a. Shareholder payouts trade off with R&D.

The orientation to maximising shareholder value and the use of devices such as share buybacks may also have been encouraged by the fact that a significant proportion of the chief executives of the top pharmaceutical companies have formal qualifications in business, mainly MBAs or economics degrees. MBAs in particular tended in the final decades of the twentieth century to emphasise the importance of maximising shareholder value (Stout, 2012; Murray, 2013). Analysis of the qualifications of the chief executives of the 2017 top 15 companies in March 2019 shows five of the fifteen had MBAs and a further three economics degrees (Bloomberg Executive Profiles, 2019). Only seven had degree-level education in science, and this is apparently not considered a prerequisite.

What are the consequences of the focus on share prices, share dividends and share buybacks? The first, previously mentioned, is that companies can become more short-term oriented seeking to maximise immediate shareholder returns instead of making investments that look to the long-term health of the company (Palley, 1997), a short-termism arguably encouraged by, and reflected in, the practice of making quarterly financial returns to the public, mandatory in the US since the 1930s and used elsewhere. In the case of pharmaceutical companies trend data indicate that they have been keen to maintain or increase dividends over recent years, notwithstanding the 2008 financial crisis. Lazonick et al. (2017) analysed data on the eighteen US pharmaceutical companies over the period 2006–15 included in the Standard and Poor's top-500 Index in January 2016 and found that over this period they distributed 99 per cent of their profits to shareholders, 49 per cent as dividends and 50 per cent as share buybacks.

A second consequence is that the company may raise the prices of pharmaceutical products to pay for costly share buybacks and dividends. Hence in order to cover their costs companies may need to charge high prices for their medicines to push up revenues. One example is provided by Gilead Sciences which acquired the biopharmaceutical company, Pharmasett, in 2012 that was developing a new drug for the treatment of hepatitis C. When put on the market by Gilead the US prices of what had become two drugs - Sovaldi and Harvoni – were so high, and far higher than Pharmasett had planned, that a Congressional enquiry was set up to investigate (Senate Committee on Finance, 2015). Significantly, the increase in Gilead's revenue resulting from the sales of the two drugs was associated with a markedly increased programme of share buybacks (Lazonick et al., 2017). There are also numerous examples of steep price rises for drugs already on the market (Angell 2001).

A third consequence is that where the company orientation is towards revenue maximisation then more money is usually spent on marketing and advertising in order to push up sales – what Angell calls ‘the hard sell’ (2004:115). The high level of spending on marketing by pharmaceutical companies has long been noted, but there is evidence of increased spending in the US at least over the last two decades. A study by Schwartz and Woloshin (2019) found that US marketing expenditure increased from $17.7 billion in 1997 to $29.9 billion in 2016. And while spending on marketing directed at health care professionals accounted for the largest share, spending on direct-to-consumer advertising (legal in the US since 1985 and made easier by the FDA in 1997) increased significantly. Such marketing means that the prescribing of medicines increases as does the medicalisation of everyday life (Conrad, 2007).

A fourth consequence is that if more money is spent on dividends, share buybacks, managers' pay and marketing, less is available to invest in R&D and the development of new drugs. Lazonick et al. (2017) calculate that share buybacks of the top eighteen US pharmaceutical companies over the years 2006–15 reached as much as 56 per cent of the companies' total spending on R&D. They also note that in the case of Gilead almost all their new drugs since the company was founded came from company acquisitions – a point discussed further below. Moreover, exceptionally high salary packages for senior managers and spending on dividends and buybacks can increase companies’ indebtedness and its associated costs.

Fifth, companies oriented to shareholder value can also be especially keen to cut the costs of production and manufacturing. Apart from trying directly to reduce staff within the company one means of doing this, not new to the industry, but that has increased over recent decades, has been the outsourcing of both manufacturing and R&D, usually to countries where labour costs are lower. The former has a rather longer history (Miller, 2017) than the latter and is more extensive, but outsourcing of R&D, both basic research and clinical trials, is now occurring quite widely, partly generated by the wish to cut costs but also by companies’ lack of success in identifying new drugs (Schumacher, 2016), and is arguably more problematic. Some of this outsourcing is to academic research centres and some to contract research organisations, sometimes in the country where the pharmaceutical company has its headquarters; sometimes to countries where labour costs are lower. While such outsourcing can be effective, there are also drawbacks. It can, for instance, lead to the closure of older R&D facilities and the breakup of research teams, which can weaken the R&D capability of pharmaceutical companies (Ebnasajjad, 2017) and may also lead to the loss of jobs in the country where the company has its headquarters. However, the outsourcing of manufacturing, mostly overseas, has not entirely escaped criticism both for the local reductions in employment, but also on grounds of safety. For example, 40 per cent of active pharmaceutical ingredients are made up and supplied by companies in China and this is currently a matter of some concern since the oversight of such manufacturing is often weaker than in western countries with poor record keeping and fewer spot checks, and there have been a number of recent scandals concerning products (Hancock and Xueqiao, 2018).