Sanofi (NYSE: SNY) has had a bumper year thus far. Its revenue has exceeded analysts expectations and its share price jumped more than 20% YTD. It has outperformed the S&P 500 as well as the NYSE ARCA Pharmaceutical Index. That performance means Sanofi has successfully dodged the struggles plaguing other pharmaceutical firms after the shenanigans surrounding the late American Health Care Act. But a series of scandals and changing political attitudes have sounded alarm bells for the companys fortunes.

As Bon Jovi put it in his 1988 ballad: It'll take more than a doctor to prescribe a remedy. I got lots of money, but it isn't what I need. More than anywhere else in the world, access to medicine in the United States is predicated on a patients ability to pay and since American patients often pay far more for the same drugs, Sanofi, as well as most of its peers, are in for some choppy waters ahead.

A recent Health Affairs study comparing drug prices revealed that Americans pay on average more than a 60% premium over other Western nations all while unravelling the pharmaceutical industrys arguments that hiking prices pays for research & development. Companies including Biogen (BIIB), Amgen (AMGN) and Pfizer (PFE) were estimated to have spent less than half their 2015 profits from US premium prices on R&D. Bad press, especially in light of pharma-bro Martin Shkrelis unscrupulous drug price gouging and (unrelated) conviction for fraud, is adding to growing anti-pharma sentiment and making it harder for the industry to fix its public image.

Drug pricing has likewise been occupying President Trump, as he re-entered the fray with a speech in March, calling the prices of prescription drugs "outrageous" and prompting a dip in both the NASDAQ Biotechnology Index and the S&P Biotech ETF (XBI). Since the market reaction was more muted than his January lambasting of drug makers when he claimed they "are getting away with murder", it seems the sensitivity to Trump outbursts and policy threats is waning. Trump did however vow to tackle the issue of drug pricing after successful 'repealing and replacing' Obamacare, and, with the American Health Care Acts spectacular failure, the Trump administration may yet turn the erstwhile rhetoric into a determined focus on enacting valuable policy to get drug prices down. With public sentiment clearly against Big Pharma, any such action with both public and bipartisan support - could be a (relatively) quick and (comparatively) easy win. It may also serve as a valuable measure to reconnect and appease his electoral base.

One sure way to strain high cost is encouraging price completion through generic alternatives. A development that investors should take heed of is the Federal Drug Administration's (FDA) "Drug Competition Action Plan" - announced in May - in which they pledge to reduce the time taken to approve generic versions of branded drugs. Another, albeit less celebrated piece of legislation is a bipartisan solution being re-introduced to curb anti-competitive practices that have historically stymied market entry to lower-cost generic drugs. The Creating and Restoring Equal Access to Equivalent Samples (CREATES) Act, will introduce measures allowing generic drug makers to seek legal recourse to force brand-drug companies to supply samples: a process required in order to allow the generic drug maker to test and produce the generic alternatives. The bill would moreover authorize the Federal Trade Commission to prohibit a popular tactic employed by big drug makers known as "pay for delay", whereby pharmaceutical firms pay rival drug makers to delay introducing generics on the market a tactic that is currently not prohibited.

Increased competition should be in the public interest, and serve as a boon for generic drug-makers. Investors holding long positions in large pharmaceuticals may be wise to investigate how and if this legislation may have an impact on selected firms, and how it could benefit generic drug makers.

And while quarterly revenues look good, Sanofi is slogging through its own unique pricing scandal. In one particularly alarming example, Americans pay nearly 10 times more for Sanofis multiple sclerosis drug Aubagio than their French counterparts. Senator Bernie Sanders, who has the pharma industry firmly in his sights and is currently pushing a plan to let Americans buy prescription drugs from abroad, penned an op-ed in the New York Times back in March putting Sanofi on the spot for the terms of an agreement between the Paris-based CAC40 company and the U.S. government.

On the face of it, the deal is fairly straightforward: in response to the Zika epidemic that started in Brazil in April 2015, the Walter Reed Army Institute of Research (a part of the U.S. Department of Defense), signed an agreement with Sanofi Pasteur (a division of Sanofi) in September 2016 to start the development of a vaccine. Sanofi was awarded a $43 million grant, and the government has promised another $130 million to conduct further phases of development and various phases of the drug trials.

The need for a Zika vaccine is self-explanatory. Any outbreak can have a devastating impact, both in terms of loss of life and economic output. The World Bank estimated that the Ebola crisis of 2013 2016 in West Africa wiped as much as 4% of growth of Guinea and 8% of that of Liberia. Sanofi has extensive experience in developing vaccines - it is one of their main business lines - and developing a Zika vaccine means utilizing advances the company previously and successfully developed for both its dengue fever and Japanese encephalitis vaccines. All three belong to the same family of viruses, and are transmitted by the same type of mosquito.

Though the justifications for the deal between Sanofi and the U.S. Army are sound, the parts of the agreement provoking Senator Sanders ire have to do with the Armys decision to grant the company an exclusive license to sell the vaccine in the U.S. Pricing practices in the U.S. are such that any vaccine from the public-private tie up could well be too expensive for most Americans, despite the fact that American taxpayer dollars are funding its development.

Matters escalated when the Army, responding to Sanders, requested Sanofi make a commitment to fair pricing and the company reportedly refused (for the record, the company insists no such rejection has occurred). Senator Sanders and Congressman Peter DeFazio of Oregon have now responded by proposing a new rule (introduced as an amendment to the 1938 Federal Food, Drug, and Cosmetic Act) requiring drug makers to levy fair prices for drugs developed with taxpayer-backed research. An amendment to military spending authorization that would allow the Department of Defense to open tenders to other drug makers when it helped fund research is currently making its way through Congress.

Sanofis pricing controversy illustrates one of the potential shortcomings of public-private partnerships in a context where drug prices are artificially inflated. According to conventional wisdom, Big Pharma has far less market incentive to develop drugs for Zika and other similar neglected diseases. To bring private sector companies on board, the thinking goes, the public sector has to make it worth their while.

And yet, some non-profit organisations have managed to develop successful, extremely cost-effective solutions for treating neglected diseases at far lower costs than major pharmaceuticals companies. One of those non-profits Sanofi should look to is the Drugs for Neglected Disease Initiative (D.N.D.I), founded in 1999. The D.N.D.I. has already developed seven approved, patent-free, low-cost treatments for neglected diseases. It succeeds in piggybacking on, and paying for, established infrastructure through government and grant funding relying on the so-called product development partnership (PDP) model.

PDPs keep costs down through collaboration either with universities, governments or the pharmaceutical industry itself. If anything, the model that D.N.D.I employs serves as a proof of concept that an organisation without any profit objective can develop and deploy medications at a fraction of the cost of global drug makers. The D.N.D.I has a further 26 drugs currently under development. Tallying together its completed drugs and ongoing projects, the non-profit has thus far spent $290 million much less than what a typical pharmaceutical company would spend to develop just one drug. Sanofi itself partnered with the D.N.D.I. to develop and produce the ASAQ Winthrop malaria treatment.

While for-profit drug companies can hardly be expected to adopt D.N.D.I.s business model, the dispute over Zika vaccine pricing has nevertheless overshadowed some highly successful public-private partnerships in which private companies have taken on neglected diseases without a profit motive. This was the case with West Africas Ebola outbreak in December 2013, in which a number of private firms partnered with both local and outside governments to address what was otherwise an unmitigated medical calamity.

In West Africa, some of the most impactful partnerships came from outside the pharmaceuticals industry. The Gavi global vaccine alliance may have partnered with Merck on the latters Ebola vaccine, but the Russian aluminium producer UC Rusal also partnered with the Russian government to develop Ebola vaccines now being deployed to Guinea. At the height of the outbreak, Rusal leveraged its extensive operations in the country the epicentre of the Ebola outbreak to establish a local Centre for Microbiological Research and Treatment of Epidemic Diseases, investing $10 million and donating medicines, sanitary and hygiene items to the Guinean Ministry of Health from 2014.

When compared to those fruitful, mutually beneficial examples, the dust-up between Sanofi and the U.S. government over developing the Zika vaccine seems to be an anomaly. Nonetheless, Sanofis clumsy response to Congressional criticism may have already contributed to a bipartisan backlash against the industry as a whole. A growing chorus of lawmakers is targeting the seemingly predatory pricing schemes employed by drug makers in the U.S. New legislation is ripe for the making: the U.S. counts as a nearly unique exception of a developed nation with no drug price regulation policy, and pressure is mounting from politicians, physicians, and also the FDA to seriously address the regulation of drug pricing.

And while the government is currently unable to negotiate drug pricing as part of Medicaids so-called "Part D" program (which covers most prescription drugs and constitute 25% of large pharmaceuticals gross sales), the practice is being reviewed and does not carry the favour of the current administration.

If the U.S. finally does close its drug pricing loopholes, the pharmaceutical giants will be even more reliant on emerging market sales for their profit margins. Sanofis emerging market sales, as per their Q-2 earning report, grew by 6.6% year-on-year at constant exchange rates, compared to a 2.7% decline in the U.S. With that in mind, it would be good business for these firms who carry an inherent moral responsibility to do good to engage in fruitful, balanced R&D partnerships with the public sector. As Bill Gates declared at the World Economic Forum (WEF) in Davos this year, the world remains tragically unprepared for the next epidemic.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Sanofi's Zika Standoff: Bad Medicine? - Seeking Alpha