This is a good commentary. Earlier this year, I read “Where are all the trillion dollar biotechs?” - clearly, a lot would have to change in the traditional pharma model for companies to start hitting $1T valuations; notably the R&D and clinical pipeline would have to become much more efficient. Then, I asked myself “Will tech start buying pharma?”, and I thought they may. It’s the tech companies who have better vantage point to digital and personalized health, and I can definitely see them building out labs for automated, AI-driven biological discovery. Buying pharmas would then simply be a means to market access (which is imo one of the few pharma’s strong moats currently, the other being proficiency in running clinical trials).
This article highligths an ongoing transition towards an alternative way for pharmas to leapfrog to $1T valuations - becoming a (direct-to-consumer) subscritpion business. You can debate whether this is good or not for the consumer (lol, a patient!), but the economic forces seem very strong:
The core problem is that drugs have a shelf life. Genericization is a gravitational well no company has been able to escape: there is a limited window of exclusivity to recoup your investment before patents expire and generic drugs commoditize your product. This dynamic has historically capped pharma valuations at around $200bn. It also makes these businesses difficult to value because pharma companies are a complex conglomerate of discrete scientific, regulatory, and market risks.
First, pharma needed doctors to bundle demand. Illnesses were specific and hard to identify; the doctor was the necessary aggregator who matched patients to products. Later, as drugs became complex and expensive (specialty oncology, etc.), the system needed to bundle price. Few patients can pay $50,000 per year out of pocket for a drug, so the market relies on insurance pools to spread costs. The GLP-1 market is the first instance where neither applies. Demand is ubiquitous (doctors aren’t needed to find it), and the price — while high — is within the stretch capability of the middle-class consumer.
The business model that Ricks describes is much closer to a consumer subscription model than the established model, and so Wall Street is beginning to value Lilly not as a drug company but as a subscription business with high retention and a massive TAM (one wonders how long until Lilly starts reporting its monthly active users).
🤣🤣🤣
Ricks describes a ‘rich get richer’ scenario where the success of the current franchise funds bets that are too expensive or risky for peers. One type of bet are “moonshots” (Ricks mentions a potential preventative Alzheimer’s therapy). The other way to leverage their capital advantage is by parallelizing clinical trials — running all necessary studies at once rather than sequentially:
Ricks argues that this shift is necessary because the traditional “moat” of intellectual property is eroding. In an age of AI and rapid patent-busting, the chemical matter itself is losing its ability to protect value: “Ricks: what is a patent? It’s a decree to publish your finding to make it a public good, in return for that monopoly. But if the monopoly is debased by 30 Chinese biotechs who feed that patent into a computer, the computer then can imagine chemical structures that have one or two atom differences that don’t fit within the patent and then make that substance, test it, it works just the same. You’ve created basically a shadow generic industry and undermine the patent system itself.” If you can’t protect the molecule, you must protect the channel.
It’s either go direct or be absorbed for pharmas if you ask me! That also somewhat explains why so many companies have been acquiring GLP-1(-like) molecules, even if the returns would seem to be diminishing quickly beyond the few top players. It’s about building the direct-to-consumer channel.