When the FT listed the fifty largest businesses by market capitalisation in May, eight pharmaceutical companies were included  When it listed the fifty most respected businesses last week, only one of them – Johnson and Johnson – made it into the list.

For an industry that depends more than any other on public trust, that demonstrates a problem.  And the consequence was vividly illustrated on the front page, where Raymond Gilmartin of Merck was defending his handling of Vioxx, its now withdrawn painkiller.   A decade ago, Merck was always among the most admired companies.  It is no longer in the FT’s most respected fifty, and is now struggling to keep its place in the top fifty by market capitalisation.

Not only has the pharmaceutical industry lost status with other business leaders:  it is under attack.  In books from novelist John le Carré, journalist Merrill Goozner, and doctor Marcia Angell.   In the public stance of from Eliot Spitzer and film-maker Michael Moore, as well as Food and Drug Administration officials, anti-globalisation protesters and senior citizens.  

George Merck, Mr Gilmartin’s predecessor, understood the implicit deal between the industry and the public when he said ‘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’.   And for decades the formula worked well:  the industry produced a stream of new drugs and received a stream of dollars in return.

But these sentiments were out of fashion in the 1990s. Financial markets required corporate action and double digit growth in earnings per share.   So the companies spent the money the public had given them for research on buying each other. They raised the market prices of successful drugs.  They hired representatives to promote their products.  They focused on imitative versions of established therapies at the expense of genuine innovation.

Keeping treatment out of the reach of terminally ill patients in southern Africa is bad public relations.  Companies that derive their revenues from governments and the sick must take special care with their pricing strategies.   Selective dissemination of research results undermines trust.  It is surprising that generous remuneration for senior executives failed to attract people with the acumen to see these consequences.  Or perhaps, motivated by share options, they did not care.

The pharmaceutical industry, more than most, does rely on exceptional talent:  but these gifted people are in laboratories not boardrooms.   And while they were once content to work in large drug companies for modest salaries, they are now able to attract venture capital for their own show.

Tougher regulation might restore confidence in the industry but the companies have sought to undermine regulation by political action.  Drug company lobbyists have won some victories.  But members of congress ultimately need the votes of senior citizens even more than they need campaign finance.  Healthcare reform is not an issue which will go away.

The funding and technology of health is now likely to develop in ways that marginalize the giants.  Today one dollar is retained in profit and one spent on marketing for every dollar that goes to research.  You need to be very confident of the quality of the research dollar for the equation to represent value for money. And that confidence has largely evaporated.

The old model worked best for traditional blockbusters, products that relieved but did not cure the chronic illnesses of the affluent, like hypertension, depression and flagging virility.   Future drugs will be targeted more at individuals and at rarer conditions, cocktails of treatments will take the place of single therapies.  Perhaps, also, the West will recognise that simple drugs for debilitating illnesses are among the most effective forms of foreign aid.   All these developments suit the public and philanthropic funding of basic research, with incremental innovation and peer review, better than proprietary programmes directed to mass market drugs of big pharmaceutical companies.   Their fat market capitalisations reflect their past achievements and present profits, but not their future prospects.