I listened to the latest episode of The Readout Loud from Stat News yesterday, and the hosts of the show said that bio-tech companies have a huge amount of cash available as 2022 starts. The hosts stated that they are interested to see if any major acquisitions are announced by bio-tech companies at this year’s JP Morgan Chase Healthcare Conference.
This short discussion about mergers and acquisitions from the podcast came to mind when I re-read a short quote from Yuval Noah Harari on capitalism in his book Sapiens. Harari writes, “in the new capitalist creed, the first and most sacred commandment is: the profits of production must be reinvested in increasing production.”
Bio-tech companies, which range from major pharmaceutical companies to start-ups using artificial intelligence to better diagnose disease, seem to have a lot of money at their disposal (at least the major companies do). This suggests that companies have not been following Harari’s capitalist creed. Rather than reinvesting in their own production, companies are sitting on capital, waiting to purchase a smaller company. It is interesting to consider that major companies are expected, by journalists and shareholders, to use their money in this way. They are not expected to invest in their own research and development, but in an acquisition of a smaller company. As an example, the hosts quickly mentioned a few companies with blockbuster drugs that will soon be loosing their patent protections, meaning another manufacturer can begin making those medications. When that happens, the companies will need a new drug to bring to market to maintain profits. That new drug is expected to come from a smaller bio-tech company with a break through medication or treatment technology that could be absorbed by the larger existing pharmaceutical or bio-tech giant.
In the capitalist system that Harari described, acquisitions doesn’t seem to fit with the idea that profits need to be reinvested to increase production. Following that model, companies wouldn’t sit on cash produced by patent protected drugs until they could acquire a new company. Instead, they would continually put their profits back into their own systems to increase productivity of their manufacturing process, supply chains, and their own drug development. Instead, what we see is cash and funding infused into smaller start-ups that can drive a particular technology or product to a point of success, and from there a larger company buys out the start-up, flushing the initial investors in the start-up with profits. This model seems to work fine, but it is distinctly different from the capitalist system that Harari describes, and which most of us probably think about when we consider what capitalism is.