The impact investment imperative in pharmaceuticals

The creation of new medicines is a natural area of focus for impact investors. Not only do many of the treatments directly contribute to improving peoples’ lives, but their developers offer differentiated investment characteristics that can help build resilience in investment portfolios, especially when wider market sentiment is negative.  

For a new drug to be approved and come to market, big budgets and extensive time frames are required. The trial process can take over ten years 1 and cost hundreds of millions of dollars, even billions 2 . Consequently, there’s need for private capital to fund the development process. 

There are several ways investors can allocate capital across the pharmaceutical value chain. For later stage medicines, listed pharmaceutical companies, who rank high on key sustainability metrics, and have the experience and funding capacity to launch new treatments and manage the complicated market dynamics can provide interesting opportunities. At Tribe, we invest in companies with a clear medicinal focus that serve a high unmet patient need, and that satisfy criteria on pricing, ethics and responsible development and use. This often involves targeting diseases with growing patient populations due to demographic drivers, like an aging population.   

Through the listed investment trust market, it’s possible for investors to access early-stage ventures and help progress treatments beyond the lab and into clinical trials. There are also numerous “picks and shovels” plays into the pharmaceutical industry – the physical infrastructure needed in drug development, like diagnostics. These types of businesses are attractive because they don’t carry the risk of an individual drug failing to progress through to development.  

Investment characteristics

An attractive investment characteristic of the pharmaceutical sector is the potential for uncorrelated returns to the broader market. Because demand for a given drug often has demographic drivers that are protected from the ebbs and flows of the economy, pharmaceutical stocks can tend to move more on factors such as pipeline progress.

Nearly 70% of Americans rely on prescription drugs on a daily basis 3 . This creates an inelasticity to demand that can lead to resilience in pharmaceutical earnings. During the 2008 recession, spending decreased in every consumer category other than healthcare 4 . Steady demand makes the sector a useful building block in a diversified portfolio.   

Impact considerations

As impact investors, engagement priorities include a wide range of issues, some include pricing and access, ethics, animal welfare, lobbying, and executive pay. It’s essential that treatments remain accessible to those who need them for health (rather than aesthetic) reasons. The issue of health equity has become greatly exacerbated since the pandemic (see investing in healthcare beyond the pandemic), and developers have a responsibility to ensure that global patient access remains a core priority.  

In the UK, drug developers voluntarily agree to pay a rebate to the UK Department of Health in a bid to reduce pressure on the NHS, whilst providing a fair return for developers. This is crucial for growing the domestic life sciences industry. This voluntary arrangement has become increasingly contentious as development costs have increased since the pandemic. 

The Biden administration has also made drug pricing a key issue. This is pertinent given the US healthcare system is predominately private. Biden’s Inflation Reduction Act (passed in August 2022) included key changes that give the US government the power to negotiate with drug companies at the federal level, which should lower aggregate costs for key treatments. Insulin producers have already pre-emptively cut prices in 2023, making essential treatment cheaper for many Americans.

Noncommunicable diseases (NCDs) kill 41 million people each year 5 , equivalent to 74% of all deaths globally 6 , and six of the top 10 causes of death in low-income countries are communicable diseases. Investing in pharmaceutical interventions play a vital role in driving the delivery of the UN SDGs, specifically Goal 3: Good Health & Wellbeing. The pharmaceutical ecosystem provides interesting opportunities for investors looking to further improve the reach and efficacy of pharmacological innovation and intervention. It’s an investment theme we regularly interrogate within our Tribe portfolios as the sector can present attractive investment characteristics for diversification.