Charlotte Street Partners



Injecting capital, extracting profits

Written by Alex Massie
19 November 2020

The race to find vaccines that will protect humans from Covid-19 should be seen as an awe-inspiring epic of human ingenuity. It has been a global effort and an astonishing one. What might in more ordinary circumstances take years, appears to have been achieved in months. The prospect of a vaccine – and in all likelihood more than one – that will be both effective and deliverable is tantalisingly close; we cannot quite see it yet, but we can hear it coming. 

That is the context within which the application of harsher restrictions on day-to-day behaviour should be understood. The strongest argument against lockdown measures was predicated on the suspicion there would be no vaccine coming to the rescue for the foreseeable future. In such circumstances, and however grim the cost might be, the concept of building ‘herd immunity’ had some plausible justification. Now that a vaccine, or rather vaccines, seem more likely than not, the argument for curtailing liberties in the cause of virus suppression is stronger than ever. It is a question of holding on for a few months more and the message offered by governments everywhere is a simple one: we have come so far, let’s not jeopardise that effort now that there is the prospect of an end in sight.

Business, of course, will be expected to pay a heavy price for these fresh restrictions, but business – or capitalism – is also the only way out of this otherwise miserable and intolerable situation. Pharmaceutical companies are routinely put in the pillory, but it is ‘big pharma’ that holds the light by which we may navigate our way out of this tunnel. 

Of course, creating a successful vaccine – as both Pfizer and Moderna appear to have done – is one thing, but delivering it quite another. Still, with further promising results coming from other vaccine projects, including the Oxford vaccine upon which the UK government has staked a considerable amount of hope and expectation, it seems more likely than not that a combination of vaccines will come to market in record-breaking time. 

Some of these projects, shockingly, are expected to be delivered on a for-profit basis. Pfizer might make as much as £10bn from their coronavirus vaccine and this, as you would expect, is considered disgraceful in certain quarters. Here we go again: big pharma profiting from human misery. If you have money, you can get the vaccine; if you don’t, tough luck. How dare they! Don’t they appreciate this is a global pandemic and thus the very last place you should be expected to accept profitability!

And it is true that some pharmaceutical firms, such as AstraZeneca, say they do not expect to make money from their Covid-19 projects, but that forbearance is neither the rule nor even something that should be the rule. 

Profit is not a vile thing, for profit is the key to the efficient use of resources and this is as true of major multinational pharmaceutical companies as it is of the humble neighbourhood corner shop. Big pharma is in the game to improve the human condition – just as your local shop improves local amenities – but without profit there is little sustainable future. Much, though not all, of the criticism pharmaceutical companies receive is ill-deserved. Yes, they can make billions in profits but what of it? Advances in medical science benefit humanity even when those advances are not, or at least not initially, equally shared. Moreover, it is likely you benefit from big pharma’s profits even if you are not sick yourself, for it is probable that your pension is invested in companies such as GlaxoSmithKline or Pfizer. Drugs are for old people and so are dividends and profit is a virtue not a vice. 

The idea, popular amongst certain sectors of the left, that a Covid-19 vaccine be provided on a not-for-profit basis might seem intuitively appealing but in practice there is little logical argument for exempting a coronavirus vaccine from the usual laws of the marketplace that does not also require every other drug to be supplied in the same fashion. That would have obvious consequences, not the least of which would be a dramatic reduction in the number of drugs brought to market. 

Nationalising pharmaceutical companies – another hare-brained but uncomfortable popular notion – means nationalising risk. At present, failures are chiefly paid for by the drug companies themselves. That means they are incentivised to cancel projects before the fallacy of sunk costs kicks into operation; a state-owned pharma company might deliver successes ‘cheaply’, but it would almost certainly pursue dead-end projects long past the point of any potential return. That imposes an opportunity cost, too. 

Where there are shortcomings in the drugs business – and there are – these are often the result of misaligned – or missing – incentives rather than of profit-hoarding venality. Critics correctly observe that too few new antibiotics are brought to market, for instance, and that the growth of resistance to current antibiotics is a significant, and looming, threat. This is true. And it is also true that new antibiotics are not a profitable area for research – the whole point being that they would be prescribed rarely and typically only in cases where there is resistance to existing antibiotics. 

The solution is to create better incentives and, happily, there are moves afoot towards doing so. The British government is looking at schemes whereby pharma companies would be paid a guaranteed sum for new antibiotics, regardless of how often they are actually prescribed. That model – a kind of subscription service, if you will – would likely increase the cost of individual doses of the drugs but do so in a fashion that offers security – and therefore incentives – to pharmaceutical companies. 

This is not a zero-sum game where what is good for big pharma must be bad for the NHS and vice versa. On the contrary, health systems around the world and pharmaceutical companies have a mutually dependent relationship. The latter cannot operate without customers; the former cannot continue to improve without new drugs. So the question is not one of determining winners and losers but, instead, of finding the appropriate balance between competing interests. 

Profit and public health are not distinct interests; they are intimately connected. Without profit there is little incentive to research new treatments. The rewards for ‘winning’ drugs can be enormous, but these must be offset against the losses incurred in the far greater number of projects that never produce a drug which can be taken to market. Typically, these failures are often forgotten, but successful products cover the costs of failed ones rather as, in Holywood’s better years, blockbuster hits subsidised the cost of producing smaller, but arguably more interesting, movies of more limited appeal but greater artistic merit. 

The lesson of the chase for a coronavirus vaccine is twofold. First, it shows what the human race can do when it works together, but it also demonstrates the value of a diversified approach in which a problem is attacked from many different angles. A year ago, we did not know which of these would prove effective; now it seems as though the coronavirus puzzle can be solved by several different routes. That is a proof of market concept, albeit one that in this case has also been helped by the guiding hand of state intervention and support. In the end, however, it is chiefly a demonstration of what the market can deliver; a reminder that capitalism, for all its shortcomings and brutality, is the means by which the human race improves its lot. The role of the state is to act as arbiter and to ensure incentives are positioned correctly; if that is achieved, everything else is possible too. There is a lesson there, if politicians wish to learn it, that may be applied beyond our current circumstances. 

About Beyond the Street and Alex Massie

We are all guilty of being too inwardly focused sometimes, especially as we navigate these changed times. It is all too easy to be caught up in the problems close to home, and for overarching trends to pass us by.

To remedy that short-sightedness, Charlotte Street Partners has enlisted the ingenuity and talent of the writer and commentator Alex Massie. As our new correspondent at large, Alex will look at the bigger picture for us each week. We have challenged him to come up with something a bit different: broad, lateral thinking, thematic insights and a more global perspective.

Alex is a freelance journalist and commentator based in Edinburgh. Not only is he Scotland editor of
The Spectator, but he also writes a political column for The Times and The Sunday Times. He features regularly on the BBC as a political commentator and has written in the past for The Telegraph, Politico, The Washington Post, the Los Angeles Times, The New York Times, the New Statesman, The Observer, and TIME magazine, among others. He was also the Washington correspondent for The Scotsman and assistant editor of Scotland on Sunday

We hope you enjoy his work – and do feel free to forward this email on to colleagues and friends you think might be interested. They can subscribe to Beyond the Street and our other regular briefings here

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