First, Do No Harm

It says something about human nature – or perhaps just human nature under capitalism – that we, as responsible investors, should need to think twice about the pharmaceutical industry.


It says something about human nature – or perhaps just human nature under the conditions of late capitalism – that we, as responsible investors, should need to think twice about the pharmaceutical industry. Medicine ought to be an objective good: improvements in health care were one of the great drivers of progress in the 20th century. The eradication (or near-eradication) of diseases such as polio, leprosy, measles, smallpox and diphtheria has led to vast improvements in the quality of life for huge swathes of the global population. And yet, the pharmaceutical industry – particularly in the US, but also in the UK and other European countries – is beset by perverse incentives, graft, absurdly skewed priorities and vast wastage.

The problem lies in the complex and problematic friction between two fundamental drives within the industry: the profit motive and the wish to provide access to health care to as many as possible. The pendulum has long swung between the two; where it sits at any one point is a factor of the relative power of the various stakeholders within the industry: patients, governments, insurers, shareholders and the pharmaceutical company executives themselves.

Where the US Leads, the Rest Follow

Much has been written already of the way money has warped the US health-care system. The average amount spent on health insurance and supplementary medical costs per citizen in the US is more than USD11,500 each year.1 While the price of drugs in Europe has remained flat over the past 10 years (and has gone down 3% annually in Japan), the US has seen price rises of an average of 10% each year. Average drug costs in the US are, by some distance, the highest globally.

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Source: A Painful Pill to Swallow - U.S. vs. International Prescription Drug Prices Prepared by Ways and Means Committee Staff; as of September 2019

A large part of the problem is that pharmacy benefit managers (‘PBMs’) are incentivised to drive prices ever higher. The PBMs – whose role is to manage the interaction of pharmaceutical companies, pharmacies and insurance providers – negotiate rebates from drug manufacturers in exchange for assigning the manufacturers’ drugs preferred formulary status (thereby securing more customers for the drug). It seems that, finally, the political tide may be turning against PBMs, with both US President Donald Trump and US Presidential candidate Senator Elizabeth Warren recently indicating that they would address the slew of perverse incentives baked within the system.

The Epidemiological Hierarchy

If we put aside this particularly egregious element of the industry, it’s clear that the senior executives at pharmaceutical companies are faced with profound ethical questions in the day-to-day management of their businesses. We see significant divergence between the best- and worst-performers in this space. Indeed, we believe that it’s of increasing importance – in an investment environment that has begun to look beyond mere financial metrics – that CEOs know how to answer the deep bioethical questions that their positions pose them.

There is, for instance, an epidemiological hierarchy that is based on the developmental status of the countries who suffer most severely from each disease. Thus, it has necessitated the involvement of Bill and Melinda Gates to drive forward the search for a cure for malaria, or the participation of NGOs like Gavi, which last year carried out the first large-scale Malaria vaccine trial in East Africa. While malaria affects millions, it is concentrated amongst the world’s poor. A pharmaceutical company might make more from a niche oncology treatment that alleviated symptoms for 10,000 wealthy Americans than it would make from curing the more than 200 million cases of malaria each year.

When making investment decisions, we therefore ask CEOs how they address this question of cost versus impact. We look for companies that enter into partnerships with NGOs and other public bodies, which seek to address some of the issues related to developing world health care. Multinational companies need to consider that one of their key stakeholders groups is the global population of patients, not merely a wealthy local subset.

It's Up to CEOs to Make Ethical Decisions

We need to hear from CEOs that they are aware of the necessity to consider other factors than mere short-term gains when judging their research and development priorities. Witness, as an extreme case, that of Martin Shkreli, whose price-gouging tactics with regards to the drug Daraprim ended up with the CEO in jail and near-bankrupt.

What is clear is that this is merely a particularly egregious example of practices that are widespread in the industry, practices which are under more and more scrutiny. These include the concentration of research efforts on treatment products rather than cures (given the longer-term nature of them); minor alterations to drug formulas in order to maintain patent exclusivity; the disproportionate targeting of high-ticket drugs; the low-balling of potential profits in order to avoid paying upfront costs to government; the false or misleading marketing of drugs that companies know to be ineffective or less effective than competitors; the creation of syndromes requiring treatment or the medicalisation of non-medical conditions; the excessive incentivisation of health-care professionals. Indeed, a recent Transparency International report2 found that corruption in the sector causes losses of over USD500 billion every year, more than it would cost to bring about worldwide universal health coverage.


Pharmaceutical companies should recognise that the deeply price inelastic nature of the products they sell brings with it duties as well as opportunities. They are able to put a price on a life, and on vastly improved quality of life, and this should not always be the maximum amount that someone is prepared to pay. The best companies acknowledge that the future of the industry will see increased scrutiny around issues of governance and social responsibility and are taking positive steps to address these issues now.

“First, do no harm” isn’t actually part of the Hippocratic Oath – it’s from another of Hippocrates’s texts, Of the Epidemics. But, it’s not a bad first step for a pharmaceutical industry that has allowed the relentless pursuit of profit to blind it to the ethical duties it owes to all of its stakeholders.

1. Source: National Health Expenditure (NHE) historical data (1960–2017), Centers for Medicare & Medicaid Services (CMS); and NHE projections (2018–27), CMS.
2. The Ignored Pandemic: How corruption in healthcare service delivery threatens Universal Health Coverage; Transparency International; March 2019.