A social investment model for financial pharmaceuticals

Recently I wrote a post on the ClearlySo blog about GSK, the large British based pharmaceutical firm, regarding its decision to cut prices by 95% (!!) for one of its anti-diarrhoeal drugs sold in poor countries.  Diarrhoea is a serious killer so the action will undoubtedly save lives.  While easy to dismiss this as a small gesture, we took the view that GSK CEO was sincere in his claim that this was not a gimmick, but a genuine attempt to adjust its business model.

We raised the question of whether the social enterprise and finance model were well-suited for the pharmaceutical sector.  Financing drug development is a massive/high-risk investment, although there is a SUBSTANTIAL social upside when something worthwhile is developed.  The companies recoup the cost of wasted research monies on duds by charging high prices for blockbusters.  Is there not some way to imagine social investment playing a role in exchange for a different funding model?  Certainly in the developing world; but perhaps even elsewhere?

One of the key issues is that nearly ten years of testing is required by regulators for new drugs.  It feels that this is driven by US legal requirements.  Could this really be the best way to do things outside of the USA?  Again, where the fear of monumentally expensive litigation is diminished, is there not another pricing model available?  Where there is trust, is there not a way to allow for companies to undertake best efforts in the development and trial phase and get drugs into the hands of those who face imminent death, for example, far more quickly?  Could this not lead to a change in the business model?

It seems to me there is a case for social, if not public investment, in the case where there are significant positive externalities generated.  Where public benefits are generated, could not other non-financial costs also be reduced somehow?

It strikes me that the social enterprise and investment model could be tried in the pharmaceutical sector, and the announcement by GSK, subsequently followed up by others, is a useful step in this direction.  I suspect there are other areas where new models could be tried.  What we must avoid, however, are cases such as we had in the case of the trading activities of investment banks.  In such cases only losses were “socialized”.  When the financial equivalents of “blockbusters” were generated the returns were fully “privatized”.  Not a sustainable model—as we have painfully learned.

First Published in Third Sector in June 2011.