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 a tablet.

The pharmaceutical industry has a checkered history. The Carbolic Smoke Ball was typical of the industry’s products at the end of the 19th century. Promoters made baseless claims that their product would cure a wide range of diseases. Widely advertised elixirs (patent medicines) often contained cocaine and alcohol. These potions may have made patients feel better, but they did little for their health. The term “snake oil” is still used today to describe worthless propositions from persuasive salespeople. Medicinal “snake oils” were once promoted to the gullible – and some really did contain oil from snakes.

The Rise of Scientific Medicine

Some control of medicines had long been practiced through pharmacopoeias – that is, lists of drugs recognized by the medical professionals of the time. But the harsh reality of pre-scientific medicine was that doctors and apothecaries knew little more than their patients. Medical practice relied on folk wisdom, snake oils and an unwarrantedly confident bedside manner.

Drug regulation began in 1906. Congress passed the Pure Food and Drug Act in response to the abuses in the meatpacking industry uncovered by Upton Sinclair and the exposé of fraudulent patent medicines described by Samuel Hopkins Adams. Science and medicine were gradually introduced to each other. Aspirin, one of the first drugs with demonstrated efficacy and possibly still the most widely used, was trademarked by the German company Bayer in 1899. (Aspirin became a generic term in the U.S. and UK when Bayer’s assets outside Germany were confiscated during the First World War.) Sulfonamides derived from coal tar had been used as dyestuffs for decades. In the 1930s German scientists at Bayer, by then part of IG Farben, conjectured that these compounds might have antibacterial action and successfully demonstrated this effect for a drug labelled Prontosil. Thereafter therapeutic sulfonamides were widely marketed.

Events immediately revealed the pharmaceutical industry’s potential for both good and harm. A Tennessee company, Massengill, manufactured Elixir Sulfanilamide in 1937 to meet demand from doctors and patients for a liquid formulation. The solid product was dissolved in toxic diethylene glycol, which today is widely used as an antifreeze. More than a hundred people died; the company’s chief chemist, who had not understood the implications of his formulation, committed suicide. Proposals for tighter regulation of new pharmaceutical compounds had been controversial in Congress but were now quickly passed into law.

In the 1950s the German company Chemie Grünenthal marketed Thalidomide, a sedative widely prescribed for morning sickness in pregnant women. The Distillers Company, the poorly managed dominant producer of Scotch whisky, obtained a British license for the product. The drug was linked to birth defects and withdrawn from the market in 1961, but tragically not before many children in Britain and Germany had been born with seriously deformed limbs. A campaign to obtain compensation for the victims dragged on for many years.

In the United States, Frances Kelsey documented the Elixir Sulfonamide tragedy when she was a graduate student. Later, as a reviewer for the Food and Drug Administration, she thought the information provided on the safety and efficacy of Thalidomide inadequate and refused to authorize its use. President Kennedy subsequently awarded her a medal for distinguished public service.

Antibiotics

The antibacterial properties of penicillin were observed in 1928 by Alexander Fleming at St. Mary’s Hospital in London. Still, this discovery attracted little interest.

Stop there for a moment. For a decade, neither government nor business pursued one of the most important innovations of the century – and one with huge commercial potential. Shortly before the outbreak of the Second World War, however, the Rockefeller Foundation funded research by Howard Florey and Ernst Chain at Oxford University, who were trying to find a way to synthesize penicillin. They would go on to share a Nobel Prize with Fleming.

The war concentrated minds and released funds – similar effects were observed in many other areas of innovation. Florey visited the U.S. to evangelize for penicillin and found an enthusiastic supporter in George Merck, president of the company that bears his name. The Distillers Company’s ill-fated diversification into pharmaceuticals originated in an invitation from the British government’s wartime Ministry of Supply to manage a newly constructed penicillin plant in Liverpool. The Ministry had evidently perceived some similarities between whisky distillation and the synthesis of penicillin.

Sulfonamides and penicillin were the first antibiotics, and over the following decades this category of drugs would cure millions of people who would otherwise have died of infectious diseases. The life-changing potential of pharmacology was now apparent – as was the opportunity to create profitable new business ventures.

Merck was one of the first companies to recognize that potential – and to benefit from it. George Merck Sr. had emigrated to the United States at the end of the 19th century to establish a branch of his family’s German pharmacy business.

The company describes the “Merck Manual” of those times as “a widely used medical reference” – it advocated bloodletting as a treatment for bronchitis and arsenic as a remedy for impotence. Merck Manuals are still a widely used medical reference, though they now contain more reliable information.

The American branch of the German company was nationalized in 1917, and when the war ended George himself purchased its stock from the U.S. government. German and American Merck were then – and remain – wholly separate businesses.

George Sr.’s son, George W. Merck, turned the company into a research-oriented business that has been listed on the New York Stock Exchange since 1927. After his meeting with Florey, and following the attack at Pearl Harbor, Merck made a commitment to mass production of penicillin. Supplies were made available not only to the military but also to other companies and researchers. In 1944 Merck launched streptomycin, another antibiotic, discovered by Rutgers chemist Selman Waksman. The first patient successfully treated with streptomycin was U.S. Army Lieutenant Robert Dole, subsequently Senate Majority Leader and Republican presidential candidate, who lived for another 75 years. This drug was not just the first effective treatment for tuberculosis; it was sometimes a cure.

George Orwell, dying from the disease, persuaded David Astor, the rich Anglo- American editor of the Observer (for which Orwell was a columnist) to purchase a supply of streptomycin from the U.S. But the author of 1984 responded badly to the drug and died in 1950. Penicillin and streptomycin were licensed freely, but in the future pharmaceutical companies would guard their intellectual property much more closely.

In 1950 Merck famously told students at the Medical College of Virginia: “We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been.”

Johnson & Johnson’s 308-word credo, published in 1944, is the work of RW Johnson, another member of a founding family. Its emphasis on profit as a result rather than an objective resembles the sentiment of George Merck. In what became a classic business-school case on ethics and corporate reputation, the company’s executives applied the credo in 1982 to implement a speedy product recall of Tylenol, the business’s best-selling painkiller, after a bad actor spiked containers with cyanide. Middle managers did not have to be told to take the products off the shelves. They knew that was the right thing to do and were correctly confident that their bosses would support them.

In the 1980s Merck chemists suspected that a veterinary product they had developed might treat river blindness, a disease caused by a parasite that grows inside the human body and leads to immense suffering for millions in sub-Saharan Africa. Merck created an appropriately modified version of the drug and confirmed its efficacy. Failing to persuade governments or charities to fund further development, the company decided to give the medication away to all who might benefit and continues to do so. (The cost of this philanthropic gesture is less than might be imagined because it is sufficient to take the tablet once a year.)

For many years Merck topped Fortune magazine’s list of most admired companies. The company was an exemplar of successful long-term corporate strategy in business guru Jim Collins’s 1994 classic Built to Last. Collins’s research method was to pair what he described as “visionary” companies – Merck was one – with more pedestrian but similarly large companies in the same industry.

Collins compared Merck to Pfizer and contrasted George Merck’s “medicine is for the people” with the emphasis of his counterpart at Pfizer, John McKeen: “So far as humanly possible, we aim to get profit out of everything we do.” Collins’s argument stressed that, judged by stock returns, the “visionary” companies, including Merck, had far outperformed their comparators.

The Tide Turns

The post-war pharmaceutical industry enjoyed an implicit contract with the public and the government. The arrangement was complex: drug pricing was, and remains, controversial. The most profitable drugs were not the lifesavers such as antibiotics and vaccines but those that alleviate but do not cure chronic diseases suffered by rich people – depression, hypertension, excess stomach acidity. Pharmaceutical products benefit from patent protection, and regulation both constrains their use and restricts competition. But overall, the industry was permitted extraordinary profitability in return for the businesses behaving as exemplary corporate citizens. Yet those days have long gone.

Drug companies came under pressure from Wall Street to demonstrate their commitment to securing value for shareholders. The pay-off from marketing is immediate whereas the pay-off from research is delayed, and industry strategy came to reflect that difference. Merck stumbled – the company would feature again in a 2009 book by Collins, How the Mighty Fall. Ten years earlier, Merck had marketed a new painkiller, Vioxx, not just for the minority of patients who derived a unique benefit but for many who might – just as advantageously for them, if less profitably for the pharmaceutical industry – have taken aspirin.

U.S. law permits direct advertising of prescription drugs to patients, and for a time Vioxx was the most heavily promoted product in that category. As Ray Gilmartin, then Merck CEO, explained in the company’s 2000 annual report: “As a company, Merck is totally focused on growth.”

That is not a good strapline for a health care company; demand for its products is a regrettable necessity. Vioxx was subsequently linked to heart conditions in some patients. Merck withdrew the product in 2004 amid recrimination and lawsuits. Even the revered Johnson & Johnson would find its reputation tarnished by the regulator’s discovery of bad practice – and inadequate management responses – at the company’s McNeil consumer products group.

Merck and Johnson & Johnson deservedly remain respected businesses – 2020’s Fortune list put J&J at 26 and Merck at 40 in its top 50 admired companies. But they are now outliers in their industry.

When Michael Pearson took over as chief executive of Valeant Pharmaceuticals in 2008, he adopted a new strategy. Others in the industry had been edging towards this approach, but Pearson made it explicit. Valeant bought established drug companies, stopped research and development, emphasized marketing and substantially raised the prices of the proven products to which it had acquired the rights.

For a time, the company’s profits and share price responded favorably, and Pearson and other executives rewarded themselves accordingly. Some senior employees reveled in the atmosphere of unfettered greed sufficiently thoroughly to commit fraud. When illegality was revealed, Pearson was forced out and the company’s shares plummeted. The business has since rebranded itself as Bausch Health, taking the name of the respected eyeglass supplier it had acquired.

Valeant’s approach found imitators, however. Martin Shkreli adopted an even more extreme strategy of price gouging at Turing Pharmaceuticals, increasing the cost of Daraprim, on the market since 1953, from $13.50 to $750. In 2007 generic drugs producer Mylan acquired the rights of the long-established EpiPen used to provide urgent relief to people with severe allergies, and over the next 10 years raised the price six-fold. The company paid almost a billion dollars to settle – “without admission of liability” – claims that it had violated antitrust laws and defrauded Medicaid.

In 2019 Mylan merged with a divested subsidiary of Pfizer and renamed the business Viatris. As the company explained, “deriving its name from Latin, Viatris embodies the new company’s goal of providing a path – ‘via’ – to three – ‘tris’ – core goals: expanding access to medicines, leading by innovating to meet patient needs, and being a trusted partner for the healthcare community worldwide.”

Chairman Robert Coury declared, “We are creating a company unlike any other – a company focused on building a more hopeful and sustainable healthcare journey, empowering patients to live healthier at every stage of life.” All companies, though, make statements of this kind.

But the most egregious abuse was the aggressive marketing of addictive drugs. Purdue Pharma, privately owned by the Sackler family, is now notorious for promoting opioids to small-town America. And even Johnson & Johnson agreed to contribute $5 billion to a settlement, led by the Sacklers, in acknowledgement of J&J’s role in what Princeton economists Anne Case and Angus Deaton dubbed “deaths of despair.”

The Sackler family have been generous philanthropists, making donations to museums and galleries in London and New York and to Oxford’s Bodleian Libraries. This philanthropy has become controversial, with a campaign demanding that Sackler gifts be refused and the family name removed from the buildings that they financed. The protest is led by the American photographer Nan Goldin, who battled an addiction to Oxy-Contin (produced by Purdue Pharma). The issues are not straightforward: would critics prefer that the family spent its undeserved money on itself rather than on purposes of public benefit?

Drug companies continued to push the limits of customary behavior. Insys Therapeutics had developed an opioid for terminally ill cancer patients, for whom its highly addictive properties were of no consequence. But this market was doubly limited: only the terminally ill were customers, and they soon ceased to be customers (although they were replaced by newly diagnosed cancer patients). The head of sales for Insys, Alec Burlakoff, hired a stripper to persuade physicians to promote and prescribe the opioid to non-terminal patients, giving a new interpretation to the term “hooker.”

In an interview with the Financial Times, Burlakoff acknowledged that he did not have “morals, ethics and values.” He described his thinking once he realized that prosecution was likely: “Not only is the company going to get fined an astronomical amount of money, which I’ve seen a million times, but worse [sic] case scenario, which I’ve never seen before, they might actually take my money.”

Burlakoff and his fellow executives were prosecuted under federal racketeering legislation aimed at criminal gangs; they are now serving prison terms. A pharmaceutical industry that once seemed to exemplify a constructive relationship between private enterprise and public benefit had become widely and justifiably detested. In 2019 Gallup asked Americans whether their view of a list of 25 activities was favorable or unfavorable. Only four had net negative ratings – federal government, public relations, health care and pharmaceuticals – and pharma’s score was much the worst.

The Quest for a Covid-19 Vaccine

On the last day of 2019, China notified the World Health Organization of an outbreak of a novel coronavirus around the city of Wuhan. In 2020 the virus spread across the world, overwhelming hospital facilities. By the end of the year the illness was implicated in the deaths of millions of people. Lockdowns crushed many businesses and resulted in massive losses of economic output.

Within a few weeks the genome of the virus had been identified, and work began to produce a vaccine. There were two strands of development: the traditional approach to vaccine production, which employs a weakened or modified strain of the virus to provoke the production of antibodies, and a still experimental procedure, messenger ribonucleic acid (mRNA), which trains the body to generate its own immune response – an idea that would win a Nobel Prize in 2023 for its pioneers Katalin Karikó and Drew Weissman.

In the U.S. and Britain, governments offered funding for vaccine development by pharmaceutical companies and placed large advance orders for successful products. The European Union did something similar on behalf of member nations, but more slowly and less effectively. Within a year, four companies – AstraZeneca, Johnson & Johnson, Moderna and Pfizer – had taken their vaccines through clinical trials and obtained emergency use authorization in several countries.

Fortune’s 2021 Most Admired Companies list showed that the rankings of Johnson & Johnson and Merck had risen by more than 10 points. Merck’s rating had improved even though the company’s vaccine product had failed in trials. The speed and overall effectiveness of response had done something to restore the industry’s damaged reputation. And yet the negative consequences of past abuses lingered.

The conspiracy allegations that circulated on the wilder fringes of the Internet can perhaps be discounted – there has always been an audience for such stories. But take-up was inhibited even among otherwise-reasonable people by baseless claims of unacknowledged side effects. In Gallup’s 2020 survey, pharma’s net favorability rating had improved by seven points. But it was still the lowest of any industry sector.

A Case for Treatment

The pharmaceutical industry illustrates modern business at its best and worst. Its products – antibiotics, antihypertensives, statins, vaccines and many others – have saved hundreds of millions of lives and improved the quality of life for almost everyone. Its revenues have funded new research and made large profits for investors. Since stock in companies such as Merck, Pfizer, AstraZeneca and Roche is widely held by individuals and institutions, these returns have contributed to the retirement funds of many people.

The profits have also supported the philanthropy of Merck and, even though one should hesitate to applaud, the benefactions of the Sacklers. The Novo Nordisk Foundation, which owns a controlling stake in the eponymous Danish drugmaker, is the largest charitable foundation in the world, and the Wellcome Trust, by far the biggest educational endowment in Britain, has funded British science to remarkable effect. Thus two of the four largest charities globally are the result of the philanthropy of the leaders of the pharmaceutical industry: the Danes’ August Krogh and Harald Pedersen, and the British Henry Wellcome. (The list of leading charitable foundations is completed by those established by Bill Gates and by Sweden’s Ingvar Kamprad, founder of furniture chain IKEA.)

But the same industry also illustrates all the features that have led to public mistrust of big business. Many of its executives have demonstrated standards of behavior far below those that any modern society could accept or should tolerate from people occupying positions of responsibility whose actions bear crucially on the welfare of others.

The pursuit of “shareholder value,” the belief that profit is the defining purpose of a corporation, was one element in the decline of ethical standards. Yet the pharmaceutical industry is also a powerful counterexample to a simplistic view of the problem of “short-termism.” Venture capitalists cluster around bright academics who have innovative ideas with possible commercial potential. Many established companies invest heavily in the development and trials of new products, the majority of which will fail and few of which will yield revenues for many years.

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.

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 behavior 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.