Big pharma’s financialization makes them bad for drug development.

First, companies have put far more emphasis on paying shareholders. In the last twenty years or so, we have seen historically high returns to shareholders and investors. The team found that an average big business in the United States has handed 87 per cent of its income to shareholders in the ten years leading up to 2019. That is a huge amount— and it is all money that cannot be reinvested and spent on improving the business. At the extreme end, things are even worse. In a sizeable minority of cases, returns to shareholders exceeded the profits that the company in question had made.

Pharmaceutical corporations are particularly extreme in this regard. In a separate study that looked only at companies listed on the British stock market, both UK-based Big Pharma giants GlaxoSmithKline and AstraZeneca fell into this category, returning over 100 per cent of their net income to shareholders." I repeated the exercise for the five companies examined in this chapter — AbbVie, Gilead, Pfizer, GSK and AstraZeneca — for the years 2016—20. All of them returned more to shareholders in that period than their net income, AbbVie returning a huge 165 per cent.13

This seems counterintuitive. How on earth can a corporation possibly return more to its shareholders than it made during the year? There might be several answers to this question, but it likely involves the second and third traits of financialisation that the Sheffield researchers identify — the growth of cash and debt, and the growth of something called ‘intangible assets'.

I have mentioned debt already. Financialisation has seen the ballooning of cheap and often very risky debt. Usually, the bigger you are, the more you can borrow, and within our economic model there are huge incentives to borrow. In theory, firms use their debt to invest and generate a good return, allowing them to repay their debt and make a reasonable profit. In practice, they can use debt to bankroll their shareholder bonanza — and effectively make up the difference between what the company is making in a given year and what they are handing over to shareholders. They can also use debt to gain leverage, buying out their competitors, and thereby becoming even bigger and more powerful. As likely as not, this will attract even more investors. Using debt to pay shareholders rather than investing in improving the business is not a great long- term strategy if what is needed is a more productive company. But this is what happens practically in the financialised economy.

To understand the scale of this problem, it is worth quoting from the findings of a study by Rodrigo Fernandez and Tobias J. Klinge.14 Examining the accounts of twenty-seven of the world's largest pharmaceutical corporations between 2000 and 2018, including most of the corporations mentioned in this chapter, they found that debt had ballooned from $60 billion to $520 billion. This trend was particularly pronounced in the top ten companies, where debt had increased from $50 billion to $310 billion, well in excess of the growth of those same companies during this period. The financial reserves of these companies had also increased massively, from $83 billion to $219 billion, with most of the increase again accounted for by the top ten largest corporations.

The researchers suggest this shows that, by holding more debt and cash, these corporations are not reinvesting profits in better medicines, equipment or staff, but hanging on to cash so they can buy up other companies, stash money in tax havens, or use it to enrich wealthy shareholders. When they compare this pile of cash to the amount of ‘real' assets owned by the companies, like factories or labs, they find that ‘the largest pharmaceutical companies increasingly hold more financial reserves than physical means of production for drug manufacturing'.

The fact that so much money is chasing proportionally less research and fewer drugs explains why the price of medicine has increased so much. It is not to do with the cost of making the drugs — in fact, medicine prices are entirely unrelated to research costs; rather, it is hard-wired into the financialisation of the industry.

But there is a third aspect of financialisation: the growth of intangible assets. I am going to explore this in much more detail in Chapter 5, but for now, I will simply note it refers to a whole host of assets businesses own that you cannot quite put your finger on, but which have become increasingly important to their profits. It includes things like a company's brand, its reputation, or the know-how embedded in whatever it produces and that its competitors cannot use. It is not as simple as, say, owning a factory, or even having workers on your payroll; you can assess the value of those things relatively easily. But how do you assess the value of owning, say, the Levi's brand? How can you put a figure on what McDonalds's name-recognition might mean for your profits over the next ten years?

Frankly, it is almost impossible to do so. But that doesn't mean there are not accounting techniques dreamed up to put very precise figures on this sort of thing. For some companies, including Big Pharma, this stuff has become really important — in particular, when it comes to the so-called intellectual property that protects recipes and know-how and technologies over which their owners enjoy a monopoly. In fact, this stuff is considered more important than their scientists or laboratories — and so they assign a value to it. And because it is quite difficult, many of these assets end up overvalued — which is great news for investors in the short term, because it means the company looks better off than it actually is.

That might all be acceptable if you are about to invest in some amazing new technology or in improving your productivity. But if you are simply using it to make your wealthy shareholders even richer, then, just as with debt, what you are really doing is hollowing out your own firm, leaving little real value in the underlying company.

In fact, this massive concentration of the pharmaceutical industry — with ever fewer and bigger corporations — has been shown to be bad for drug development. A piece in Science magazine tells the story of a very important cancer drug that languished in the fridge for years because it went unnoticed.15 The reason was that, through buying out a potential competitor in 2003, Pfizer found itself in possession of an enormous amount of research, which it did not adequately assess for medical potential. Several years later, some scientists outside the company were doing cutting-edge research that forced Pfizer to sit up and take notice. They looked through the research sitting on their shelves and turned it into an important medicine. It ended well, thanks to independent research, but years had been lost in which many patients could have been helped if everyone at Pfizer had not ‘been so preoccupied with merging, buying, moving, rearranging, and figuring out if they were getting laid off or not'.16

Intangible assets, particularly intellectual property, are at the heart of the pharma model.17 For the twenty-seven biggest pharma companies, intangible assets increased from $48 billion in 2000 to a staggering $857 billion in 2018. The latter figure is not far off the GDP of a very rich country like the Netherlands. The concentration of such assets in the ten largest firms was particularly pronounced, increasing from $38 billion to $522 billion. As a proportion of a company's total assets, intangible assets had ballooned from 13 per cent to 51 per cent. Meanwhile, the growth of physical productive capacity (such as factories and labs) has sharply declined as a share of total assets.

This means, in turn, that Big Pharma spends more and more of its resources trying to bolster the value of its intangible assets, rather than engaging in productive activity. One report looks at the twelve best-selling drugs in the United States, and finds that drug makers filed nearly 1,500 attempted patent claims on them — the vast majority successful — simply to extend their monopolies far beyond the twenty years of protection they enjoy by right.18