Consider big pharma. In 2018, the world’s ten largest drug companies spent more than $76 billion on R&D—42 percent of the global total. Yet of the fifty-nine drugs that were approved that year, only 15 percent originated in the labs of the top-ten pharma giants. Pint-sized innovators with less than $1 billion in sales accounted for 63 percent of all new drug approvals.

Pedro Cuatrecasas, an industry veteran who brought more than forty medicines to market, blames bureaucracy for big pharma’s malaise:

[Drug companies felt] confident that they could manage and mandate results with discipline, order, formality, and efficiency. Unfortunately, many of these qualities are ones that suffocate creativity and innovation. Freedom, spontaneity, flexibility, nimbleness, tolerance, compassion, humor, and diversity were replaced by bulky and inflexible organizational structures characterized by regimentation, control, conformity, and excessive bureaucracy.

When something that used to be complex and expensive becomes convenient and cheaper, one result is often an explosion in demand. If we extrapolate from the statistic that only one in five people who could use help with their hearing have hearing aids today, the market size in short order could be five times greater—perhaps as big as $40 billion —after the inflection point that allows anybody to get a discreet, self-adjustable hearing device.

SEVEN: Deathmatch

“Wall Street loved it. Nvidia shipped new cards on a six-month cycle, twice as fast as any other vendor. The company introduced a new product line for the back-to-school cycle each fall, then updated that product in the spring. Demand accelerated when flat-screen monitors arrived, and within a few years graphics accelerators were standard on most PCs. In early 1999, fewer than six years after its founding, Nvidia went public with a $600 million valuation. Sequoia, which had initially valued Nvidia at $6 million, tallied a hundred-bagger, subsidizing the losses from countless other speculative investments.

2. A History of Pharmaceuticals: A Case for Treatment

“‘If there was a company that was selling an Aston Martin at the price of a bicycle, and we buy that company and we ask to charge Toyota prices, I don’t think that that should be a crime.’

Martin Shkreli, CEO of Turing Pharmaceuticals, defending a decision to raise the price of a

62-year-old drug to fight parasitic infection from $13.50 a tablet to $750, 2017

This is an important and underappreciated point: there is no shortage of ‘patient capital’ – institutions such as pension funds and university endowments are naturally looking for investments that may only pay off in the long term – but there is a shortage of patient individuals working in the finance sector, an industry remunerated almost entirely by transactions. The result is a constant flurry of financial activity engaging senior executives, investment professionals and advisers which rarely adds to, and often detracts from, the effectiveness and success of the underlying business. The financial pressures that motivated strategy at Merck and Valeant not only damaged the standing of the businesses and their products but also diminished the returns to their shareholders in the long run. In later chapters I will show that these are far from exceptional cases. The history of pharmaceuticals illustrates much that is right and wrong in the relationship between business and society. I have described four problem areas: the motivation and standards of behaviour of leaders of the industry; the interface between business and finance; the difficulty of constructing a regulatory regime that is relevant and effective; and the sometimes too tenuous relationships between prices, costs and values. None of these issues is unique to the pharmaceutical sector: similar questions arise in every kind of business, and the answers are necessarily specific to industry, time and place. But in this book – and another that will follow – I will illustrate principles and directions of travel.