Strategic View:(A)

Prescription medicines represent the fastest-growing segment of healthcare costs in the United States. We at Trillium have taken notice, as have other investors. For example, last year 11% of shareholders voted for Pfizer to report on measures it is taking to contain the price increases of its most-prescribed drugs.

Still, most investors do not perceive such resolutions to be in their narrow financial interest. Case in point was one of the nation’s largest mutual fund groups defending their hundreds of votes against social and environmental resolutions: “our mutual funds are managed with one overriding goal: to provide the greatest possible return for our shareholders.”

But are they? The vast majority of individuals and institutions are diversified universal investors, whose fortunes rise and fall with the overall prospects for the markets, not for any one sector or stock. The key to their long-term financial gain is the overall health and profitability of the economic system. So our investment manager duty is to ask whether overpriced medicines support profitable economic growth in the aggregate.

Falling drug prices might squeeze suppliers, but all of the buyers of prescription drugs benefit, including corporate purchasers. Cost savings on health care should mean higher profits and stock prices in a broad range of industries. Pfizer’s loss becomes a gain for virtually every other non-pharmaceutical stock in the portfolio that funds prescription drug benefits for employees and retirees.

Beyond shifting cost and profits around, there are powerful dynamic impacts of lower drug prices. It is estimated that the lost economic output resulting from the combination of not working, sick days, and inferior productivity on the job totaled $260 billion in 2003 – roughly 2.4 percent of GDP. Lowering the price of pharmaceuticals provides consumers and employers an opportunity to allocate more resources towards health, while at the same time diverting resources to other goods and services. For investors, this translates into higher overall levels of productivity, profitability and return.

A standard argument against drug price cuts is the potential impact on research and development. However, economists have long noted the extraordinary levels of pharma sector profitability, suggestive of the pricing power that comes from less-competitive industries. This indicates ample room for price cuts before profits fall to levels that impinge on research. One simulation study found that modest price cuts would likely have negligible R&D impact.

During the long horizons appropriate to most investors, some of the largest risks to portfolio returns result from macro trends, including issues such as access to healthcare, environmental sustainability and even nuclear proliferation. Today, most investors see such issues as beyond their purview, although the risks of climate change have gained attention and action from a growing number of institutional investors. The bird’s eye view of the universal investor may require rising above the trees in order to nurture and protect the forest in unconventional ways, such as supporting increased access to healthcare.

1This article is based on a working paper I have written with my colleague Steve Lippman and Dan Rosan of the Interfaith Center on Corporate Responsibility.