Big Pharma’s vac­cine quest may give in­jec­tion of re­spect

Firms may not see in­stant profit from a Covid cure but it could win the in­dus­try the pub­lic ap­proval it needs It will be dif­fi­cult for com­pa­nies to be seen to be prof­it­ing from a dis­ease that has claimed so many lives

The Daily Telegraph - Business - - Business Comment - STEVEN DES­MYTER Steven Des­myter is co-head of responsibl­e in­vest­ment at Man Group

Let’s start off with a state­ment of the ob­vi­ous: those health­care firms in­volved in the search for a coro­n­avirus vac­cine are in­volved in an un­der­tak­ing that is ob­jec­tively good. And yet the phar­ma­ceu­ti­cal in­dus­try has his­tor­i­cally scored poorly when it comes to both en­vi­ron­men­tal, so­cial and cor­po­rate gover­nance (ESG) rat­ings and pub­lic opin­ion, with a re­cent Harris poll rank­ing the in­dus­try above only to­bacco and gov­ern­ment when it comes to its rep­u­ta­tion.

The ques­tion is, will coro­n­avirus be a game-changer for the in­dus­try when it comes to ESG? And are the firms chas­ing a Covid-19 vac­cine good in­vest­ments, as well as do­ing good?

Since the onset of the pan­demic, there has been a wave of re­tail money fol­low­ing in­sti­tu­tional in­ter­est in phar­ma­ceu­ti­cal and biotech firms as­so­ci­ated with the search for a vac­cine. The four ma­jor biotech firms in­volved in vac­cine de­vel­op­ment have en­joyed a sub­stan­tial rally in their stock prices.

If in­vestors are bank­ing on a wind­fall from a Covid-19 vac­cine alone, these in­vest­ments may prove to be al­most as short-sighted as the mass re­tail buy­ing of air­line and en­ergy stocks in May. But this mo­ment may still prove trans­for­ma­tional when it comes to the in­dus­try’s rep­u­ta­tional is­sues.

Such has been the im­pact of coro­n­avirus on all of our lives, such the wave of money pass­ing from gov­ern­ments to health­care com­pa­nies, uni­ver­si­ties and oth­ers in search of a cure, that it nat­u­rally feels as though the firm that solves this ex­is­ten­tial co­nun­drum ought to be able to name its price and reap sig­nif­i­cant fi­nan­cial re­wards.

But the very se­ri­ous­ness of the cur­rent cri­sis may mean that the sit­u­a­tion is not quite so clear cut, and that in­vestors hop­ing for dra­matic price ac­tion in the wake of a vac­cine suc­cess are likely to be dis­ap­pointed.

While find­ing a vac­cine for the worst pan­demic in a cen­tury will in­deed be a sig­nif­i­cant vic­tory for the firms that achieve it, they may find that the vic­tory is more rep­u­ta­tional than fi­nan­cial. I be­lieve it will be dif­fi­cult for com­pa­nies to be seen to be prof­it­ing from a dis­ease that has claimed so many lives, par­tic­u­larly when these lives have been lost in such a hor­ri­fy­ingly pub­lic fash­ion.

Al­ready two of the ma­jor play­ers in the search for a cure, As­traZeneca and John­son & John­son, have pledged to sell any vac­cine at cost price – es­ti­mated at $10 a dose – while the out­break is still classed as a pan­demic. And while Pfizer has not made such a con­ces­sion, it has so far sold yet un­proven vac­cines to the US gov­ern­ment at $19 a dose. This is far below the po­ten­tial $50-$60 price point which Gold­man Sachs an­a­lysts be­lieve could be achiev­able.

This highlights a key fric­tion in ESG in­vest­ment, sug­gest­ing ini­tially that in­vestors have to choose between do­ing good and mak­ing money. It’s a di­chotomy that is par­tic­u­larly fraught for the phar­ma­ceu­ti­cal in­dus­try, which ought to score well when it comes to the so­cial as­pect of ESG – what could be more laud­able than sav­ing lives and treat­ing dis­eases – but is too of­ten marked down for its pric­ing poli­cies and ag­gres­sive mar­ket­ing prac­tices (par­tic­u­larly in the US).

Never has the phar­ma­ceu­ti­cal in­dus­try had a poorer rep­u­ta­tion: both Repub­li­can and Demo­cratic Party can­di­dates for Novem­ber’s pres­i­den­tial elec­tion have high­lighted drug prices, know­ing that a prom­ise to re­duce the egre­gious cost of med­i­ca­tion is an easy win with vot­ers.

Here, then, is where the real long-term re­wards of the search for a coro­n­avirus vac­cine may ac­crue: not solely (or even at all) to the firm or firms that first crack the code of the dis­ease, but rather to the in­dus­try more gen­er­ally. In­stead of look­ing to jump into what is an al­ready over­crowded trade with an un­cer­tain fi­nan­cial endgame, in­vestors should in­stead look at the sec­ond-or­der ram­i­fi­ca­tions of the role of the in­dus­try in deal­ing with the pan­demic.

It felt as if un­til coro­n­avirus came along, tighter reg­u­la­tion for phar­ma­ceu­ti­cal firms was merely a mat­ter of time.

The PR win of a vac­cine may per­suade a scep­ti­cal pub­lic that the in­dus­try can be a force for good. It may also al­low com­pa­nies to main­tain pric­ing lev­els for other drugs for longer than most an­a­lysts as­sume. The speed with which vac­cines and treat­ments for coro­n­avirus are be­ing ap­proved is per­mit­ting com­pa­nies to test and prove a range of new tech­nolo­gies, par­tic­u­larly RNA mod­i­fi­ca­tions that have dra­mat­i­cally re­duced the time from DNA se­quenc­ing to vac­cine trial.

I es­ti­mate that Moderna, one of the firms in­volved in the hunt for the vac­cine, will be around 25-30pc fur­ther along in the sev­eral dozen other vac­cines it is test­ing be­cause of the ad­vances made dur­ing work on coro­n­avirus.

How do we think about all this within the frame­work of ESG in­vest­ment? The an­swer is that, as so of­ten, there is no one sim­ple so­lu­tion.

It is with­out doubt that com­pa­nies in­volved in the search for a coro­n­avirus vac­cine are un­der­tak­ing work that is ob­jec­tively ben­e­fi­cial to hu­man­ity; it in­creas­ingly looks as though the company or com­pa­nies that suc­ceed in cre­at­ing a vac­cine will be sell­ing it – at least ini­tially – at cost or near-cost; the in­dus­try’s pric­ing model re­mains prob­lem­atic and I un­der­stand why there is such wide­spread crit­i­cism of cer­tain prac­tices – par­tic­u­larly Big Pharma’s his­tor­i­cal propen­sity to priv­i­lege treat­ments over cures.

All this said, I think the cur­rent pe­riod could see a dra­matic reeval­u­a­tion of the in­dus­try’s place in so­ci­ety, as I recog­nise that drug com­pa­nies have been an easy tar­get for dis­quiet at a time when po­lit­i­cal dis­course tended to­wards the ex­tremes. When the pan­demic re­cedes and life re­turns to some­thing like normal, peo­ple may be­gin to ac­knowl­edge that we need our phar­ma­ceu­ti­cal com­pa­nies to make a re­turn on their in­vest­ments, and that they can be a force for good in a world where the next pub­lic health cri­sis may be just around the cor­ner.

Dis­cov­ery of a vac­cine may per­suade a scep­ti­cal pub­lic that the phar­ma­ceu­ti­cal in­dus­try can be a force for good

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