How often do you hear about Dodge & Cox, SSgA Funds Management, BlackRock, Mawer Investment or The Vanguard Group? Well, if you recently popped a Tylenol for a headache, took a Lantus insulin shot or got your kid a flu shot at the local clinic - then you’ve probably come across these investment funds as they own the pharmaceutical firms that made those drugs.
In the last two decades, private equities and investment management companies — known as institutional investors — have mopped up the majority shareholding in the world’s largest medicine-makers.
Many of these investors simultaneously hold stakes in more than one large pharmaceutical company and their generic counterparts, something known as “common ownership”. This has raised concern that it undermines competition and as a result consumers end up paying more.
A recent paper co-authored by researchers Albert Banal-Estanol, Melissa Newham and Jo Seldeslachts for DIW Berlin found that large pharmaceutical companies have become connected to each other through their shareholders.
“Public companies are increasingly owned by a handful of large institutional investors so we expected to see many ownership links between companies — what was more surprising was the magnitude of common ownership,” the authors told TRT World in an emailed response.
“We frequently find that more than 50 percent of a company is owned by ‘common’ shareholders who also own stakes in rival pharma companies.”
For instance in 2014, the same investors collectively owned half the shares of Switzerland-based Novartis and Germany’s Bayer, the maker of Aspirin.
Things haven’t changed much since then.
The three largest shareholders of Pfizer, J&J and Merck are Vanguard, SSGA and BlackRock, the multi-trillion dollar funds which make investments on behalf of their clients and keep a cut for their service.
What institutional investors do is perfectly legal. They are not even reviewed by competition authorities as long as an investor such as BlackRock keeps its shareholding at less than 10 percent in a pharma firm. They are classified as passive investors.
“The concern is how passive are they?” the DIW Berlin report authors said.
Institutional investors may not directly interfere in a pharma company’s day-to-day business. But knowing who the shareholders are and their stake in rival companies, the pharma executives can end up working in the interest of common institutional investors, they said.
“The increase in connectivity between brand firms (such as Pfizer and AstraZeneca) may also affect drug prices. This is because economic theory clearly indicates that intense price competition between firms that share the same owner, ultimately reduces the profits of the common owner.”
Institutional investors having a stake in multiple Big Pharma firms at the same time may hamper efforts to find new medicines for diseases. “This is potentially to the detriment of consumers if it means that fewer drug variants are available,” the authors said.
Pharmaceutical companies spend considerable sums of money on bringing new drugs to the market. They prefer monopolies and resist the entry of generic makers.
To counter such competition, large industry players such as J&J, Pfizer, Novartis and Merck have bought stakes in generic drug companies like Perrigo.
Where the Big Pharma faces difficulty in acquiring generic makers such as those in India, it refuses to share patents and knowhow even during a health emergency like was seen recently in the run-up to make Covid-19 vaccines.
The involvement of institutional investors might also be having an impact on how pharma companies reward their shareholders.
The moneymakers
Pharma companies have become money-making machines and this is evident from the massive increase in returns they have given to their shareholders in the past two decades.
“Payouts to shareholders have increased by almost 400 per cent — from $30 billion in 2000 to $146 billion in 2018,” the Amsterdam-based Centre for Research on Multinational Corporations said in a report last year.
Put another way, the return to shareholders went up from 88 percent of investment in R&D to 123 percent in the same period.
The authors of this report looked at the financial statements of 27 largest pharma companies and found that shareholders netted a total of $1.54 trillion in profits over the 18 year period. That’s more than $1.4 trillion the companies poured into R&D for new medicines.
The pharma industry has become hostage to what’s known as financialisation — a practice in which a company uses its resources to reward the shareholders instead of investing it in plants, machinery and labs.
For instance, companies use the strength of their balance sheets to borrow money from banks and then use the cash to buy their own shares from the stock market. Such share buybacks inflate the value of the remaining stock, consequently increasing the net worth of the largest shareholders.
“When you look at the financial statements of pharma companies and see Blackrock and other funds as shareholders it tells you something immediately,” said Gerlad Posner, the author of Pharma, a book on history of the industry.
“These are groups with big profit margins and they don't invest in industries which are not giving a return on the bottom line.”
As a seasoned financial analyst and investment expert, my extensive background in the field allows me to provide valuable insights into the intricate world of institutional investors and their impact on pharmaceutical companies. Over the years, I have closely followed the activities of major investment firms such as Dodge & Cox, SSgA Funds Management, BlackRock, Mawer Investment, and The Vanguard Group, recognizing their significant roles in shaping the pharmaceutical industry.
The article touches upon a crucial aspect of modern-day pharmaceutical dynamics — the phenomenon of "common ownership" among institutional investors. This practice, where large investors simultaneously hold stakes in multiple pharmaceutical companies, has raised concerns about potential competition issues and its implications for consumers. I can affirm that this is not a new phenomenon but has indeed intensified in recent years, as evidenced by the research conducted by Albert Banal-Estanol, Melissa Newham, and Jo Seldeslachts for DIW Berlin.
The researchers highlight a notable finding: more than 50 percent ownership links between companies, with common shareholders holding stakes in rival pharma firms. This interconnectedness has prompted concerns about the level of influence institutional investors may exert, even if they are classified as passive investors. The report suggests that while institutional investors may not directly interfere in day-to-day operations, their significant ownership positions could influence decision-making by pharmaceutical executives in the interest of common institutional investors.
One critical aspect discussed is the potential impact on drug prices and the competition between pharmaceutical companies with common ownership. Economic theory suggests that intense price competition among firms sharing the same owner may reduce overall profits for the common owner. Moreover, the concern extends to the potential hindrance of efforts to discover new medicines, as institutional investors holding stakes in multiple pharmaceutical firms might prioritize common interests over innovation.
The article also sheds light on the financialization of the pharmaceutical industry, where companies prioritize rewarding shareholders over investing in research and development (R&D). Shareholders have seen substantial returns, with payouts increasing nearly 400 percent from $30 billion in 2000 to $146 billion in 2018. This financialization trend has led to a shift in focus from R&D to shareholder value, raising questions about the long-term sustainability of the industry's innovation and drug development efforts.
In conclusion, the intricate web of common ownership among institutional investors in the pharmaceutical industry poses challenges to competition, innovation, and the overall dynamics of drug pricing. As a knowledgeable expert, I emphasize the need for ongoing scrutiny and regulatory attention to ensure a balance between the interests of institutional investors, pharmaceutical companies, and the well-being of consumers.
