Randomness).
Companies with steady profits over time outperformed Collins’s “great” companies, if stock price increase over an extended period was the measure of greatness. Investors in pharma love the pharma market for the prospects of big hits and big busts playing out in just the right time frame–not too long, not too short. Will a drug in the “pipeline” make it big or get shot down in Phase III trials? It’s like betting on a slow-moving horse race, where government officials with guns aim to shoot horses as they get to various locations on the track. My, the entertainment! the volatility! Not only which horse is the fastest, but also which FDA review committee has a wacky shot. Investors who want to play in such markets do so by betting both on the company horses and betting against these same horses. That is, they are not betting on the success of the horses but rather betting on the gullibility and mistakes of other bettors. That’s hardly investment in companies or investment in innovation or investment in research. It’s hardly investment in the hope that something good will come of it in the larger world. It’s “investment” in an abstract, technical sense of placing money at risk in the hopes of making more money–the outcome in the world doesn’t matter.
But in this use of “investment,” plain old gambling is investment, too–it’s just investment with poor odds, investment where the house has better odds of profit than the gambler. In the patent world, the house is the legal infrastructure–patent attorneys, licensing administrators, litigators, and the PTO. As David Teece explained in “Profiting from Technological Innovation,” the infrastructure is one of the three competitors for the benefits arising from new technology. In the case of pharma research, the infrastructure has tamed the business to its purposes so that the infrastructure no longer has to respond to innovation with new and creative ways of taking value, but rather arranges it so all possible new value passes through its hands from beginning (early as possible reports of invention) to middle (patents filed and issued) to end (litigation for infringement, licensing or sale when the product begins to fade).
Investment within this “market” is merely investment in self-interest, or in the stock market itself, the casino that sponsors the self-interest. It’s not investment in the efforts of researchers. They don’t see a dime of such money. It’s not investment in new companies that might develop a new drug or method of identifying new drugs or method of testing new drugs or method of formulating new drugs. Those companies don’t see a dime either. It’s not an investment to call forth new and beneficial products, either. Even if this may happen, it is not the investor’s particular concern. An investor of this sort could be betting the new products will fail and taking a short position on the company’s stock.
This form of investment is trading in equities to anticipate (if not collectively influence) share price fluctuations and profit from these fluctuations. The connection is tenuous between share price of established companies and the research they do. If anything, I would expect that share price would go down if a company announced that it was diverting profits from dividends to research. That would signal a warning about problems in the product pipeline, a failure of competitiveness, and a future with lower dividends.
My line of argument is more than the intentions of investors matter. Sure, what does it matter if Investor Alpha sincerely wants a new drug to save her mother’s life and Investor Omega sincerely wants to make as much money as possible for his employer’s endowment and Investor Mu just wants to see the biggest possible personal payout? Their money is put in play, and no one else gives a rip about their inner feelings for why they do it. But this critique is itself abstract, as if nothing investors can do will affect innovation, except by an unqualified good of their investing. That’s the thrust of the Vox argument–that investment of any kind is necessarily good, and without all such investing behaviors, from day trading to selling short to trading ahead to buying and hold long term and putting money at risk to enable entrepreneurs to try something new–without all this, why, research won’t happen and innovation will grind to a halt.
While I’m ready to acknowledge that investment is an important way in which research happens, it certainly is not the only way. Witness all the donations for cancer research. Look at all the federal money devoted to research. None of that is “investment.” And even within investment, I’m not at all persuaded that all investment of whatever sort, with whatever intentions, is good for research. A pharma with a stock price run up by “investor” demand may well have reason to be distracted from trying to find new drugs to replace the ones that apparently are so successful. Isn’t that possible? The pharma could go shopping for acquisitions rather than plow profits into new, ground-breaking, uncertain research. Perhaps a low stock price is more motivating for research than a high stock price (with “low” and “high” having to do with expectations of investors than anything absolute). Perhaps there are studies of the effect of share price rises on subsequent company spending on research–and the outcomes of those “investments.”
My premise: crappy investors behave in ways that harm innovation and innovation research. Bayh-Dole is a law designed for crappy investors. Expectation: Bayh-Dole has harmed innovation and innovation research. First-order evidence: most university patented inventions are never legally worked and “commercialization rates” appear to be 1/10th the rate of the federal government’s rates, back when the federal government wasn’t even trying, and 1/70th the rate of the private invention management agent network that didn’t handle federally supported inventions. Bayh-Dole purported to divert federally supported inventions into this private network, but instead it led to the patent management infrastructure dismantling that network and replacing it with a portfolio-based system of institutional speculation. Instead of enabling innovation, the present infrastructure assumes it and aims to collect as much rent from it as it can. It’s like asking for control of potential renters’ bank accounts just to apply for an apartment. No wonder there are such shrill announcements of Bayh-Dole’s success and absolutely no public data that supports the claim. Sure, there’s plenty of data, but that data isn’t relevant to Bayh-Dole’s practical application–use with public benefit on reasonable terms. That data is relevant only to the monstrous growth of a portfolio infrastructure of institutional speculation–grasping, arbitrary, unaccountable, mechanical, abstract, moralizing, self-congratulatory, bungling (policy, contracts, negotiation, data, law), demoralizing, and ineffective. Other than that, we are in full agreement on Bayh-Dole.
According to PhRMA, about half the drugs on the market were discovered with federal funding. Would federal funding for medical research end simply because “investors” couldn’t make as much money as now from patent positions? What about all those foundations raising money for research–to cure cancer and the like? Would they fold up, too? Not likely.
So there are two sorts of investors and they work in competition with each other. One sort puts money into new companies, so they have resources to pursue a new product–venture investors, or venturers if you wish. The other sort of investor buys and sells shares of companies, being a bull (stock prices will go up, so buy and hold shares) or a bear (stock prices will go down, so offer now to sell shares in the future for more than they will be worth then). This second sort of investor exists because stock prices are volatile, and if this sort of investor wants to make a lot of money, then the investor needs stocks to behave exponentially–up or down does not so much matter as the size and speed of the swings–not so much to be unexpected, but not so slow that anyone is willing to “invest.” But when this second sort of investor–call them speculators–buys and sells shares, they don’t provide a company with more operating capital. They just trade capital back and forth among themselves. Those with better information, and able to operate sophisticated software, and purchase the services of top advisers, stand to make their money off the dunderheaded rest of us who have to rely on less information and less well positioned advisers.
Sure, a company might use its stock as bonuses for executives or collateral for debt, Enron-style, and swings in stock price could have an effect on how the company can borrow, but that’s not going to affect profits on drugs all that much and certainly doesn’t change a decision, say, to develop drugs rather than start selling smartphone apps. The concern of the passage I have quoted from Vox is with the first sort of investors, the venturers. There, the argument is that if there’s not some inordinately huge upside, then the venturers won’t invest and drug development will grind to a halt. This is the part that doesn’t make much sense. The venturers don’t need big pharmaceutical companies. Medivation, for instance, was almost a virtual company, outsourcing pretty much everything to develop Xtandi (from UCLA, with some strange doings by UCLA folks–for another time) and get it on the market. That Pfizer would buy out Medivation is a different issue. Where do the profits from that buy-out go? Clearly, not into more drug research at Medivation or Pfizer.
Put it another way: Are there better opportunities to make money right now than biotech? Sure. Consider this table of anticipated margins reproduced from a recent article in Forbes. It would appear that biotech is not so good as, say, software services or tobacco, and only marginally better than banking. What’s fascinating is that the most profit is being made in the generic drug industry, not in either major pharma or biotech. If the argument is drawn only on profits, then folks should be abandoning biotech even as we speak and advocating for government to expand the generic drug market. Subsidize that, not speculation on brand-name drug pharma.
Further, as an industry, biotech has barely swung a profit. Here’s an observation from DataFox, with their emphasis:
Because the process of developing biotech products is very capital intensive with long R&D and approval cycles, the industry has been largely unprofitable in aggregate historically. The earnings of the small number of profitable publicly listed companies were vastly outweighed by the net losses of the much larger number of private, early-stage firms.
That is, a wonderful betting market with a few winners and a lot of losers. Like a horse race. Win, place, and show–and everyone else is out of the money. Most biotech companies that attract venturer investors lose money. Only a few “hit it big.” So it’s a big betting parlor, with the equivalent of biotech casinos operated in California and New England. Most people lose, a few hit it big, and the house (here, the infrastructure of attorneys and business incubators and university licensing folks and the like) make a consistent profit. Not usually a huge profit, but enough for a happy–really happy, by most global measures–livelihood.
The question in all of this that lingers is whether we really have no alternative but to operate in such a casino fashion to have a supply of new therapeutic drugs. If the end result is a cure for cancer, the argument goes, all investment will dry up unless there’s a risky upside as big or bigger than it is now–and the government should contribute to make sure that risky upside stays risky and uppity by subsidizing research and paying like a loon for high-priced winners. Yet the upside for most investments in biotech is actually down–“high risk” as it were. And the upside apparently has been less in the past, and we have had periods of plenty of new drugs, even cures, come on the market with private capital. And in places such as Cuba, not known for capitalist ventures, there have been drug development that has not depended on venturers or speculators. Government-supported development, end-to-end. Money quote:
It’s like Castro said: They don’t really like patents. They like medicine. Cuba’s drug pipeline is most interesting for what it lacks: grand-slam moneymakers, cures for baldness or impotence or wrinkles. It’s all cancer therapies, AIDS medications, and vaccines against tropical diseases.
That’s probably why US and European scientists have a soft spot for their Cuban counterparts. Everywhere north of the Florida Keys, once-magical biotech has become just another expression of venture-driven capitalism.
It appears entirely possible to discover new therapies, new drugs, and demonstrate that they work and are relatively safe, and make them in commodity form–all without opening up a market for private venturers or speculators. We don’t have to speculate on the value of health care. It doesn’t have to be a market that is so volatile, so full of monopolies, so focused on betting on the fortunes of other people betting on the fortunes of companies betting on their fortunes in turning something acute into something chronic. When the value of a derivative market becomes larger than the value of the primary market–stocks on biotech companies trade at many multiples the even inflated revenue streams–then clearly those owning that “value” will have nothing to do with the prospect of bursting their bubble. As they see it, they have developed an engine for extracting wealth from “payors” (insurance companies, governments, donors) and they don’t want anyone to consider alternatives, even as their wealth extraction bleeds the country of its resources.
Presently, drug discovery is operated like a horse track or a casino. It exists for those betting. The actual outcome–a new therapeutic, relief for suffering–is a secondary effect. People make money betting on success, betting against success, betting on the foolishness or delay of others. It wouldn’t matter a lick whether the product was tires or fertilizer or cures. The public policy question is whether we must rely on casinos to improve our health care. It does not have to be this way.
It may well be that price controls on drugs “won’t work.” Drug companies would fight back. They’d try anything to make the government pay for not paying. Boycott (worked before, their Lysistrata moment, withholding their charms from government bureaucrats and bestowing their love on university bureaucrats). Public service campaigns (as now, with PhRMA). Taking research overseas (fine–that’s still research, no?)
We might even look to the regulatory apparatus, which makes it difficult to get drugs reviewed and approved. Perhaps putting a $1b into regulatory reform and procedures might create more competition among the players–lower entry cost, not so much territory controlled by a few humongous companies.
Perhaps, too, we might consider alternatives to the strange “is she a witch” statistical version of the clinical trial. How do surgeons do new things? Surely not with a double blind clinical trial. “Gosh, didn’t know whether I just implanted something or not.” And why is ingesting a variation on pit viper venom for high blood pressure such good science but changing one’s diet is just folksy hearsay?
Perhaps, too, we might find that the federal government can do more to screen compounds and conduct clinical trials itself. Generic drug manufacturers then could produce commodity versions. No private monopoly-seeking venturers needed.
Perhaps, too, there could be incentives for lower prices, such as extending the term of patents (or not reducing the term of patents on inventions made with federal funding). If a little monopoly is a good thing, then perhaps a longer monopoly is just as good. Total value might still be there, but the profit would accumulate over a longer term. Not so much fun for the volatility-loving speculator, but good for stability and consistency. Doing something like this might put some meaning back in “on reasonable terms” in Bayh-Dole, for instance. “Reasonable terms” clearly must include price, and must mean not just any price, but price that would otherwise reflect “free” competition and despite any patents, leaves money on the table, in people’s pockets, for other uses.
Or perhaps we could restore Bayh-Dole to its original condition:
Exclusivity for five years from first commercial sale or use or eight years from date of exclusive license, whichever comes first. Patents on subject inventions aren’t normal patents, and when Congress approved Bayh-Dole, those patents were even less normal. Perhaps the problem is “too much normality”–we have entered the “uncanny valley” of patents on subject inventions. Now they are not abynormal, just creepy.
Or perhaps restore Bayh-Dole to the Kennedy patent policy:
Just three years from date of the patent issuing. Back in the 1960s, it was innovate fast or dedicate the invention to the public. These days, with Bayh-Dole the way it is, the aim is for someone, anyone to please innovate within 20 years, so universities can sue them for damages.
Perhaps, too, there is room for collective action. That in the big expanse of human endeavor, some people still do things because those things are meaningful to do, regardless of whether there is some promised huge financial upside. Like Han Solo returning to help Luke destroy the Death Star. Oh, yeah, that was fiction. Never actually happens in the “real world.” But then there are artists. And open source programmers. And people who assist the elderly. You know–folks who find a livelihood without having to accumulate vast wealth, without having to appeal for casino-style “investing” opportunities.
Perhaps, maybe, all those folks who volunteer for clinical trials, who risk their bodies and their well being and their lives to advance medical knowledge and help find remedies–maybe they should be compensated by the companies that profit from their participation with free medication for life if the drug they helped to test proves efficacious.
Way back, in the forgotten days before the NIH was corrupted by patent-lust and nonsense about the necessity of licensing out all discoveries exclusively, the legitimate question was whether human suffering should be made a market. University medical faculties were opposed to such a thing. Medical discoveries should be free to all, not held as monopolies. That’s how research operates. That’s how medical science advances. That how we honor our commitments to help each other–first, not after piles of money have been made. The ambulance crew does not show up to negotiate a fee based on the need, and doesn’t have a gun fight with your insurance agent over charges before helping out. I know, this is an argument drawn from morals. The a-moral argument is that anywhere there can be a casino, there should be one. This, to my mind, is the desperation of capital unable to find places to be spent on something productive–capital that aims to grow itself by slurping up the capital of others. If not in biotech, then in smartphone apps.
Perhaps, then, we could do quite well with a different infrastructure directed at our medical needs. Perhaps our doctors don’t need to be multi-millionaires, nor our health insurance company executives, nor our hospital administrators, nor our drug company investors. Maybe people would do these jobs for a reasonable livelihood. Is that possible? Or are the people involved with our health really only in it for the money and if there wasn’t a huge upside for a thin slice of folks–1% perhaps–then the rest of the activity–the nurses, the janitors, the lab techs, the equipment technicians, the doctors, the janitors–would just fold up and stop working?
It would see we can do better than casino economics when it comes to health care. I don’t see why, at any rate federal patent policy should be constructed to help the patent management industry take inventions from inventors with special love and caring for speculator investors. Is Bayh-Dole going to continue to be a federal law to enable speculators to control research while betting against each other? Is gambling by nonprofit institutions on the fortunes of companies really the federally endorsed engine of health care innovation?