[Ip-health] NYT: How high drug prices inflate CEOs pay (Lazonick and Tulum)

Suerie Moon suerie.moon at graduateinstitute.ch
Fri Mar 1 02:22:26 PST 2019

 Nice op-ed from Lazonick and Tulum, summarizing their work in a longer
analysis available here:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3035529How High Drug
Prices Inflate C.E.O.s’ Pay

Pharmaceutical companies say their profits fund research and innovation in
new medicines, but they are spending billions to enrich shareholders and

By William Lazonick and Öner Tulum

Mr. Lazonick is an emeritus professor of economics at the University of
Massachusetts, Lowell. Mr. Tulum is a postdoctoral fellow at SOAS,
University of London.

The New York Times, Feb. 26, 2019:

Drug company executives faced tough questions from Congress
on Tuesday as they attempted to explain why, thanks to high drug prices,
per capita spending on pharmaceuticals in the United States is double
<https://data.oecd.org/chart/5tUr> the average of other advanced countries.
For decades, American drug makers have justified these high prices
<https://www.healthaffairs.org/do/10.1377/hblog20171113.880918/full/> by
asserting that the higher profits they generate fund research that
accelerates the development of new medicines. Our data shows, however, that
these companies spend every penny of their profits on distributions to
shareholders in the forms of cash dividends and stock buybacks.

Because the greater part of management compensation is linked to stock
price, the prime beneficiaries of this abuse of corporate profits are the
executives who claim that high drug prices redound to the common good. At
the same time, drug giants such as Merck and Pfizer seem to have become focused
more on buying companies with successful new drugs
than developing their own.

Congress has been raising alarms over drug prices for years. In 1985,
Representative Henry Waxman, a California Democrat who was chairman of the
House health subcommittee, accused
the pharmaceutical industry of “gouging the American public,” driven by
“greed on a massive scale.” But the escalation of drug prices has only
gotten worse
as documented in various
Despite their claims, the big American drug companies have not been using
profits from high prices to ramp up investment in drug development. Our
research shows
that for 2008 through 2017, 17 pharmaceutical companies in the S. & P. 500
distributed just over 100 percent of their combined profits to
shareholders, $300 billion as buybacks and $290 billion as dividends. These
distributions were 12 percent greater than what these companies spent on
research and development.

With most of their compensation coming from exercising stock options and
stock awards, senior executives benefit immensely. We gathered data on the
500 highest-paid executives in the United States from 2008 through 2017.
The number who came from the drug industry ranged from 21 (in 2008 and
2011) to 42 (in 2014). The total compensation of those 42 executives
averaged about $73 million, compared with an average of an already
over-the-top $32 million for all 500 in 2014.

A total of 88 percent of the 2014 compensation was based on stock. In 2017,
28 drug executives in the top 500 averaged more than $41 million in total
compensation, with 83 percent stock-based. By jacking up product prices and
distributing the increased profits to shareholders, executives lift stock
prices and their take-home pay.

Our research
for the Institute for New Economic Thinking demonstrates that these
companies, even when they show substantial R. & D. spending on their books,
do not have much to show for it.

For example, Merck distributed 133 percent of its profits to shareholders
from 2008 to 2017, and Pfizer 107 percent. Although both companies recorded
large sums spent on R. & D. — Merck $80 billion and Pfizer $81 billion over
the decade — these companies generated most of their revenues by acquiring
companies with patented drugs on the market, rather than by developing
their own new drugs. Since 2001, by our analysis, Pfizer has had
significant revenues from only four internally originated and developed
products. Since Merck’s merger with Schering-Plough in 2009, it has had
only two blockbuster drugs, of which only one was the result of its own

The public foots the bill for this behavior. Not only do we pay high drug
prices, our tax dollars supply more than $30 billion per year for
life-sciences research through the National Institutes of Health
<https://officeofbudget.od.nih.gov/history.html>. Yet, like most American
companies, the drug industry claims that its corporations need to pay lower
corporate taxes
to remain competitive globally.

European pharmaceutical companies such as Roche and AstraZeneca, on the
other hand, have used the same American drug ecosystem — profits from high
drug prices and scientific advances
<https://www.pnas.org/content/115/10/2329> resulting from government
research funding — to become leaders in medical innovation. Roche dominates
the market for specialty drugs in oncology and immunotherapy, while
AstraZeneca has a strong pipeline in the latest phases of development.
Merck and Pfizer, in comparison, have fallen seriously behind.

Congress should put an end to this madness. The government funds medical
research and grants the patents and other intellectual property protections
that make the pharmaceutical industry’s products financially viable. It
should therefore regulate drug prices.

The United States should also redesign executive pay to reward drug company
leaders who actually bring new innovations to market, and ban most forms of
stock buybacks, which are nothing but a manipulation of the stock market
<https://hbr.org/2014/09/profits-without-prosperity> that makes the rich
even richer. Reinvesting the hundreds of billions of dollars that American
drug companies are squandering on buybacks would be a big step on the path
to affordable health care for all.

William Lazonick, emeritus professor of economics at the University of
Massachusetts, Lowell, is the president of the Academic-Industry Research
Network, where Öner Tulum, a postdoctoral fellow at SOAS, University of
London, is a senior researcher.
Suerie Moon, MPA, PhD
Director of Research, Global Health Centre and Visiting Lecturer, Graduate
Institute of Geneva
Adjunct Lecturer, Dept. of Global Health and Population, Harvard T.H. Chan
School of Public Health
Bureau P2-712, Maison de la Paix, Chemin Eugène-Rigot 2, CP 1672, 1211
Geneva, Switzerland
Tel: +41-22-908-5845       Mobile: +41-76-823-2830           Skype ID:

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