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

Introduction: Value creation and value extraction in the US pharmaceutical industry

This article shines a bright light on “predatory value extraction” (PVE) in the US pharmaceutical industry. PVE occurs when certain parties—specifically, senior corporate executives and hedge-fund managers—possess the power to extract far more value from the business corporation than they have contributed to its value creation (Lazonick and Shin, 2020; Lazonick, 2023). Among established US-based pharmaceutical companies—often known as Big Pharma—the prime tool of PVE is massive distributions to shareholders in the form of open-market share repurchases—aka stock buybacks—often in addition to ample cash dividends. Financialized companies tend to inflate PVE by price gouging, downsizing the labor force, and tax dodging. Legitimizing these distributions to shareholders is the erroneous ideology that, for the sake of economic efficiency, a company should be run to “maximize shareholder value” (MSV).

Value extraction presupposes a process of value creation, through which a business corporation can produce goods and services that buyers need or want at prices they are able or willing to pay. Through “innovative enterprise,” a business corporation can compete for product-market revenues by, in the case of pharmaceuticals, generating medicines that are higher quality (safer and more effective) and lower cost (making them potentially more accessible and affordable) than competitive products previously available (Lazonick, 2019a). An innovative enterprise creates value by investing in the productive capabilities of its labor force in the form of organizational learning to develop a higher-quality product, which it can then use to access a large extent of the market. Thus, through scale economies, the company can transform the high fixed cost of developing the high-quality product into a low unit cost. We employ the “theory of innovative enterprise” (TIE) to analyze the power of different stakeholders—principally employees and shareholders—to extract value in relation to their contributions to value creation (Lazonick, 2023).

The antithesis of PVE, which we associate with corporate stock traders (aka “shareholders”), is “progressive value creation” (PVC), which refers to the power of those employees (as well as other stakeholders such households as taxpayers and customers) who participate in corporate value creation to extract an equitable share of corporate revenues as the returns to their productive contributions. The innovative enterprise grows by investing in the productive capabilities of its labor force, providing superior wages and benefits to their employees, and generating products that are higher quality and lower cost than those that would otherwise be available on the market. A company that invests in the organizational learning of its labor force, which is the essence of the innovation process, can enable employees to improve their living standards on a sustainable basis. A basic policy question is how to govern the business corporation so that its growth redounds to the benefit of those people whom it employs by providing them with stable employment opportunities and equitable income distributions over substantial periods of their careers.

Of central importance in the pharmaceutical industry is the role of government agencies in providing support to innovative business corporations. Through the US National Institutes of Health (NIH), the United States is by far the world leader in government funding of the knowledge base that can result in innovative medicines (Tulum and Lazonick, 2018). The NIH’s 27 specialized institutes and centers have a 2023 budget of $47.5 billion (National Institutes of Health, 2023). From 1938 through 2022, the NIH spent about $1.4 trillion in 2022 dollars in support of life-sciences research. A doubling of the NIH budget in real terms occurred in 1998-2004, driven by the Human Genome Project and the threat of bioterrorism (Lazonick and Hopkins, 2020: 5–6).

Besides its own internal research, NIH funding supports labs in universities and hospitals and makes it possible to attract talented people from around the world to engage in medical studies and scientific research in the United States. NIH funding contributed to every one of the new molecular entities (NMEs) approved by the Food and Drug Administration (FDA) from 2010 to 2016, with a focus primarily on the drug targets rather than on the NMEs themselves. There were 84 first-in-class products approved in this interval, associated with more than $64 billion of NIH-funded projects (Cleary et al., 2018, 2021).

The pharmaceutical industry has benefited from general patent laws, with an increase in 1995 to 20 years of protection against competition from the time of filing a successful patent from the 17 years that had prevailed from 1861 through 1994. The Orphan Drug Act (ODA) of 1983 provides financial subsidies and market protection for pharmaceutical companies to develop drugs for rare and genetic diseases. From January 1, 1983, through July 31, 2023, there were 6538 ODA designations and 1154 ODA approvals (US Food and Drug Administration, 2023). ODA also offers R&D tax credits as well as FDA assistance in ensuring the rapid transformation of a promising compound into an approved marketable drug. Most importantly, ODA incentives include seven-year marketing exclusivity for a specific indication. Unlike patent protection, which begins at the outset of the drug discovery process, ODA exclusivity begins once the drug has been approved for sale by the FDA. Moreover, the company that has obtained ODA approval does not necessarily require patent protection to have market exclusivity in selling the drug (Lazonick and Tulum, 2011; Tulum and Lazonick, 2018).

Once a pharmaceutical company has generated an FDA-approved product, it can achieve scale economies through mass production and mass distribution of the medicine. When successful, the innovative enterprise will possess a downward-sloping supply curve as it transforms the high fixed cost of developing, manufacturing, and delivering the medicine into a low unit cost of sold output. At the same time, the pharmaceutical company will face a relatively inelastic demand curve, reflecting the fact that prescribed medicines are necessities; indeed, access to them is often a matter of life or death. There is no equilibrium market price for the medicine, and given the inelasticity of demand, a knowledgeable and objective government agency must be involved in the regulation of the product price, balancing the rewards to employees and affordable prices to the healthcare system with the pharmaceutical company’s need for retained profits as the financial foundation for reinvestment in the next generation of innovative medicines (Collington and Lazonick, 2022). The regulated price can also accommodate reasonable amounts of value extraction in the form of both corporate taxes and shareholder dividends.

Proponents of MSV, including financial economists known as agency theorists, complain that government price regulation, among other obstructions to the operation of the “free market,” undermines “economic efficiency.” They contend that corporations should “disgorge” the “free cash flow” to public shareholders, who are viewed as the only participants in the corporation who bear risk of whether the company makes a profit or loss from its investment strategy. They argue, therefore, that shareholders have the sole claim on corporate profit, when it occurs (Jensen, 1986). Agency theorists advocate the use of stock-based pay (stock options and stock awards) to align the interests of corporate managers as “agents” with those of shareholders as purported “principals” (Jensen and Murphy, 1990).

The agency-theory assumption that shareholders are the sole risk-bearers is fundamentally flawed. As private shareholders, venture capitalists bear the risk of making direct investments in productive resources, but from the 1970s institutions evolved in the United States—first and foremost, the highly speculative NASDAQ stock exchange (launched in 1971)—that could make that risk ephemeral by enabling them to transform their illiquid private shareholdings into liquid public shareholdings (Lazonick, 2009: Chap. 2; Lazonick and Tulum, 2011). Public shareholders almost never invest in the value-creating capabilities of the company at all. Rather, they purchase outstanding corporate equities on the stock market with the expectation that dividend income will be forthcoming while they hold the shares and that the stock price will have risen to yield a financial gain when they decide to sell the shares.

In contrast, households as both taxpayers and workers invest in innovation and have valid economic claims on the distribution of profit, when it occurs. Through government investments in human capabilities and physical infrastructure, taxpayers regularly provide productive resources to companies without a guaranteed return (Hopkins and Lazonick, 2014). Businesses that make use of NIH-sponsored research benefit from the public knowledge that it generates. As risk-bearers, taxpayers who fund investments in such research, or in physical infrastructure such as roads and utilities that business requires for its operations, have a claim on resulting corporate profit, when it is generated. Through corporate taxes, US households, represented by the Internal Revenue Service, seek to extract returns from corporations that make profitable use of government-funded resources. Whatever the prevailing corporate tax rate, households as taxpayers face the uncertainty that changes in technological, market, and/or competitive conditions may prevent corporations from generating profits and the related business tax revenues that serve as a return on the taxpayers’ investments in physical infrastructure and human capabilities. Households also face the political uncertainty that predatory value extractors may convince government policymakers to implement tax cuts or financial subsidies that will augment profits available for PVE.

Through their skills and efforts, workers regularly make productive contributions to the companies for which they work that are beyond the levels required to lay claim to their current pay. However, they do so without guaranteed returns (Lazonick, 1990). An innovative company wants workers who apply their skills and efforts to organizational learning so that they can make enduring productive contributions—including those that will enable the development of the firm’s next generation of high-quality, low-cost products. In making these productive contributions, employees expect that they will be able to build their careers within the company, putting themselves in positions to reap future benefits at work and in retirement. Yet, these potential careers and returns are not guaranteed. In fact, under the “downsize-and-distribute” resource allocation regime—one that downsizes the labor force and distributes corporate cash to shareholders—that MSV ideology legitimizes, these careers and returns are generally undermined (Lazonick, 2021).

Workers supply their skills and efforts to the process of generating innovative products through a “retain-and-reinvest” resource allocation regime: the company retains workers and reinvests profits in productive capabilities. But workers take the risk that their productive contributions could go unrewarded. Far from reaping expected gains in the form of higher remuneration, more job security, and better working conditions, value-creating employees could face cuts in pay and benefits, or even find themselves laid off. MSV ideology empowers corporate executives to cut some workers’ wages and lay off others—all so that the value that workers helped to create can be redirected to shareholders, including the senior executives themselves with their copious stock-based pay as well as hedge-fund managers whose stock-trading strategies count stock buybacks as money in the bank (Lazonick and Shin, 2020). In short, the corporate resource-allocation strategy may transform from retain-and-reinvest to downsize-and-distribute, with devastating impacts on the realized gains that committed employees had expected and deserved (Lazonick, 2023).

Proponents of MSV may accept that a company needs to retain some “free” cash flow to maintain the functioning of its physical capital, but they generally view labor as an interchangeable commodity that can be hired and fired as needed on the labor market. From the MSV perspective, layoffs and wage suppression are efficiency-enhancing ways of making more cash flow “free.” In addition, they ignore the contributions that households as taxpayers, through government agencies that invest in infrastructure and knowledge, make to business value creation. Rooted in the neoclassical theory of the market economy, MSV assumes that markets, not organizations, allocate resources to their most efficient uses. But lacking a theory of innovative enterprise, agency theory cannot explain how the “most efficient uses” are created and transformed over time (Lazonick, 2022).

To escape MSV ideology and to understand economic reality, one needs a theory of innovative enterprise (Lazonick, 2019a). Most stock buybacks are done by corporations that have become highly profitable through prior retain-and-reinvest allocation regimes. In 2021, of $874 billion in buybacks by the 500 corporations in the S&P 500 Index, 68% were done by the 50 largest repurchasers, which also had 34% of the S&P 500 revenues and 45% of the profits while paying out 28% of the dividends. The adverse impacts of stock buybacks on investment in innovation have been unstable employment opportunity, inequitable income distribution, and fragile productivity growth. The causes of the adverse impacts have been not only the diminished amount of finance that can be committed to investing in productive capabilities but also the predatory orientations of senior executives who, in positions of strategic control over corporate resource allocation, fail to invest in the integration of employees into the organizational learning processes that are the essence of innovation (Lazonick, 2023).

In the second section of this article, we document the extent to which, in the name of MSV, major US-based pharmaceutical companies have become highly financialized, distributing all their profits and even more to shareholders as buybacks and dividends. This despite the US pharmaceutical industry’s contention that it needs unregulated drug prices that are far higher than anywhere else in the world so that its companies will possess the funds from higher profits to reinvest in medical innovation—thus, implicitly adopting a fundamental principle of TIE. The third section provides data on the remuneration of senior executives of major US pharmaceutical companies, indicating that the stock-based components of this pay incentivize them to do these massive distributions to shareholders. As cases in point, the fourth section considers 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 by placing our analysis of PVE in the US pharmaceutical industry in the broader context of the US healthcare system and the US economy.

Do US pharmaceutical companies need high drug prices to fund drug innovation?

On August 16, 2022, the US Congress passed the Inflation Reduction Act (IRA), which, among other things, will enable, beginning in 2026, Medicare to negotiate the prices of certain high-cost prescription drugs (Cubanski et al., 2022; Reference). A step forward in confronting US pharma’s financialized business model, this legislation was a long time coming. In 1985, the Washington Post reported accusations against pharmaceutical companies by US Representative Henry Waxman (D-CA) of “outrageous price increases” and “greed on a massive scale.” In response to Waxman, drug-company executives asserted that “prices have climbed recently to cover accelerated investment in researching and developing new and better medications to protect Americans” (Horwitz, 1985).

Over the decades, the argument that pharmaceutical companies need high drug prices to finance drug innovation has been central to the industry’s opposition to price regulation. Not surprisingly, with Medicare’s right to negotiate prescription drug prices as a key policy objective of President Joe Biden’s Build Back Better agenda, the industry lobby association, Pharmaceutical Research and Manufacturers of America (PhRMA), published a slew of blog posts, with data from commissioned “studies,” to argue that government drug-price regulation would deprive member companies of the profits needed to augment and accelerate investment in drug innovation (Longo, 2021-2022). A letter dated August 4, 2022, signed by PhRMA president Stephen Ubl and 31 senior pharmaceutical company executives (mostly CEOs) on PhRMA’s board of directors sounded the alarm on drug-price regulation under the Inflation Reduction Act: “Some economists estimate upwards of 100 new treatments may be sacrificed over the next two decades if this bill becomes law,…the annual $2.7 trillion medical and lost productivity costs of which far exceed the direct federal “savings” this bill would achieve” (Ubl, 2022).

With the IRA passed into law, on June 6, 2023, Merck, a major Big Pharma company, announced that it had filed a complaint against the US Department of Health and Human Services (HHS), contesting its right to mandate the negotiation of drug prices (Merck v. Becerra, 2023). Describing that IRA’s Drug Price Negotiation Program as “a sham” and “tantamount to extortion,” Merck’s complaint argues that it violates the Constitution’s Fifth Amendment, which “requires the Government to pay ‘just compensation’ if it takes ‘property’ for public use.” In a letter to the “Merck community,” the company wrote: “By changing the incentives and returns for some therapies and technologies over others, the IRA is changing the course of R&D, which in time will leave many patients without treatment options” (Davis et al., 2023).

The US Chamber of Commerce chimed in with its lawsuit, arguing that “government price controls harm patients, limit access to medicine, and stifle American innovation” (Watts and Mahoney, 2023). Next up was Bristol Myers Squibb (BMS), with a press release entitled “The Impact of the Inflation Reduction Act on Innovative Medicines for Patients.” The Big Pharma company explained that it was suing HHS: “This program is bad for innovation—and, in turn, the millions of patients who are counting on the pharmaceutical industry to develop new treatments and cures that save lives and improve health and wellbeing” (Bristol Myers Squibb, 2023).

On June 22, PhRMA along with the Global Colon Cancer Association and the National Infusion Center Association added a fourth legal challenge to IRA price negotiations, contending that “the Inflation Reduction Act of 2022…upends [the] time-tested, market-based system for encouraging innovation. In its place, Congress established a system of price controls, seeking to reduce expenditures even at the cost of drastically slowing innovation, reducing drug availability, and worsening patient outcomes” (National Infusion Center Association et al. v. Becerra, 2023).

Underpinning the argument of PhRMA and its allies of the devastating impact of price regulation on drug innovation and patient access to medicines is the assumption that the pharmaceutical companies systematically reinvest profits in productive capabilities that improve the development, manufacture, and delivery of drugs. Negating this assumption, however, is abundant—and indeed overwhelming—evidence that, in line with MSV ideology, most of these pharmaceutical executives allocate corporate profits to massive distributions to shareholders in the form of cash dividends and stock buybacks (Lazonick et al., 2019). Rather than devoting high profits from high drug prices to augmenting and accelerating investment in drug innovation, US pharmaceutical companies burden US patients and taxpayers with high drug prices so that, through massive distributions to shareholders, the senior executives who make these allocation decisions can boost the yields on the companies’ publicly traded shares.

The 474 corporations in the S&P 500 Index in January 2022 that were publicly traded from 2012 through 2021 distributed $5.7 trillion as share repurchases during their 2012-2021 fiscal years, representing 55% of net income, and $4.2 trillion as dividends, an additional 41% of net income (see Table 1). About 95% of these stock buybacks were done as open-market repurchases (OMRs) of common shares, the purpose of which is to manipulate the company’s stock price.

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Table 1.

Financial and employment data for selected S&P 500 index constituents.

As shown in Table 1, for the decade 2012–2021, distributions to shareholders by the 14 pharmaceutical companies among the 474 S&P 500 companies in the database represented 110% of net income, ¹ a larger proportion than the highly financialized 96% for all 474 companies. At 55%, pharmaceutical stock buybacks were the same proportion of net income as the 474 companies, but, at 54% versus 41%, pharmaceutical dividends as a proportion of net income far exceeded that of all the companies in the dataset. The 14 pharmaceutical companies accounted for 3.1% of the revenues of all 474 companies but 6.6% of the net income, 6.6% of the buybacks, and 8.8% of the dividends. The $747 billion that the pharmaceutical companies distributed to shareholders was 13% greater than the $660 billion that these corporations expended on research & development over the decade.

Although US President Joe Biden and Senate Majority Leader Chuck Schumer, along with many elected Congressional Democrats, have been sharp critics of stock buybacks (Lazonick, 2023), in 2021 a record $874 billion in share repurchases by companies in the S&P 500 Index easily outstripped the previous annual high—fueled by the Republican 2017 corporate tax cuts—of $806 billion in 2018. In 2022, S&P 500 buybacks reached $923 billion (Yardeni et al., 2023: 3).

Executive stock-based pay incentivizes distributions to shareholders

Among the 14 pharmaceutical companies in Table 1, seven—J&J, Pfizer, Merck, AbbVie, BMS, Lilly, and Baxter—have their historical roots in the “Old Economy” business model (OEBM) that dominated the US pharmaceutical industry coming into the 1980s, while the other seven—Gilead, Amgen, Biogen, Viatris, Regeneron, Vertex, and Incyte—all of which were founded in 1971 or later, have emerged and grown on the basis of the “New Economy” business model (NEBM) (Lazonick, 2009; Lazonick and Tulum, 2011). Under OEBM, the most successful companies, now known as “Big Pharma,” integrated the development, manufacture, and delivery of drugs and provided their employees with the expectation of a career with one company, manifested by decades of employment with the company, company-funded nonportable defined-benefit pensions, and company-subsidized healthcare insurance in employment and retirement. Under NEBM, associated with the biotech revolution, companies specialize in drug development, typically outsourcing manufacturing to contract development and manufacturing organizations (CDMOs), and depend on a scientific labor force that is highly mobile from company to company and even across nations, with pensions in the form of portable defined-contribution 401(k) plans.

Of critical importance in the rise of NEBM have been the changing functions of the stock market. Under OEBM, the role of the stock market was to separate share ownership from managerial control. Precipitating this separation was not, as is commonly assumed, the need for these companies to raise cash from the stock market to fund their growth. Rather the function of public share issues was to enable owner-entrepreneurs and their family members who had led the growth of their firms to monetize their investments, passing on strategic control of the companies to professional managers in what the business historian Alfred D. Chandler, Jr calls “the managerial revolution in American business” (Chandler, 1977).

Given the decades-long time lags between the years in which the OEBM companies in Table 1 were founded and the years in which they did their initial public offerings (IPOs), these companies were already highly profitable when they listed on the stock market. These corporations did not rely on stock-market issues to finance investment in the growth of the firm. Rather their source of investment finance for internal growth was earnings retained out of profits, leveraged (if necessary) by bond issues, while striving to pay a steady dividend to shareholders.

Central to the rise of NEBM was NASDAQ, the automated quotation system for “over-the-counter” stocks established in 1971. A highly speculative stock market with lax listing requirements, NASDAQ enabled the rapid transition from founding to IPO (see Table 1). Under NEBM, an IPO continued to play a “control” function, enabling venture capitalists and owner-entrepreneurs to cash in their founder shares, with, in many but not all cases, professional managers assuming strategic control. By enabling startups to go public without a profit or even a product, a NASDAQ IPO has provided venture capitalists with a quick “exit strategy” that, because of stringent listing requirements, was not possible on the New York Stock Exchange (NYSE), on which the shares of the Old Economy corporations have been traded. Thus, under NEBM, in the presence of the highly speculative NASDAQ, the stock market began to perform a “creation” function, inducing venture capital to invest in uncertain new firms because of the possibility of a relatively rapid exit from these investments via an IPO. Indeed, all seven firms identified as NEBM in Table 1 are listed on NASDAQ.

With the rise and expansion of NEBM in information-and-communication-technology and biotechnology in the 1980s and 1990s, the stock market also began performing “combination” and “compensation” functions. A small company could grow large by using its stock as a combination currency in lieu of cash to acquire other companies (see Carpenter and Lazonick, 2023). Given its uncertain future, a startup could not hold out the expectation to employees of an OEBM-style career with one company, but it could use its stock as a compensation currency, typically in the form of stock options, to attract, retain, motivate, and reward a broad base of employees. During the 1980s and 1990s, with NASDAQ generally booming, the use of stock options by New Economy biopharma startups to lure scientific and managerial personnel from secure employment with established Old Economy companies eroded the organizational capabilities of Big Pharma’s corporate research labs, eventually compelling these Old Economy companies to use stock-based pay to compete with New Economy companies for personnel.

Prior to the 1980s Old Economy pharmaceutical companies did not make significant use of the stock market to raise cash for investment in the growth of the firm. Nor did they do significant amounts of share repurchases, which can be viewed as the “negative cash” function of the stock market. That changed from the mid-1980s as Big Pharma companies sought to compete for acquisitions and personnel using their shares as a currency, with stock buybacks as a tool for giving manipulative boosts to their own companies’ stock prices.

Enabling large-scale stock buybacks as OMRs, which at Big Pharma companies have been in addition to a steady stream of dividends, is Securities and Exchange Commission (SEC) Rule 10b-18, adopted in November 1982, which is aptly called “a license to loot” the corporate treasury (Lazonick and Jacobson, 2022). Legitimizing this use of corporate cash from the late 1980s was the flawed ideology emanating from US business schools and board rooms that, for the sake of economic efficiency, a business corporation should be run to MSV (Lazonick and O’Sullivan, 2000; Lazonick, 2021).

Meanwhile, from the beginning of the 1980s, New Economy biopharma startups found that, even without products or profits, they could raise substantial amounts of cash for internal investment through their IPOs and subsequent secondary stock issues on NASDAQ when this highly speculative stock market was booming, and hence liquid. Shareholders who absorbed these new share issues could look for a quick opportunity to sell their shares at a higher price. As indicated in Table 1, however, once some of these New Economy biopharma companies generated profitable drugs, they also turned to stock buybacks as OMRs to give manipulative boosts to their stock prices.

The data on distributions to shareholders sharply contradict PhRMA’s contention that its member companies need unregulated drug prices to generate profits that they then reinvest in drug innovation. At the same time, significant beneficiaries of these distributions to shareholders have been the very same senior executives who control the pharmaceutical companies’ resource-allocation decisions. Table 2 displays data on the compensation of the 500 highest-paid executives in the United States for each year from 2006 through 2021 and the subset of pharmaceutical executives among these 500 highest paid.

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Table 2.

Total direct compensation (TDC), with percentage stock-based components, of 500 highest-paid vs. pharmaceutical executives, 2006–2021.

From 2006 through 2021, the average total direct compensation (TDC) of the 500 highest-paid executives ranged from, with the stock market depressed, a low of $15.9 million in 2009, of which 60% were realized gains from stock-based pay, to, with the stock market booming, a high of $47.4 million in 2021, of which 88% were realized gains from stock-based pay. In most years, the average TDC of the pharmaceutical executives was higher than for all 500 executives.

Distributions to shareholders in the form of dividends and buybacks inflate executives’ realized gains on stock-based pay. In the case of stock buybacks, not even the SEC, which purportedly regulates US financial markets, knows the precise days on which buybacks as OMRs are executed (Lazonick and Jacobson, 2022). But the CEO and CFO of the repurchasing corporation possess this material insider information, and, moreover, they decide when to execute buybacks. The executives’ strategic control over resource-allocation decisions and insider information about the timing of buybacks can contribute to the gains that these executives realize in exercising stock options and the vesting of stock awards (Eisinger, 2014; Jackson, 2018; Palladino, 2020).

The extraordinarily high pharmaceutical TDC and percentages that were stock-based in 2014 and 2015 were largely the result of bonanzas reaped by several executives at Gilead Sciences through the impacts on the company’s stock price of its soaring sales of the high-priced Sovaldi/Harvoni hepatitis-C drugs combined with its use of its inflated profits to do stock buybacks (Lazonick et al., 2017: 87–92; Roy, 2023). Also, when the average pay of the top 500 executives exploded to new heights in 2020 and 2021, the pay of the subset of pharmaceutical executives took off even more. As the pandemic raged, the average TDC of 27 pharmaceutical executives among the top 500 rose to an unprecedented $61.6 million, with 93% of it coming from realized gains on stock-based pay, the highest proportion since data on realized gains on stock awards as well as stock options became available in 2006 (Hopkins and Lazonick, 2016).

Tables 3 and 4 show distributions to shareholders by Merck and Pfizer, two US-based Big Pharma companies that for decades have been among the most financialized of all US corporations. Merck began doing large-scale buybacks in the second half of the 1980s, and Pfizer in the first half of the 1990s. Merck greatly increased its buybacks in the late 1990s and Pfizer even more so in the early 2000s. Over the 25-year period 1995–2019, Merck distributed an amount equal to 118% of net income to shareholders, with 54% as buybacks, while Pfizer paid out 114% of net income, with 58% as buybacks. As discussed below, Pfizer ceased doing buybacks from August 2019 through February 2022, while its net income soared in 2021 on profits from its COVID-19 medicines. As a result, its buybacks as a proportion of net income fell to 32% in 2017–2021, while Merck’s proportion was 52%.

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Table 3.

Merck’s distributions to shareholders as stock buybacks and cash dividends, in billions of current dollars and as percent of net income, 1972–2021.

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Table 4.

Pfizer’s distributions to shareholders as stock buybacks and cash dividends, in billions of current dollars and as percent of net income, 1972–2021.

Notes: REV: revenues; NI: net income; BB: stock buybacks; DV: dividends; R&D: research & development expenditures; EE: end-of-fiscal-year employment for last year in cell; %change: change in employment over the 5-year period.

Sources: calculations from data in the S&P Compustat database and company 10-K reports.

Table 5 shows the TDC for 2007–2021 of Kenneth Frazier, who was CEO of Merck from January 1, 2011, to June 30, 2021. Over the years of his CEO tenure, Frazier averaged $27.4 million per year in TDC, of which 72% was stock-based. As also shown in Table 5, Ian Read was Pfizer CEO from December 5, 2010, to January 1, 2019. Over his tenure as CEO from 2011 through 2018, Read averaged $30.2 million per year in TDC, of which 64% was stock-based. In addition, Read stayed on as Pfizer executive chairman in 2019, pocketing another $49.7 million (89% stock-based) on his way to retirement.

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Table 5.

Total direct compensation (TDC) and percent stock-based (%SB) 2007–2021, Kenneth Frazier (Merck CEO, 2011–2021) and Ian Read (Pfizer CEO, 2011–2018; Chair, 2019).

As displayed in Table 6, the top executives of younger New Economy companies such as Regeneron and Vertex, and most recently Moderna, have received these enormous pay packages, partly supported by stock buybacks as OMRs. Their jackpots are mainly the results of soaring stock prices, driven by a combination of innovation and speculation, and the abundant amounts of stock-based pay that their boards (of which they are often members) have lavished on these executives (Lazonick, 2019b). In the case of Regeneron, Schleifer and Yancopoulos are founders and board members as well as CEO and CSO, respectively, and their enormous TDC included in the data in Table 6 does not include their sales of founder shares. Nor does it include the fortunes made from founder shares by Moderna chairman Noubar Afeyan and CEO Stéphane Bancel.

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Table 6.

Total direct compensation of leading new economy biopharma companies with one or more executives in one or more annual list of highest-paid us corporate executives, 2012–2021.

Table 6 shows the data for six New Economy biopharma companies that in one or more years from 2012 through 2021 had one or more executives among the annual lists of 500 highest-paid US executives. In every year, the average TDC of the New Economy biopharma executives in the top500 is far higher than the average TDC for all pharmaceutical executives and (except for 2018) even more so than for all top500 executives.

Table 7, which selects from all pharmaceutical executives in the S&P ExecuComp database (and not just from those companies in the S&P 500 Index), identifies the six highest-paid pharmaceutical executives for each year from 2006 through 2021. Note the prominence of executives from three of the New Economy biopharma companies in Table 6: Regeneron (19 of 96 cells, all during 2012–2021), Gilead Sciences (17 of 96 cells), and Celgene (8 of 96 cells). Also note the extent to which their pay is stock-based. Of the 96 cells in Table 7, the pay levels in 88 cells are 60% or more stock-based, with 61 cells 90% or more, 17 between 80% and 90%, seven between 70% and 80%, and three between 60% and 70%.

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Table 7.

Six highest-paid pharmaceutical executives, 2006–2021, with total direct compensation (TDC) in millions of dollars (stock-based pay as percent of TDC).

Of the highest-paid executives, founders of the companies include Leonard Schleifer and George Yancopoulos, Regeneron (founded in 1988; IPO in 1991); Leonard Bell, Alexion (1992; 1996); Martine Rothblatt, United Therapeutics (1996; 1999); Sol Barer, Celgene (1986; 1987); and Jonah Shacknai, Medicis Pharmaceutical (1988; 1990). As indicated, all these companies went public within a few years after their founding, a phenomenon encouraged by the creation of the highly speculative NASDAQ stock exchange in 1971 and its subsequent growth. The compensation of these individuals shown in Table 7 is as executive employees of the companies and does not include personal income received by selling founder shares.

A ten-time “medalist” in the highest-paid rankings is Gilead’s John C. Martin, who was the company’s CEO from 1996 to 2016 and executive chairman from 2016 to 2018. He appears on the top-six list in each of the first 12 years, 2006–2017, including five times in first place, three times in second, and twice in third. His average annual TDC of $197.9 million in 2013–2015 was more than double the $85.5 million he took home in 2012 and the $98.4 million in 2016. Propelling Martin’s megapay in 2013–2015 were surges of Gilead’s profits and stock price, based on massive revenues from its price-gouged Sovaldi/Harvoni drugs, aided by $15.3 billion in buybacks in 2014–2015 and Gilead’s first dividend ($1.9 billion) in 2015. From 2012 to 2015, Gilead’s revenues increased by 3.4 times, its profits by 7.0 times, and its stock price by 4.4 times (July 2012 to its all-time peak in July 2015). In 2016, Gilead distributed $11.0 billion in buybacks and $2.5 billion in dividends—a combined 99.7% of net income—but its profits declined from $18.1 billion to $13.5 billion, and its stock price declined from $118 (July 2015) to $72 (December 2016). As a result, CEO Martin’s 2016 compensation fell to $98.4 million—a sum which nevertheless placed him at the top of the pharma executive-pay podium for that year.

The established Big Pharma companies, including Wyeth (founded 1860; IPO in 1926), Abbott (1888: 1929), Johnson & Johnson (1886: 1944), and Merck (1891: 1941), were better represented among the top six in the earlier years, including four from Merck in 2009. Both 2018 and 2019 were bountiful years for Big Pharma executives, with Merck’s Frazier and Pfizer’s Read at, respectively, #3 and #4 in 2018 and #4 and #5 in 2019. Johnson & Johnson CEO Alex Gorsky was #5 in 2018, and Lilly CEO David Ricks #6 in 2019.

In 2020 and 2021, Regeneron’s Yancopoulos and Schleifer took turns at #1, with three Regeneron executives holding the top three positions in 2020. Looking back a decade to 2012, Yancopoulos was #1 and #2 three times each, #3 twice, and #4 once, while Schleifer was also #1 and #2 three times each as well as #3, #4 and #5 once each. Moderna’s massive stock-price explosion (see the discussion below), based on COVID-19 profits (prospective in 2020 and realized in 2021), enabled two of its executives to enter the top six in 2020, and then two different executives in 2021. Not in the top six in 2020 or 2021 were Moderna’s Afeyan and Bancel, both of whom took home vast fortunes by selling founders’ shares at high stock prices (Tognini, 2021; Kimball, 2022).

The mRNA COVID-19 windfalls of Pfizer and Moderna

The Academic-Industry Research Network is currently engaged in an in-depth assessment of the tension between innovation and financialization at those pharmaceutical companies that participated in the development, manufacture, and delivery of the COVID-19 vaccines which received emergency use authorization (EUA) in the United States, United Kingdom, and the European Union. With the riches garnered from COVID-19 medicines overspilling their corporate coffers, let us take a peek at how Pfizer and Moderna have managed the innovation-financialization tension during the pandemic.

The case of Pfizer clearly illustrates that, even within a business corporation that has become one of the leading repurchasers of its own stock, there is an ongoing tension between innovation and financialization, with specific sets of circumstances determining the outcome (see Tulum et al., 2022). A highly financialized corporation from the late 1980s, Pfizer in early 2019 committed to doing $8.9 billion in buybacks, to be completed by August 1 of that year. Thereafter, the company ceased doing buybacks as it turned its strategic attention to conserving a portion of its profits to finance investment in its drug pipeline. Previously, Pfizer’s strategy had been to acquire other companies with lucrative drugs on the market that had years of patent life left and to extract the profits from these drugs to fund its distributions to shareholders. By 2019, however, with Big Pharma acquisition targets disappearing and the patents on some of Pfizer’s major drugs expiring, its board recognized that Pfizer itself could be taken over by another Big Pharma company unless it could build a pipeline of internally developed drugs.

For the sake of internal drug development, Pfizer refrained from doing buybacks from August 2019 through February 2022. Indeed, in an almost unheard of move among US corporations, in January 2020 Pfizer publicly announced its commitment to forego buybacks that year, and it did so again in January 2021. The company did, however, increase its dividend in 2019, 2020, 2021, and 2022.

The implementation of the change in Pfizer’s resource-allocation strategy followed the end of Ian Read’s tenure as Pfizer CEO as of January 1, 2019, in favor of current CEO Albert Bourla. As CEO from 2011, Read had engaged in a downsize-and-distribute strategy (Lazonick et al., 2019). In an earnings call with stock-market analysts in January 2020, Bourla made an extraordinary admission of the company’s financialized past, declaring that Pfizer had stopped doing buybacks so that the company could invest in innovation:

The reason why in our capital allocation, we are allocating right now money [is] to increase the dividend and also to invest in our business…all the CapEx to modernize our facilities. The reason why we don’t do right now share repurchases, it is because we want to make sure that we maintain very strong firepower to invest in the business. The past was a very different Pfizer. The past of the last decade had to deal with declining of revenues, constant declining of revenues. And we had to do what we had to do even if that was financial engineering, purchasing back ourselves. We couldn't invest them and create higher value. Now it’s a very different situation. We are a very different company (Pfizer, 2020).

Bourla did not explain why the “old” Pfizer—which, less than 12 months before, had done $8.9 billion in buybacks—“had to do what we had to do even if that was financial engineering, purchasing back ourselves.” But his rambling statement is a very rare recognition by a CEO of a major US corporation that stock buybacks are the enemy of investment in innovation.

Shortly thereafter, SARS-CoV-2 was declared a pandemic, and Pfizer found itself in what turned out to be a very lucrative partnership with the German firm, BioNTech, to develop, manufacture, and deliver a COVID-19 mRNA vaccine. Even though Pfizer’s revenues almost doubled from $41.9 billion in 2020 to $81.3 billion in 2021, with profits soaring from $9.6 billion to $22.0 billion, the company refrained from doing buybacks, while the dividend payout ratio declined from 88% to 40%.

With revenues and profits continuing to explode in 2022, bolstered by sales of its COVID-19 antiviral pill Paxlovid—given EUA by the FDA on December 22, 2021—Pfizer did $2.0 billion in buybacks, all of them in March 2022, at an average price of $51.10. Why, for the first time since early 2019, did Pfizer decide to repurchase shares in March 2022? On December 16, 2021, in apparent anticipation of approval of Paxlovid, the company’s stock price hit an all-time peak of $61.25. By March 1, 2022, however, the stock price had declined to $45.75. Pfizer did the $2.0 billion in buybacks in March 2022 to boost its sagging stock price, increasing it to $55.17 on April 8, 2022. These March 2022 buybacks may have been Pfizer CFO Frank D’Amelio’s good-bye present to himself, given his upcoming retirement from the company on May 1. Subsequently, through the first quarter of 2023, Pfizer resumed its no-buybacks policy.

If Old Economy Pfizer seems to be concerned with using a portion of its pandemic profits to continue its strategy of investing in innovation, New Economy Moderna’s executives appear to be laser focused on the company’s stock-price performance, in a market that has placed highly fluctuating valuations on its shares (Figure 1). At $67.47 on October 30, 2020, the stock price almost tripled to $183.74 on February 12, 2021, before falling to $115.49 on March 30, and then more than quadrupling to a high of $484.47 on August 9. By March 7, 2022, the price had collapsed to $126.46, and it then fluctuated around $150 through mid-November 2022. On July 31, 2023, the stock price had fallen to $117.66. With its sales of the COVID-19 vaccine dramatically reduced, Moderna’s before-tax net income collapsed from a profit of $6.7 billion in the first half of 2022 to a loss of $2.1 billion in the first half of 2023, of which $1.0 billion was due to an increase in R&D expenditures.OPEN IN VIEWER

Founded in 2010 with its NASDAQ IPO in December 2018, Moderna, headquartered in Cambridge MA, had 830 employees at the end of 2019. In achieving its first commercial product with the COVID-19 vaccine, Moderna collaborated with the NIH, whose team of researchers conducted most of the development effort, including clinical trials (Glim, 2021). In May 2020, Moderna entered into a 10-year pact with Lonza, a long-established Switzerland-based contract manufacturer, to mass produce the vaccines, initially at a plant in New Hampshire (which Lonza had acquired from a British company in 1993), a 90-minute drive from Moderna’s headquarters in Cambridge, and subsequently on dedicated lines at Lonza facilities in Switzerland (Tulum et al., 2021; Chappelka et al., 2021). While accepting substantial COVID-19 vaccine development and procurement funds from the Trump administration’s Operation Warp Speed, Moderna retained control of marketing the vaccine, enabling it to keep the lion’s share of the profits subsequent to EUA, notwithstanding the critical contributions of NIH and Lonza—not to mention decades of research by the wider scientific community—to the success of the vaccine.

Providing venture capital to Moderna was Flagship Pioneering, based in Cambridge MA, whose CEO, Noubar Afeyan, hired Stéphane Bancel as Moderna CEO in 2011, giving him a substantial quantity of co-founder shares in the startup. In 2014, Moderna was the first biopharma startup, not yet publicly listed, to gain “unicorn” status (a $1-billion valuation), even though it had no products in clinical trial. At the IPO in late 2018, Moderna had 21 drugs in development, with no expectation of a product launch for several years. Bancel was, however, a hyper-aggressive fundraiser, with Moderna securing $2 billion in private equity and another $600 million in the IPO (Tulum and Lazonick, 2023).

From May 2020, 7 months before the Moderna vaccine received EUA, Flagship and Moderna senior executives began selling their shares. Over the course of about one month from late February to late March 2021, two Flagship funds sold a portion of their Moderna shareholdings for $1.4 billion, with Afeyan gaining from not only his 75% ownership of Flagship Pioneering but also venture-capital fees and the “carried interest” (typically 20%) of the funds’ profits (Tognini, 2021). By March 2022, Bancel had sold shares valued at $408 million since January 2020 (Kimball, 2022). The 2021 compensation of Moderna’s five highest-paid executives totaled $362 million. Moderna CMO Tal Zaks sold stock to the tune of $1 million per week from May 2020, only to announce in February 2021 that he would leave the company (riches in hand) in September 2021, in advance of a possible EUA for the Moderna vaccine. As we have seen in Table 7 above, among the highest-paid pharmaceutical executives were, in 2020, Moderna CFO Lorence Kim ($89.7 million) and Zaks ($68.8 million) and, in 2021, CTO Juan Andres ($195.9 million) and President Stephen Hoge ($167.7 million). As we have also mentioned, Afeyan and Bancel were not among the highest “paid” executives because their stock sales were founders’ shares.

Moderna has not yet paid a dividend, but, with its stock price declining from its peak of $484 in August 2021, the company did $857 million in stock buybacks in the last quarter of the year at an average price of $245.76, including $540 million in November. Moderna did another $143 million in buybacks in January 2022 at an average price of $236.33. Subsequent to its stock continuing its free fall to $147.63 on January 27, the company did no buybacks in February as its fluctuating stock price appeared to stabilize. Nevertheless, it dropped to $126.46 on March 3, and from March through November Moderna did buybacks every month for a nine-month total of $3.2 billion (average price: $140.31). The $3.8 billion that Moderna spent on buybacks to manipulate its stock price in 2021 and 2022 represented 20.1% of its substantial pandemic profits of $20.6 billion over the two years.

Given its 10-year contract with Lonza, Moderna is not investing in manufacturing capacity (beyond a plant it already had in Norwood, MA prior to the pandemic designed for manufacture of doses for relatively small-scale clinical trials of therapeutic and vaccine candidates for various types of rare, cancer, and infectious diseases). Additionally, a potentially significant constraint on Moderna’s growth as a multiproduct firm is Flagship Pioneering, which exercises strategic control over Moderna. Flagship’s business model favors the creation of new startups for the development of new drug candidates because of the stock-market gains that can be realized from a productless IPO can be much greater than those that occur when an already profitable firm is successful in drug innovation.

The incentive of a venture-capital firm such as Flagship to MSV via a proliferation of startups has been tested in 2022 and 2023, by the very weak biopharma IPO market, with Flagship cutting staff at some of its unlisted new ventures (Bayer, 2022; Carroll, 2022; Walrath, 2022, 2023a, 2023b; Wu, 2022). With the NASDAQ stock exchange highly liquid, there were 76 biopharma IPOs in 2020 and 89 in 2021. But, in 2022, with stock prices falling, there were only 16 biopharma IPOs (Ritter, 2023).

An even more extreme biopharma IPO drought occurred in 2008–2010, but the speculative phenomenon of the productless IPO remerged even stronger in the subsequent decade. As the liquidity of NASDAQ was restored in the 2010s, stock traders became willing to absorb initial and secondary stock issues precisely because they had the expectation that they would be able to sell the shares for a gain without having to hold them until the issuing pharmaceutical company might generate product revenues, much less profits. Rather, the liquid market has enabled stock traders to try to time the buying and selling of shares to realize financial gains. Driving the stock-price movements of most young publicly listed biopharma companies is speculation about stock-price movements; not drug innovation, which has yet to occur and which may never occur (Lazonick and Tulum, 2011; Lazonick et al., 2017).

Meanwhile, both Pfizer and Moderna are fighting to be sure that any benefit that the world gets from mRNA medicines means more money in their corporate treasuries. Given the novelty of mRNA technology, there are myriad patent claims, with Moderna challenging not only the intellectual property rights of Pfizer/BioNTech but also the NIH, whose scientists developed the “Moderna” COVID-19 vaccine (Aquino-Jacquin, 2022; Gold, 2022). Both Moderna and Pfizer have prevented the US government from providing expired doses of their COVID-19 vaccines to researchers who want to use them in experiments to develop next-generation applications such as nasal vaccines (Mueller, 2022). Both companies are determined to raise the prices of their COVID-19 vaccines—driven by so-called “normal market forces” (LaMattina, 2022)—to about six times the $20 per dose negotiated with the US government during the pandemic (Erman, 2022; Mahobe, 2023).

Conclusion: Pharmaceutical PVE as part of the financialization of US healthcare and the US economy

As we have emphasized, PhRMA espouses the valid principle that the earnings that a pharmaceutical company retains out of profits provide the financial foundation for corporate investment in drug innovation. The problem is that, in practice, as the evidence presented in this article makes abundantly clear, contrary to PhRMA’s claims, major US pharmaceutical companies typically distribute all their profits and even more to shareholders in the form of cash dividends and stock buybacks. In implementing price regulation, government agencies should possess the analytical capability to evaluate whether, in fact, price caps stifle drug innovation (Collington and Lazonick, 2022).

Within the US context of corporate financialization, however, government policy that seeks to support the generation of safe, effective, accessible, and affordable medicines must go much further than “smart” price regulation. Adopting a policy agenda to foster innovation across all industrial sectors that Lazonick (2023) elaborates in his book, Investing in Innovation: Confronting Predatory Value Extraction in the US Corporation, the US government should (a) ban open-market repurchases; (b) disconnect executive pay from a company’s stock-price performance; (c) place representatives of stakeholders, including employees, taxpayers, and consumers, on corporate boards; (d) reform the corporate tax code to reward innovation and penalize financialization; and (e) support the working population in gaining access to productive and remunerative employment on a sustained basis through careers that enable them to engage in collective and cumulative learning.

These reforms are relevant to US industrial corporations in general, and not just to pharmaceutical companies. The shareholder-value sickness that afflicts the US pharmaceutical industry is a socioeconomic epidemic that was present in the United States for decades before the SARS-CoV-2 pandemic further exposed the chronic disease of corporate financialization. Indeed, as we document in a recent working paper (Lazonick and Tulum, 2023), the entire US healthcare system is under attack. We identify the perpetrators as “public equity” and “private equity” to distinguish between the looting of healthcare corporations that are publicly traded on the stock market, documented for the case of the pharmaceutical industry in this article, and those that are not traded on the stock market and hence deemed to be “private.” For public equity the main tool of PVE takes the form of stock buybacks while for private equity it takes the form of dividend recapitalizations (having the company take on debt to pay the private-equity firm dividends), in both cases, the PVE toolbox contains many other value-extracting devices as well.

There is nothing wrong per se with extracting value. The delivery of high-quality healthcare depends on paying those employees who produce healthcare goods and provide healthcare services wages and benefits that balance the value that they contribute through their work with the value that they extract as income. With a healthcare system that provides high-quality goods and services in place, government policy can then consider ways of making healthcare affordable to the US population. A system of healthcare delivery that achieves a creation-extraction balance would provide healthcare that is not only much higher quality but much lower cost than the system that currently prevails in the United States.

Under the current PVE regime, however, the US healthcare system is not only far more costly on a per capita basis than any other system in the world. In terms of a wide range of metrics of healthcare delivery, it is also, on average, much lower quality than most other OECD nations (Lazonick and Tulum, 2023). Moreover, the US quality-cost deficit is getting worse over time, with devastating economic, political, and social outcomes. As we have sought to demonstrate in this article, socioeconomic scholarship can contribute to the improvement of healthcare delivery by providing an analysis of PVE that informs social movements that seek to root it out.