Benefiting pharmaceutical rent seekers

The Private Equity Firm That Quietly Profits on Top-Selling Drugs

By Randall Smith
The New York Times, July 8, 2017

Cashing in on rising drug prices often unleashes an outcry from consumers and politicians.

But a little-known private equity investor, Royalty Pharma, has built an unusual investment portfolio valued at $15 billion — it buys up the rights to royalties on future drug sales — while largely avoiding public controversy. By its own count, Royalty Pharma owns partial rights to seven of the 30 top-selling drugs in the United States, including giants like Humira, the arthritis treatment that is the single biggest-selling medication in America. And its deals have been getting larger.

While Royalty Pharma has benefited by riding the rising tide of drug prices, the drug companies play the largest role in setting prices. George Lloyd, Royalty Pharma’s executive vice president and general counsel, said: “Royalty Pharma has no influence over how drugs in which it invests are priced. These prices are set by the marketer of the product, and we play no role in that process.”

To make big money on promising drugs, investors like venture capital firms and biotechnology funds typically place long-shot bets on drugs that are still in the development stage. Royalty Pharma, based in New York, steps in later in the game: It generally buys rights to the royalties on drugs that have already been approved for sale by regulators. It buys them from patent holders, often hospitals or universities, that want to convert their future royalties into cash right now.

Royalty Pharma has successfully created “a new segment of the investment management industry,” which has helped offset a decline in other types of funds for drug investments, said Andrew Lo, a finance professor at the Massachusetts Institute of Technology’s Sloan School of Management, in a 2014 study written with Sourya Naraharisetti of M.I.T. and Duke University.

Royalty Pharma’s revenues have risen an average of 30 percent annually, from $161 million in 2005 to $2.47 billion in 2016, according to company material.



By Don McCanne, M.D.

As we look at some of the innovative approaches in health care financial management, we should always ask ourselves, how does this benefit the patient?

Here we have a financial intermediary placing bets that the pharmaceutical industry will continue to gouge its ultimate customers - the patients - using outrageous pricing practices for its pharmaceutical products. This intermediary provides us with a prime example of rent seeking - scooping up large amounts of funds without providing any tangible product.

And the benefit to the patient? None, but worse than that - the patient is harmed by having to pay higher prices, either directly or indirectly, when the entities pricing drugs include in their prices the funds drawn off by these superfluous intermediaries. Of course, there are many other useless intermediaries, not only in pharmaceuticals, but in the rest of the medical-industrial complex as well.

Isn’t it about time that we tailor our health care financing system to serve patients rather than rent seekers and others who drain our resources while shorting patients on essential health care services?

We desperately need to replace our dysfunctional health care financing system with a well designed single payer system. Instead of standing by and watching the politicians struggle with forcing upon us highly flawed health financing policies that cater especially to stakeholders, we should mobilize our forces of citizen action - now - because, if we don’t, they’re going to do it to us again.

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