Amazing podcast about semaglutide, with really interesting takes about big pharma: Novo Nordisk (Ozempic): The Complete History and Strategy
The picture really is like, as an industry, are they over earning? No, they used to until 2000. But nowadays, the ROIC numbers are just actually not that interesting.
In fact, some would argue as pharma gets less and less efficient, capitalists should just not allocate their dollars there, because thereâs literally not enough incentive in the profit dollars that you get to earn from your drug after itâs patented for many years. Should you actually index the pharma sector? Probably not. Itâs a little better than other sectors, but not necessarily enough to take the sector risk of putting all your dollars there.
Pharma as a whole of the medical pie only occupies about 13% of revenue. I really would have thought, with all the hate toward Big Pharma, that it would be higher.
David: Thirteen percent of revenue in the healthcare industry?
Ben: Yeah.
David: That means 87% of health care revenue is not going to pharma.
Ben: Right. If you could trade never having drugs again or never having doctors again, which one would you pick?
David: Wow, thatâs a good question. I hadnât even thought about that.
Ben: Itâs, of course, farcical.
Ben: Yeah, of course it is. But do you think drugs only provide 13% of the value to all of healthcare?
David: No, certainly not.
Ben: Itâs crazy.
David: Definitely more than that.
Ben: I will say, who is taking any risk in this whole ecosystem? Itâs only pharma. Whoâs taking risk to innovate and make anything better? Every other bet that a hospital makes or that an insurance company is just probably going to pay off.
This is actually pretty interesting. If you look at the net income of a pharma company, and letâs just take the biggest one or a very large one, Pfizer, super spiky, even though theyâre diversified, up down, up down, up down. In some years they make very little profit, some years they make a lot of profit. That is what you should expect from someone who is taking risk, trying to innovate, sometimes they succeed, sometimes they donât.
By the way, letâs define insurance company. Insurance company is someone that, in the good years, collects money, and then in the bad years, they have a big loss. Hopefully, they collected enough money such that they can still make some profit after covering the losses, like a hurricane hits. The insurance company has a bad year. Does that ever happen if you look at the net income of the big insurers? No.
David: Yeah. This is no surprise here, but health insurance in the US is not insurance. Itâs access.
Ben: Itâs a hundred percent right. We just had the single greatest healthcare crisis in the last several decades with Covid. What happened to the profits of the big health insurers? They stayed flat or grew. We arenât here on acquired to demonize people for making money or for being capitalists, but I do think we should call a spade a spade.
The health insurance companies are not actually insurance. Theyâre not actually holding the bag as the funder of last resort when calamity hits. Itâs the government, so really itâs the taxpayers. The big insurance companies and the PBMs make good profits in the good times, but the taxpayer funds the bad kinds.
I would be kinder here to the middlemen of the industry if I thought they were innovating and taking risk the way that the drug companies are. But the incredible consolidation thatâs happened among insurers, PBMs, frankly, even the hospitals and pharmacies too, there are either local monopolies in the hospital case or a three-race oligopoly in every other part of the value chain that really is just obfuscated and insulated profits.
After reading this I agree that for all their flaws, big pharma takes way more hate than any other industry, and especially than other players in the healthcare system. PMBs (in the US) private insurers, doctors, hospitals, and pharmacies represent 87% of healthcare revenues, and they definitely donât bring 87% of the value. To Benâs question, âIf you could trade never having drugs again or never having doctors again, which one would you pick?â I would definitely prefer to have all the best drugs in the world and zero doctors.
