US Pharma's Financialized Business Model

27 Pages Posted: 13 Sep 2017

See all articles by William Lazonick

William Lazonick

The Academic-Industry Research Network

Matt Hopkins

The Academic-Industry Research Network

Ken Jacobson

The Academic-Industry Research Network

Mustafa Erdem Sakinç

The Academic-Industry Research Network

Öner Tulum

SOAS University of London; The Academic-Industry Research Network

Date Written: July 13, 2017

Abstract

Price gouging in the US pharmaceutical drug industry goes back more than three decades.

In 1985 US Representative Henry Waxman, chair of the House Subcommittee on Health and the Environment, accused the pharmaceutical industry of “gouging the American public” with “outrageous” price increases, driven by “greed on a massive scale.” Even in the wake of the many Congressional inquiries that have taken place since the 1980s, including one inspired by the extortionate prices that Gilead Sciences has placed on its Hepatitis-C drugs Sovaldi since 2013 and Harvoni since 2014, the US government has not seen fit to regulate drug prices. UK Prescription Price Regulation Scheme data for 1996 through 2010 show that, while drug prices in other advanced nations were close to the UK’s regulated prices, those in the United States were between 74 percent and 181 percent higher. Médecins Sans Frontières (MSF) has produced abundant evidence that US drug prices are by far the highest in the world.

The US pharmaceutical industry’s invariable response to demands for price regulation has been that it will kill innovation. US drug companies claim that they need higher prices than those that prevail elsewhere so that the extra profits can be used to augment R&D spending. The result, they contend, is more drug innovation that benefits the United States, and indeed the whole world. It is a compelling argument, until one looks at how major US pharmaceutical companies actually use the profits that high drug prices generate. In the name of “maximizing shareholder value” (MSV), pharmaceutical companies allocate the profits generated from high drug prices to massive repurchases, or buybacks, of their own corporate stock for the sole purpose of giving manipulative boosts to their stock prices. Incentivizing these buybacks is stock-based compensation that rewards senior executives for stock-price “performance.”

Like no other sector, the pharmaceutical industry puts a spotlight on how the political economy of science is a matter of life and death. In this paper, we invoke “the theory of innovative enterprise” to explain how and why high drug prices restrict access to medicines and undermine medical innovation. An innovative enterprise seeks to develop a high-quality product that it can sell to the largest possible market at the most affordable price. In sharp contrast, the MSV-obsessed companies that dominate the US drug industry have become monopolies that restrict output and raise price. These companies need to be regulated.

Keywords: Pharmaceutical drugs, innovation, financialization, price-gouging, stock buybacks, executive pay, shareholder value

JEL Classification: D22, D24, D40, G35, H51, L10, L21, L51, L65, M52

Suggested Citation

Lazonick, William and Hopkins, Matt and Jacobson, Ken and Sakinç, Mustafa Erdem and Tulum, Öner, US Pharma's Financialized Business Model (July 13, 2017). Institute for New Economic Thinking Working Paper Series No. 60. Available at SSRN: https://ssrn.com/abstract=3035529 or http://dx.doi.org/10.2139/ssrn.3035529

William Lazonick (Contact Author)

The Academic-Industry Research Network ( email )

12 Newport Road
Porter Square
Cambridge, MA 02140
United States

Matt Hopkins

The Academic-Industry Research Network ( email )

12 Newport Road
Porter Square
Cambridge, MA 02140
United States

Ken Jacobson

The Academic-Industry Research Network ( email )

12 Newport Road
Porter Square
Cambridge, MA 02140
United States

Mustafa Erdem Sakinç

The Academic-Industry Research Network ( email )

12 Newport Road
Porter Square
Cambridge, MA 02140
United States

Öner Tulum

SOAS University of London ( email )

Thornhaugh Street
Russell Square
London, WC1H 0XG
United Kingdom

HOME PAGE: http://https://www.soas.ac.uk/

The Academic-Industry Research Network ( email )

12 Newport Road
Porter Square
Cambridge, MA 02140
United States

HOME PAGE: http://www.theairnet.org/V2/people/tulum.php

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