Sick with “shareholder value”: US pharma’s financialized business model during the pandemic

Abstract

US-based pharmaceutical companies claim that they need high drug prices to provide sufficient profits to fund investments in innovation. This argument is consistent with the corporate-finance principle of retaining profits and reinvesting in productive capabilities that is central to our “theory of innovative enterprise” (TIE). The problem is that, for decades, resource allocation at the largest US-based pharmaceutical companies, known as “Big Pharma,” has embraced the agency-theory argument that a company should be run to “maximize shareholder value” (MSV). We use TIE to expose MSV as an ideology of “predatory value extraction” (PVE), which legitimizes price gouging, downsizing the labor force, and tax dodging. In the body of the article, we document that the largest US-based pharmaceutical companies have become highly financialized, using all their profits, and often more, to distribute cash dividends and stock buybacks to shareholders. We then show the extent to which stock-based remuneration incentivizes senior pharmaceutical executives to engage in this financialized behavior. As cases in point, we consider the financialization of the two US-based companies, Pfizer and Moderna, that were centrally involved in the delivery of COVID-19 mRNA vaccines during the SARS-CoV-2 pandemic. We conclude our analysis by placing PVE in the US pharmaceutical industry in the broader context of the US healthcare system and the US economy.