New ways of working will boost medical innovation and benefit companies, shareholders, and the wider population
There are three things we know always happen in a crisis. Poor leaders get found out, as voters in the United States may already have already started to realise. The initial response is always completely hopeless, as we have discovered once again in Britain. And finally, and most importantly, whether it a war, a natural disaster, or an epidemic, eventually it sparks a wave of innovation – because in the end human ingenuity always rises to a challenge.
The Covid-19 crisis is, at the risk of stating the obvious, the worst medical crisis we have witnessed in a century. But here is a bet, and one that matters to investors: it will also spark a much-needed wave of medical innovation. The last decade has been terrible for the pharmaceuticals and life sciences industry, with slowing innovation, defensive mergers, and dismal returns for shareholders.
However, that could be about to change because new ways of working will be discovered, regulations will be re-invented for a new era, and spending on healthcare will be increased. The companies that come up with treatments will be the big winners – but the whole industry will start to flourish once again.
Over the next few months, every developed country will work its way through different strategies, from partial lockdowns to social distancing to herd immunity, to cope with Covid-19. But it remains the case that the only real solution will be scientific. Until we have a vaccine, or an effective drug treatment, the virus will just come back again and again. There is no other way of beating it. One way or another, technology will have to rescue us.
The pharmaceuticals industry, although it wouldn’t want it to happen this way, could use a boost. Its giants have all struggled over the past decade, and while the biotech start-ups may have raised a lot of money, very few of them have managed to live up to the hype. Just take a look at the figures.
The MSCI World Pharma and Life Sciences Index, which covers all the major companies globally, has generated annualised returns over the last five years of a meagre 5.2pc against 5.8pc for the MSCI World Index. In the US, the pharmaceuticals majors have under-performed the Nasdaq by a massive 70pc since 2015. For a supposedly cutting-edge technological industry that is a terrible record. As old patents have expired, relatively few new medicines have been approved and the result has been stagnant profits. Covid could soon bring about change.
First, the intense race to come up with a vaccine or effective drug will create new ways of working, collaborations and shortcuts that can be used against other diseases as well. Some of the drugs giants are already getting together on a vaccine – look at the tie-up between GlaxoSmithKline and Sanofi for example, which GSK chief executive Emma Walmsley described as "unprecedented" – but once they get used to working in new ways it will spill over into all kinds of other research and products as well. Under pressure, change that might have taken a decade can suddenly happen overnight.
Next, regulations may well be re-invented. Over decades, and for perfectly understandable reasons, we have demanded higher and higher standards for new medicines. But perhaps it has gone too far, or at least not been designed in the right way? There is a fascinating debate underway, for example, about whether "challenge vaccines", where volunteers are inoculated and then deliberately exposed to a virus, rather than waiting for that to happen naturally, should be allowed.
We might feel uneasy about that, but if it speeds up getting a vaccine by six months, then arguably it is worth it (after all, we don’t mind young men volunteering to fight wars for us, and that is a lot riskier, so what’s the problem with them volunteering for vaccine trials?). The important point is this. We may decide in the next few months that the way we test medicines needs a radical overhaul, because faster testing is the only way out of this mess - and that will change the way the industry operates permanently.
Third, spending will be increased. Whatever else happens, governments are going to be spending much more on their healthcare systems, drug development and preventative medicine. We have just discovered what a massive cost an epidemic can impose on an economy. Set against the trillions in lost output, and in extra government debt, whatever we spend on medical care, and on research in particular, is going to seem modest by comparison.
Finally, the operating environment is about to get a lot easier. We are not going to be hearing a lot about greedy "big pharma" over the next few years. If a few companies make a lot of money from a Covid-19 vaccine, no one is going to mind in the least. Indeed, this might be the moment for regulatory change. Legislators might decide to allow patents to last for more than 20 years (perhaps in exchange for lower prices) to encourage investment and innovation – it is a little hard, to put it mildly, to understand why the copyright in a book lasts for 70 years after the death of an author, but the inventor of a drug only has exclusive rights to it for 20.
Right now, investors are backing businesses in the race for Covid-19 treatments. Any company that gets a vaccine or a drug into Phase II or III trials is already witnessing a sharp spike in its share price. And, of course, any breakthrough in treating the virus is going to be massive. In truth, however, investors should be looking at pharmaceuticals and life sciences more widely. For the last decade, it has been outshone by the internet and the app economy. But this crisis will usher in a new global age – and one that will allow all its major companies to renew themselves and start growing again.