US Pharma Prices: a Hard Pill to Swallow
Though a growing cohort of investors is prepared to fight for equal access to medicine, the absence of strict pricing regulation remains a significant hurdle.
The socioeconomic ramifications of the Covid-19 pandemic have put the importance of the global workforce’s health into stark relief for investors.
As Suzi van Es, Investor Engagement Manager at the Access to Medicine Foundation, puts it: good health and wellbeing are essential pillars of any thriving society or economy. And in this age of corporate social responsibility, companies have a role to play in ensuring their products are made available to those who need them most.
But the overinflated cost of medication in the US compared to the rest of the world directly contradicts this principle, as well as responsible investors’ ambition for equal and affordable healthcare.
As it stands, prescription drug prices in the US are 2.78 times higher on average than in other countries. According to the West Health-Gallup Healthcare Affordability Index, in 2022, 112 million (44%) of adults in the US struggled to pay for healthcare, with those identified as “cost-insecure” and “cost-desperate” frequently unable to afford lifesaving medication.
In December, investor members of the Interfaith Center on Corporate Responsibility (ICCR) – a membership organisation including faith-based firms, asset managers, pension funds, and NGOs – co-filed a series of shareholder proposals at major pharmaceutical companies to be voted on during the 2024 proxy season.
The proposals were predominantly focused on increasing transparency and disclosure of the impacts of pharma companies’ pricing and human rights policies on patient access to branded medicine.
The true cost
Three of the 2024 ICCR proposals sought to understand whether pharma companies’ business models posed human rights risks when considered against the UN Sustainable Development Goals and the UN Guiding Principles on Business and Human Rights.
The co-filers asked targeted companies to align with the ICCR’s Pharmaceutical Equity Expectations, which include the need to be transparent around medication access strategies and to align lobbying efforts with support for affordable access to medicines.
“Many institutional investors are universal owners with diversified portfolios, so the impact of what happens in the pharmaceutical industry actually spreads wide across other industries and sectors,” says Meg Jones-Monteiro, Senior Director of Health Equity and Evaluation at the ICCR. “If the workforce cannot work and isn’t healthy, then companies cannot produce goods and services – it’s that simple.”
However, guaranteeing strong financial returns for clients and beneficiaries is investors’ primary fiduciary duty. This makes US pharma’s strong financial performance attractive.
In 2020, a cross-sectional study compared the profits of 35 large pharma companies with 357 non-pharma ones on the S&P 500 index over the 2000-2018 period. The median net income expressed as a fraction of revenue was found to be significantly greater for the former compared to the latter, at 13.8% and 7.7% respectively.
“Maintaining strong financial returns while also stewarding companies to address human rights and social-related risks and opportunities does not have to be mutually exclusive,” says Van Es. “Considering these risks and opportunities is consistent with fiduciary duty if the issue is material to the company – which access to medicine is.”
If pharmaceutical companies embraced access to medicine as a matter of business strategy, they would be better equipped to future-proof their operations.
“It’s the difference between whether a US pharma company is merely generating value or is also extracting [it],” Jones-Monteiro argues. “These companies have an overarching mission to further science and develop innovative medication, vaccines and treatments that help people. Expensive medicine that is inaccessible to a large chunk of the population is incongruent with this.”
Stuck in a thicket
One of the main factors keeping drug prices high in the US is patent-related issues.
Patents are typically an enabling factor for the research and development (R&D) of new medication, as they give companies exclusive rights to new drugs they discover and design, as well as any associated profits, for a set period. In the US, it lasts for 20 years.
A drawback to this system, however, is that it stops more affordable or generic versions of a drug from being developed and released into the market over this period – essentially removing competition and allowing the original drugmaker to keep prices high.
“Pharma companies should be rewarded for their innovation,” posits Catherine Rowan, Director of Socially Responsible Investments for US-based Catholic healthcare system Trinity Health, which is an ICCR member.
But the issue is that US pharma companies often attempt to extend their original patent by adding secondary or tertiary ones. “Rather than rewarding innovation, these additional measures are creating patent thickets and extending the monopoly in ways that can be detrimental to a patient’s access to that medicine,” Rowan adds.
A recent example was AbbVie’s success in delaying competition for its anti-inflammatory drug Humira in the US by four more years than in Europe. The drugmaker and its affiliates famously filed over 100 patents to prevent the development of generic rivals. Drugmakers who attempted to launch cheaper versions of the medicine lost out during court challenges, while AbbVie raised Humira’s price almost 30 times.
“Overreliance on extended and added patent exclusivities really brings into question a company’s growth,” says Jones-Monteiro. “If a company is purely growing its revenue by focusing on patents, what does that mean in terms of its long-term value creation and investments in R&D?”
AbbVie is among the US pharma companies targeted by the ICCR patent-focused proposals this proxy season, alongside Ely Lilly, Gilead, Johnson & Johnson, Merck, and Pfizer.
“We are asking companies to describe if and how they are taking access to medication into account when filing for an extended or additional patent: if they aren’t, shareholders concerned with social-related issues should know,” Rowan explains. “The more investors can understand a company’s approach to patents, the easier it will be to identify which business models are truly sustainable and what needs to change.”
Building a ceiling
Beyond patent-related issues, some industry experts attribute the significant variation in US drug prices to the absence of a central negotiator and price ceilings.
“In countries such as France, drug prices are set and regulated by the government, which gives limited opportunity for companies to quote unreasonably high figures,” says Divya Bobby Joseph, ESG Research Lead Analyst at research and data provider Morningstar Sustainalytics. “The efficacy and additional benefits of new drugs are carefully examined by the regulator, who also assesses their cost.”
Meanwhile, in the US, negotiations with drug manufacturers are typically undertaken by health insurers, doctors and distributers, giving manufacturers more pricing leverage.
“It is a very broken system in the US, and it’s very unclear how drug companies determine their prices,” Rowan argues. “As investors, we must question how sustainable the current business model is. After all, if no one can afford drugs, then there is no market.”
There are, however, some encouraging signs of change. In 2021, US President Joe Biden finalised the Inflation Reduction Act (IRA), signing into law measures to prevent drug price increases from surpassing inflation. The IRA also introduces reforms to Medicare’s drug-pricing policy, allowing the government to negotiate prices on select medications for the first time. The reforms will first cover ten medicines in 2026, which will increase to 60 by 2029.
The introduction of the act was followed by a wave of scrutiny from US government bodies. In 2023, the United States Patent and Trademark Office issued several federal register notices highlighting that change. The US Senate Judiciary Committee also passed legislation to prevent drug companies from using the patent system to delay competition, introducing measures to restrict the number of patents that holders can contest. And earlier this month, some Senate Democrats challenged pharma CEOs on drug costs after they failed to commit to lowering their prices.
Somewhat predictably, pharma companies were quick to resort to litigation, with lawsuits challenging the IRA flooding in thick and fast, prompting investor concern.
“The industry is known for its lobbying prowess, which may sway government officials in their favour,” says Jones-Monteiro. “For every one elected US government official, there are three pharma lobbyists, which goes to show their influence on the [Capitol] Hill.”
Ultimately, the solution to US pharma’s pricing problem lies in the hands of US regulators and lawmakers, several sources agree.
“Although recent progress in these quarters is reassuring to see, investors need to be acting now,” Jones-Monteiro insists. “ICCR members who filed shareholder resolutions at pharma companies this proxy season want [them] to come to the table to consider their concerns and make aligned commitments.”
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