Fred_hassan-SocialCapital "While massive advances in bioscience have been made, and these advances keep accelerating every year, most of the diseases afflicting mankind still need improvement in prevention, diagnosis and care," says Fred Hassan. Photo: Chip Somodevilla/Getty Images

The pharmaceutical industry has a strengthening social contract with society via its profound ability to innovate and to bring out new drugs that can help people live better and live longer Drug innovation has entered a golden era from an increasingly better understanding of disease cascades; validation of new protein targets; and the filling of new docking spaces, which creates new molecular interventions for previously undruggable targets.

It is not as easy as it may sound. Compared to physical sciences-based industries such as automobiles or electronics, biosciences are ruled by the capriciousness of nature – which makes them more variable, less predictable and highly complex. What is observed in the lab beaker or in a mouse may not translate well to a human. Various molecules in the bodies of individuals interact with each other in their own ways and greatly add to complexity and unpredictability. Given this challenging frontier, many good scientists may labor on throughout their careers, and then retire, all without ever experiencing that “Eureka Moment” when a drug is born.

While bioscience is among the 21st century’s life-changing technologies, harnessing bioscience for drug innovation remains a high risk/high reward activity for investors. Typical journey from conception to molecule to drug to patient takes 14 years. So, patient capital is as important as a tolerance for risk when it comes to bioscience. Nine out of 10 drugs going into development fail, often after hundreds of millions of dollars being spent. After accounting for attrition and the cost of capital, the average cost to bring out a new molecular entity is $2.6 billion, as calculated by Tufts University.

While massive advances in bioscience have been made, and these advances keep accelerating every year, most of the diseases afflicting mankind still need improvement in prevention, diagnosis and care. Fortunately, we have now entered this golden era with bioscience innovation advancing at a stunning pace, now aided by the revolution in multi-omics (including genomics and proteomics). The addition of new technologies in the drug hunters’ toolbox, all facilitated by modern data science, is facilitating this golden era of innovation. In fact, in most years during this innovation era, there can be as much advance in knowledge in the last two years as in the entire history of mankind before those two years.

This stepped-up era of innovation is coming just in time, especially as the tsunami of aging baby boomers starts going past 75. Terrible diseases such as Alzheimer’s, which are threatening to overwhelm nursing home costs and bust healthcare budgets, must be tackled by the bioscience-driven pharmaceutical industry.

And it is in this regard that the social contract between pharmaceutical industry and society becomes even more profound. Society needs the ongoing innovations that the pharmaceutical industry can produce, and the pharmaceutical industry needs the steady support from society so that it can focus on innovating efficiently while also providing a commensurate return for its investors who invest their risk capital. According to a 2021 study by Deloitte, the IRR (Internal Rate of Return) on investment in pharmaceutical R&D is 7%. This number hovers perilously close to the industry’s cost of capital. In fact, too many smaller R&D companies still end their journeys after their main R&D project fails.

In championing access and affordability for patients to be able to benefit from innovative drugs, pharma enables patients to win, and investors to also win and society to win. Drugs, at about 12% of the cost of healthcare, are the most efficient part of the healthcare system in terms of innovation headroom and avoidance of costs elsewhere, especially institutionalization costs.

At the time Medicare was launched in 1965, hospital care had a more important impact compared to the earlier drugs of that time. So, at that time, reimbursement centered on hospital care while coverage for drugs was poor. Five decades later, in spite of the thrilling advances brought about by new drugs, the reimbursement system continues to center on hospital care while coverage for drugs needs to be improved.

I was chairman of the pharmaceuticals industry association when the industry strongly championed the bipartisan legislation that brought in Part D in 2003. After this landmark legislation, the percent of seniors benefitting from drug coverage went up from 60% to 90% -- with a surprisingly modest monthly premium of less than $40. At that time, the industry also worked hard among companies to, on a voluntary basis, open up standardized patient assistance portals to access free or heavily subsidized drugs more easily for those patients who would still be “falling through the cracks” in spite of the improved drug coverage from the Part D legislation.

As mentioned earlier, while advances in drug coverage have been made, the overall drug coverage is still not as good as coverage for other healthcare costs such as hospitals. This can create stress for patients who struggle to pay for copays, co-insurance and deductibles, and these can often be very elevated for the newer specialty drugs. A distressingly large proportion of American households can’t write a check of $500.

The regulators can also do their part toward affordability by continuing to work at reducing the unnecessary friction and hurdles to new drugs being approved. In this way, the presently unacceptably high cost of R&D per new molecular (NME) of $2.6 billion can become much lower. With a more modernized regulatory construct, not only will individual cost per NME come down, but supply of new drugs will get freed up, which will then help drive down prices with the more intensified competition. Through market forces that reward innovation, and that also improve choice through the supply of new drugs through continued open competition, society can continue to benefit. Longevity will continue to advance by one or two years in every decade that passes. Babies being born today will, we hope, become part of a cohort with a median age of 100.

Some politicians argue that the government should take over the pharmaceutical sector and start setting prices. It has been demonstrated that the private sector works best at bringing out new drugs. In fact, the private sector brings out almost all the new drugs. Just as an example, the centrally directed former Soviet Union brought out hardly any drugs of any significance in its 46 years ending 1991. Even after 1991, most innovation continues to come out of the U.S. The U.S. benefits from a free market, the acceptance of risk and the entrepreneurial energy that brings in passionate drivers from around the globe. While some of the same politicians like to score points by playing up individual cases of patients running up against high drug bills at the pharmacy counter, the solution lies more in improving drug coverage and encouraging medical savings accounts than to simply attack the very same companies that bring out the much-needed new drugs.

More than many industries, pharma tends to attract people whose sense of fulfillment comes from doing good for patients. There will always be those few “bad behavior” examples within pharma. Excessive pricing of drugs typically gets punished by the marketplace or is shamed by society. Overall, the industry tends to be a magnet for people who make it their purpose to do well for others.

Besides being criticized by some politicians, many public pharma company CEOs now face a more recent change in their operating environment. We all increasingly live in a 24/7 world of fast money flow, fast trading and increasingly sophisticated and often aggressive financial players. Some of these financial players have made millions of dollars on pushing against specific pharma companies and getting them to either sell assets or to cut costs. While they are often admired in the business press for their financial acumen, it is rarely mentioned that some of what they do may have an effect on long-term innovation.

These activists typically take positions as investors in pharma companies and then look for maximizing the value of those companies on a shorter-run basis than the typical R&D cycle of 14 years. Often, R&D spending can become a target for cost-cutting. The pharma CEOs have to balance these pressures very carefully against their work toward the longer-term benefit to society. For business writers, these name-brand activists can create more interesting headlines compared to a long and unpredictable wait for many years for the fruits of long-term bioscience R&D to be realized. Among those shareholders who do care about the long term, their focus on the long term is aided somewhat by The Business Roundtable’s resolution in 2019 to broaden the CEOs obligations beyond shareholders to stakeholders. This broader obligation in favor of the social good is now also being supported by important investment funds such as the Blackrock funds. However, it remains a delicate dance, as some of the activist investors can become very persistent and even aggressive in demanding early changes. Many CEOs get moved out if they don’t satisfy the activist.

It needs to be stated that many activists do have the innovation engine in their DNA, and their “rattling the cage” activities may be constructive as there can be instances where boards and CEOs have become too accepting of the status quo, and where fresh thinking becomes necessary to replace sclerotic “country club” leadership.

Pharma CEOs also have a social contract with society to do the best they can, even if their company’s innovations go off-target. Here is an example. My former company, Schering Plough, had a molecule in its R&D pipeline for cancer called lonafarnib (SCH 66336). The molecule was less successful for cancer than for a rare disease called progeria. In this rare genetic disorder, symptoms resembling aspects of aging are manifested at a very early age. Lonafarnib, as a first-in-class medication, reduces risk of death. The molecule made no money for Schering Plough or its successor company Merck. All those involved feel good that it helps progeria patients.

Regardless of our beliefs around healthcare politics, we are fortunate to live in a time when bioscience has already created miracles such as helping reduce heart attacks and strokes by a half, reduce the terror of breast cancer, turn HIV into a manageable chronic disease, and contain the devastation from COVID with vaccines and targeted drugs. The social contract remains strong. The pharma industry remains one of the sunrise industries of the 21st century.

(Fred Hassan is a director at the private equity firm Warburg Pincus. His board memberships include Precigen, Prometheus Biosciences, Theramex, IntegraConnect and Vertice. He is also the chairman of Caret Group. His experience in the pharmaceutical industry includes serving as CEO of Pharmacia Corporation and Schering Plough)