Lavish windfall gains from biotechnological unicorns

The pharmaceutical sector has proved its agility during the Covid-19 crisis in spite of supply-chain disruptions and restrictive containment measures imposed on businesses. Many factors were projected to exert pressure on pharmaceuticals, including the delay or cancellation of non-urgent treatments or the postponement in the approval of new drugs. However, this impact was soon neutralized by the growing demand for Covid-19 vaccines, the shift towards telemedicine and thus prescription for drugs, which recorded a near all-time-high demand during lockdowns. However, the three main drug segments are projected to grow in 2021 at different paces: +2% for generic drug makers, compared to +8% for Big Pharma and +21% for biotech drug makers. Biotechs and Big Pharma benefited from substantial help from governments and humanitarian organizations such as the WHO, who would secure, in return, a supply for less advantaged countries. The race to find a cure against the coronavirus channeled around USD25bn into pharmaceutical R&D in 2020 alone, with half coming from the US’s “Operation Warp Speed”. Not only had these operations supported the development of vaccines in (much) shorter timelines, they also drove up significantly the operating margins of patented drug makers, but not for their generic counterparts. Profitwise, the operating margin rate of generic drug makers is indeed expected to remain below 10% on a global average in 2021, versus nearly 30% for Big Pharma and a lavish 45% for successful biotechnological companies.

However, the pharmaceutical sector is subject to several hurdles. One is related to the rollout of the Covid-19 vaccines and rethinking global supply chains as the pressure to ‘reshore’ drug production has risen during the pandemic, which unveiled the world’s reliance on China for many active pharmaceutical ingredients (APIs), including paracetamol, due to its cost-competitiveness. There is a growing sentiment among governments to reduce medical imports using trade barriers, regulations and incentives to encourage the development of domestic pharmaceutical supply chains in the years ahead. For instance, the 2020 EU pharmaceutical strategy is built around legislative and non-legislative actions to support competitiveness, innovation and the sustainability of the local industry. The strategy aims at enhancing crisis preparedness and response mechanisms, as well as diversifying and securing supply chains to address medicine shortages.

In addition, Big Pharma struggles relentlessly to overcome political hurdles related to drug price-gouging. Indeed, higher production costs are no longer the only argument to justify the price difference between a Western drug maker and that of a low-cost country. Pharmaceutical behemoths have been under growing pressure to work with wealthy countries on a cost cap for the less well off, even if some vaccines cannot be sold too cheap. For instance, mRNA vaccines against Covid-19 such as those from Pfizer or Moderna (USD30 per vaccine jab) are more expensive to manufacture and store than vaccines based on an adenovirus vector, such as the one developed by AstraZeneca (USD15), which needs to be administered in higher doses to elicit an immune response. So the pharmaceutical sector may become uncomfortable with spending massive amounts on R&D if its enviable pricing power is dealt with by legal regulatory frameworks rather than by laboratories themselves.