Wednesday, May 14, 2014

Pfizer, AstraZeneca and why we need a publicly owned pharmaceutical option

As a biomedical scientist myself, I was very interested to see that the US pharmaceutical giant Pfizer is trying to take over the UK pharmaceutical giant AstraZeneca. As a skeptical socialist I assumed that the reason behind this was to take advantage of our corporation tax rate of 21% which is substantially lower than the US rate of 35%. However, what really got my attention was that policy makers are worried because they understand that if this deal goes through, the UK would lose one of its few world-class companies and more specifically its jobs and investment. This seems a well founded worry as Pfizer reduced R&D expenditure from $9.4 billion in 2010 to $7.8 billion in 2012 and involved the infamous closure of its laboratories in Sandwich, UK.

However, I see a much bigger problem in investment across the whole pharmaceutical sector caused by excessive financialisation. Fuelled by the perception that corporate reorganisation could provide quick returns for shareholders, pharmaceutical companies have attempted to increase profits through mergers, acquisitions and tax evasion, with the net effect of a reduction in total expenditure on R&D. In fact when Imperial Chemical Industries (ICI) demerged in 1993, the pharmaceutical business was merged with the Swedish company Astra to form AstraZeneca but the chemicals and electronics successor companies carried out R&D at a much reduced level.

My argument is that successful, long-term R&D, which produces pharmaceutical products that benefit society and contribute to long-term economic growth, lowers profit in the short term but then provides income streams to fund further research and growth in the long-term. It is not even the case that investors could claim that, the pharmaceutical sector has not consistently delivered high margins and high growth. However, the market failure here is why I feel we need to create a publicly owned option.
Science policy is very political and ideas that can be traced back to Friedrich Hayek float around suggesting that science is a force that cannot be steered and evolves in response to the demands of the market, in an almost Darwinian manner. I admit that this is probably the case in R&D with low barriers to entry, like someone in their bedroom developing an app for a mobile phone. However, it takes on average 9 years and $2.17 billion of R&D spending to produce a single new drug (including the cost of all the failures) in the pharmaceutical industry.

Industrial policy fell out of fashion in the Thatcher revolution, however, post-Thatcher I would really like us to start making a case that the pharmaceutical sector should be planned and directed towards growth and solving the problems of society. Successive governments have asserted the promotion of economic growth as the primary goal of science policy and that is fine but in the past the state has sponsored companies like ICI with guaranteed contracts or monopolies.

The outlays for start-ups in this sector are huge and venture capital money is hard to get. There is also too much focus on the role of small and medium sized enterprises (SME) to drive innovation and in the UK only 3.5% of R&D was carried out by the independent SME sector. Large organisations are required.

The state and the non-profit sector provide massive amounts of R&D funding which largely goes to universities. We can attempt to correct market failure by giving money to companies, through R&D subsidies, tax concessions, patents or even cash prizes but at the end of the day, the state is supporting expenditure that the companies should be making anyway and there is no guarantee that the UK will retain benefit.

Resistance to innovation also comes from representatives of incumbent economic interests.
Incumbent capitalists have lower incentives to invest in R&D than new entrants as innovation causes a lowering of profits from their existing businesses. Perhaps our political system that gives excessive weight to the holders of economic power, is putting a brake on R&D even though it would be beneficial for society?

The fundamental problem is that the social value of producing new drugs does not correspond with their market value, so there is no financial reward for undertaking the R&D that society needs. I personally feel that the state should directly commission the R&D that society needs but the neoliberal dogma is that governments ‘can’t pick winners’. However, I feel that answer lies not in a board of ex-ministers, peers and professors but in an open question to citizens about what innovations are needed? Yes, choices should be underpinned by evidence and include expert advice but democracy should be at the centre of what kind of future people want and what resources we put in to get there.

Our changing age demographic and life expectancy is greatly welcomed and I feel if asked, citizens would like greater resources concentrated towards the ends of their lives. Dementias have no effective treatment and leave increasing numbers of our population and their relatives and carers suffering. It is in this context that the reduction in R&D in the pharmaceutical industry is particularly worrying.

In conclusion, if the government is able, it should stop Pfizer taking over AstraZeneca. However, that still does not tackle the greater problem of the reduction of R&D within the pharmaceutical industry. For years they have generated huge profits by patenting state subsidised research and selling it back to the healthcare system at a profit. The pharmaceutical industry – like the banks - is too important to fail and in capitalist hands, we see the results of short-term profit-maximising corporate interests. That is why we need a publicly owned option. However, we all know that our coalition government is not interested in building an industrial strategy but purely in its strategy of lowering tax.

Scott Nicholson