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How Big Pharma Actually Spends Its Massive Profits

by Ozva Admin
How Big Pharma Actually Spends Its Massive Profits

Pharma giants welcomed the new year quietly announcing price increases in the United States on more than 350 drugs, and they continue to insist that these price increases are necessary for innovation. But new research shows that the business model of America’s largest pharmaceutical companies involves far more spending on enriching shareholders and executives than on research and development.

Between 2012 and 2021, the 14 largest publicly traded pharmaceutical companies spent $747 billion on share buybacks and dividends, far more than the $660 billion they spent on research and development, according to a new study by economists William Lazonick, professor emeritus of economics at the University of Massachusetts, and Öner Tulum, a researcher at Brown University.

But that hasn’t stopped drug companies and their lobby groups from using the cost of innovation as a key argument in their campaign to stop Medicare from negotiating lower drug prices. The pharmaceutical industry has spent at least $645 million on federal lobbying about the past two years.

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Meanwhile, drug prices have continued to rise. Even before the latest round of price hikes was announced, Americans spent $800 million more on prescription drugs last year than the year before.

“The pharmaceutical industry is saying, ‘We need higher prices to reinvest in the next generation of products and give people access to medicines; if we don’t get higher prices, we won’t be able to do our job.’” lazonick said The lever. “Well, that’s not how they’re using their earnings. They are using their profits and more, sometimes more than 100 percent of their profits, to distribute to shareholders, so shut up or shut up and stop making that claim.”

The price of “innovation”

The tendency for companies to primarily return profits to shareholders rather than reinvest them in production is not unique to the pharmaceutical industry. For decades, companies have spent more and more of their profits manipulating their own share prices. through buybackspaying dividends to shareholders and increasing executive compensation.

Stock buybacks, whereby companies buy back shares of their own stock, reducing the number of shares available and increasing the value of the remaining shares, was legalized by the Securities and Exchange Commission in 1982 and has been criticized by President Joe Biden and up congressional democrats.

Meanwhile, investment in manufacturing has faltered, contributing to the supply chain crisis and consequent inflation of the COVID-19 era.

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The pharmaceutical industry is certainly not alone in spending most of its profits on shareholder enrichment. According to the study by Lazonick and Tulum, companies in the S&P 500 spent nearly $10 trillion in buybacks and dividends between 2012 and 2022. But the pharmaceutical sector has stood out in justifying exorbitant prices, which leave tens of millions of people unable to afford medicines. that save lives. , arguing that the profits from those margins will be reinvested in innovation.

That was the argument deployed by the industry over the past two years as Democrats worked on a measure to allow Medicare to negotiate drug prices, since the government’s health program has long been barred from such meaningful negotiations. common.

Democrats have campaigned to allow Medicare to negotiate drug prices with pharmaceutical companies, as health programs in most other high-income countries do, since at least 2006.

The US is an outlier on this issue, which is why drug companies “have targeted the United States to raise prices for many years while holding or lowering prices in the rest of the world,” according to a report. report by House Democrats.

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In 2021, Democrats initially proposed a drug price bargaining measure that would allow Medicare to negotiate prices for between 50 and 250 high-cost drugs that lack competition, including insulin products. The plan was to require drug manufacturers to provide their products at the price negotiated by Medicare to all insurers, so that patients of all ages would benefit from lower prices.

The pharmaceutical industry and its lobbyists responded with an all-out pressure campaign against the legislation.

“If it happens, [the measure] it will turn the same innovative ecosystem that brought us life-saving vaccines and therapies to combat COVID-19 on its head.” said the president and CEO of Pharmaceutical Research and Manufacturers of America (PhRMA), Washington’s leading drug lobby. “Under the guise of ‘bargaining,’ it gives the government the power to dictate how much a drug is worth and leaves many patients facing a future with less access to drugs and fewer new treatments.”

Last summer, after a year and a half in the pharmaceutical industry lobbying Y Campaign spentDemocrats passed a massively diluted A move that will only allow Medicare to negotiate prices on a handful of older drugs that are no longer on-patent exclusivity.

While the measure caps out-of-pocket drug costs for seniors on Medicare, the general public will not benefit. It includes a copay cap for insulin for Medicare beneficiaries, but Medicare will not specifically target negotiating insulin prices.

The final measure was included in the Democrats’ August climate and social spending bill.

The pharmaceutical industry has still criticized even these petty regulations. “While the bill saves the federal government $300 billion, it takes much more from the biopharmaceutical industry and will have significant consequences for innovation and patient hope for the future,” PhRMA said in a statement. declaration on the invoice.

Republicans, now in charge of the House of Representatives, they have their sights set about repealing the measure before price negotiations begin in 2026. Meanwhile, Biden You could use your existing regulatory authority to lower drug prices before then, but has so far refused to do so.

Drug profits flow to shareholders and executives

Even before the new study, the pharmaceutical industry’s claim that it needed to use profits from prohibitively expensive drugs to finance new drug development was already on shaky ground.

On the one hand, pharmaceutical companies continue to sell their products in countries that do not allow them to rip off their citizens the way the US government has. Then there is the fact that pharmaceutical research depends on public funding. substantial. Between 2010 and 2019, every new drug approved by the Food and Drug Administration was based at least in part in public funds science.

Furthermore, the researchers had already shown that such outsized profits were not necessary to spur most pharmaceutical innovation. In 2021, the federal and nonpartisan Congressional Budget Office Estimate that cutting profits from major drugs by 15 to 25 percent would result in the introduction of just two fewer drugs in more than a decade.

And most pharmaceutical research does not present novel therapies, but instead modifies existing drugs to expand their reach to new patents, further increasing profits for pharmaceutical companies.

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New research on buybacks and dividends further undermines the narrative that high prices are a necessary ingredient for research and development. “Companies say they need high drug prices to reinvest their profits in the next generation of medical innovation,” Lazonick said. “But they don’t need them, because they’re not using their earnings that way.”

Lazonick and Tulum analyzed the financials of 14 major pharmaceutical companies to paint a picture of an industry in which the biggest companies take over the smallest companies, squeezing every last ounce of profit they can out of drugs that already exist. they manufacture, return the profits to shareholders and executives, and then rinse and repeat.

Between 2012 and 2021, those companies not only spent $747 billion on share buybacks and dividends, but also massively increased the salaries of top executives.

In 2021, the median annual compensation for the highest-paid executives at these pharmaceutical companies was $61 million, 93 percent of which came from realized earnings from stock-based salaries. In other words, the top executives who decided to make payments through buybacks and dividends were simultaneously getting richer, since the vast majority of their income came from the inflated price of the company’s shares.

Lazonick and Tulum argue in the paper that while Medicare’s drug price negotiation measure is a necessary step, the federal government should do more to regulate pharmaceutical companies rather than simply negotiate prices for a small set of drugs. .

Such efforts could include financial reforms already proposed for him biden administration and congressional democratssuch as limits on executive stock compensation and share repurchases.

“It’s important to make a distinction between regulating and negotiating,” Lazonick said. “Pharmaceutical companies should be regulated; that is, the government should find out what these companies need, the same way they would regulate public services and say, ‘Well, this is the price of your medicine.’ In other countries, it’s not really a matter of negotiation.”

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