Biopharma Innovation as a Public Good

Background

The creation of new medicines is the result of a symphony of public and private investment spanning academic and commercially oriented activities. Innovative medicines are unique in the extent to which unit costs incentivize production as only a secondary factor, but rather are more heavily oriented to remunerate the significant amount of capital that has gone at risk supporting development and regulatory activities.

What can be lost in the discussion of pharmaceutical pricing is that the value of innovation not only needs to be reflected in high prices, but must generate substantial profits to reward investors and build capital for re-investment. Without these excess profits in the form of future cash flows, the investment worthiness of development stage medicines diminishes greatly.

This leaves an environment where substantial profits on innovative medicines are necessary, yet public trust in the institutions who actualize these profits (predominantly large pharma) remains low.

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Celebrating Our Wins

Investment in the development of new medicines is perilous, driven by low probability of success and arduous time and capital intensive activities on the path to commercialization. Yet successful assets can support tremendous value creation for innovators, investors, and the public as a whole.

In the model where pharma companies acquire drug candidates via M&A, preceding investors gain return via the sale of future cash flows to pharma. The value of this innovation is internalized to the valuation of the pharma, which becomes the party responsible for the commercialization of the asset.

This transition from ‘investor returns’ to ‘corporate revenue’ seemingly invites both scrutiny and inefficiency in the market. This comes from parties such was the government who may feel profits above the cost of production to be excessive, or from intermediaries such as PBMs who rent seek and divert value to other parties with no role in drug development or production.

A model that can discern between sales revenue which serves to incentivize profitable commercialization versus sales revenue which serves to renumerate capital that has gone at risk in the drug development process may have value to alleviate these pressures.

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Excess Profits as a Public Asset

The premise that innovative medicines necessitate excess profits in order to protect investor returns may be better accepted if paired with a model that allows greater public participation in this risk and return model. Therefore, it is proposed for the industry to explore use of public royalty assets as a means for outside capital to participate in the risk and return model of drug development.

Royalties already have a place in the industry, initially as a means to reward academic institutions for their foundational contributions to drug development, and more recently as a private financing option for late stage and approved drugs. As scientific knowledge becomes more decentralized and computational tools advance, this model could be expanded to earlier-stage assets, enabling broader participation in development decisions through structured frameworks that combine expert knowledge with collective intelligence. Public sale of royalty assets can serve to externalize the risk associated with drug development. For instance, pharma may be able to acquire assets for smaller sums of up-front capital if portions of future cash flows were sold to outside investors as part of the acquisition transaction. This approach could be particularly powerful when combined with market-based mechanisms that allow participants to evaluate and enhance development approaches while maintaining rigorous scientific standards.

Parallel concepts can be seen in energy with the use of oil and gas royalty trusts. Similar to the means by which a trust is established and dissolved according to the establishment and exhaustion of an energy source, so too could a biopharma royalty vehicle be established around the patient life of intellectual property.

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Equitable Satisfaction of Capital Returns

One of the major challenges facing the biopharma industry is the disproportionate reliance on the US market to provide the excess profits which incentivize investment in innovation and the development of future medicines. Other advanced nations such as those in Europe may pay enough to support production and commercialization of innovative medicines, but largely free-ride on the back of the US as it pertains to rewarding innovation.

By making the capital return equation more transparent, a more productive dialogue can be sought around how to renumerate capital at risk and provide confidence that future successful innovations are appropriately rewarded.

Similar conversations may also be had within the US market, to focus on the distinct issue of how pure major payers (private employers and the federal government) may appropriate reward innovation while allow lowering barriers to achieving broad access and stable supply of all medicines sought by the market.