How to Find Ethical Investments in the Pharmaceutical Industry

Between stiff fines, exorbitant drug prices, and multibillion dollar settlements for their misdeeds, drugmakers' reputations have taken big blows over the past few years.

All of this may leave you wondering if it's possible to find and invest in pharmaceuticals that are still guided by ethical standards that put patients first. Although Gilead Sciences (GILD 0.07%), Johnson & Johnson (JNJ -0.69%), and Biogen (BIIB 4.56%) haven't entirely avoided the regulatory hot seat, they've embraced efforts to improve patients' lives. Motley Fool analyst Kristine Harjes is joined by healthcare contributor Todd Campbell to discuss the patient-focused efforts underway at these companies and to offer insights about what ethical investors should look for when investing in this industry.

A transcript follows this video transcript of Industry Focus: Healthcare.

This podcast was recorded on Feb. 17, 2016. 

Kristine Harjes: Now, let's talk about some of the good stuff. We talked about a lot of negativity surrounding this industry, and explained why people are so skeptical of it, but there's also a lot of good out there.

Todd Campbell: You know, when you're trying to find great investments -- and it doesn't matter if you're talking about biopharma companies or you're talking about a footwear company -- you want to find companies where leaders are willing to invest in people. Not only their employees, if you will, to have happy employees to create new innovation, but you also want to find those companies that are willing to invest in their consumers.

In biopharma, I think one of the ways that maybe their reputation can get repaired for some of these companies is to more actively advocate for patients. There are some companies that are doing a good job of this, and they're letting people know that they're doing it, which I think is valuable toward repairing relationships with consumers and everyone.

Two of those companies that jump out are Gilead Sciences and Johnson & Johnson. Both of those companies have suffered their own fair share of setbacks as far as fines for acts that are arguably unethical, but at the same time, they're also putting their money where their mouth is and showing that they're willing to make a commitment to returning money either through setting up charitable organizations, or doing a very good job of raising awareness and providing free screening for patients, like Gilead Sciences does, or putting the patient at the center of their entire process, like Johnson & Johnson. CEO Alex Gorsky said in its recent fourth quarter earnings conference call, that any discussion regarding where healthcare should go from here has to put the patient front and center.

Harjes: It's not just words, either. These companies also back what they're saying with quite a bit of money and quite a bit of initiative to fund ... Allowing access to their drugs in more developing markets. Gilead, for example, allows several Indian generic companies to make and market Sovaldi, their hepatitis C treatment in over 90 countries in the developing world, just to provide more affordable access.

Campbell: Yeah. They didn't have to do that yet. They could have held off on that. It's good to see that they took that initiative. They also provide free screening for both HIV and HCV in certain cases. Johnson & Johnson has made a commitment globally toward helping through Save the Children and also through helping to support research into things such as Ebola.

These companies are doing good as well, and they're good corporate citizens, and those are the kind of things that investors should be looking for, because over time, the people who are in it just for the current quarter, they're not the investments you want to have in a portfolio that's got a 20-year time horizon.

Harjes: One more question I want to pose to you before we sign off, and this is actually a question that comes from a co-worker of mine who came up to my desk a couple of months ago, and she was very concerned about all of this bad news that she was hearing about biotech and big pharma, and whether or not they're ethical companies. She asked me: "Is it ever in the best interest of a company to make a cure when you could just continue to make treatments?"

Campbell: Yes, and I think Gilead Sciences showed that. I mean, they're effectively curing hepatitis C with Harvoni and Sovaldi. Theoretically, they could have created a drug that was less efficacious, and would have basically required a pill a day for the rest of your life, but they chose not to do that, and as a result, that innovation's being rewarded in the marketplace with billions of dollars in additional sales. Yeah, I think it's within their best interests, do you?

Harjes: Absolutely. Yeah, that was a similar answer that I gave to her, which is, if you can make a cure for it, if it's possible, then somebody's going to do it. Ethics aside, it's in your best market interest to be the first one to do it. If you're the maker of treatments, and a competitor comes out with a cure, you get totally wiped out. You might as well make that cure first.

One company that I want to point out that I think sums this up pretty well is actually Biogen in multiple sclerosis. They've got this Phase 2 drug, Anti-LINGO, that the hope is it can slow, halt, or even reverse the adverse effects of lesions tied to multiple sclerosis. You're reversing the damage there. MS drug revenue for Biogen is huge for them. It's 80% of their total revenue, but right now it's coming from treatments like Tecfidera, which is just that, a treatment. When we get this results from LINGO in mid-2016, it's quite possible that Biogen could be eating their own market by bringing this to the public.

To me, that demonstrates the kind of hope that we're talking about there. It is in your best interest to cure these diseases, both from an ethical perspective and from a finance perspective. I think really, at the end of the day, that is our biggest hope, is that the two can be married.

Campbell: I absolutely agree with that. I think that they're not mutually exclusive, and I think that it starts at the top. You need to have leaders who are committed to the long haul, and to patient outcome. If you have that, then everything else will follow.

Harjes: Absolutely. I am going to end the episode with a quote from George W. Merck, who was the president of Merck & Co. quite a long time ago. He says -- and I think this sums up the best hope that we have for the industry -- he says, "We try to remember that medicine is for the patient. 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, then they have never failed to appear. The better we have remembered it, the larger they have been."