US Biopharmaceutical Finance and the Sustainability of the Biotech Boom

In the decade before the current economic crisis, the US biotechnology industry was booming. In a 2006 book, Science Business: The Promise, the Reality, and the Future of Biotech, Gary Pisano implies that, given the 10-20 year time-frame for developing biotech products and the lack of profitability of the industry as a whole, the US biotech boom should not have happened. Yet the biotech industry has received substantial funding from venture capital firms as well as from established companies through R&D alliances. Why would money from venture capitalists and big pharma be flowing into an industry in which profits are so hard to come by? The purpose of this article is to work toward a solution of what might be called the “Pisano puzzle”, and in the process to provide a basis for analyzing the industrial and institutional conditions under which the growth of the US biopharmaceutical (BP) industry is sustainable. One part of the answer has been the willingness of stock-market investors to absorb the initial public offerings (IPOs) of a BP venture that has not yet generated a commercial product, and indeed may never do so. The other part of the answer is that the knowledge base that BP companies can tap to develop products comes much more from government investments and spending than from business finance. Indeed, we show that, through stock buybacks and dividends, established corporations in the BP industry have been distributing substantial sums of cash to shareholders that may be at the expense of R&D. We use the framework that we have developed for analyzing the sustainability of the US BP business model to pose a number of key areas for future research, with an emphasis on the implications of the financialization of this business model for the generation of safe and affordable BP drugs

INNOVATION vs FINANCIALIZATION: AN ANALYSIS ON THE UNITED STATES AS A SOURCE OF INNOVATION FOR EUROPEAN BIG PHARMA

Driven by the perspective of maximizing shareholder value (MSV), the U.S. biopharmaceutical industry has adopted a highly financialized business model. In such a model, the key metrics are stock-price performance, earnings per share, and dividend yield, supported by distributions to shareholders in the forms of dividends and stock buybacks. Such value extraction is incentivized by stock-based executive pay and can be pursued at the expense of productivity in drug innovation (Lazonick et al. 2017). Yet with government support for drug development through the National Institutes of Health and various forms of intellectual property protection and government financial subsidies as well as unregulated drug prices that can provide high profits for reinvestment in drug development, the U.S. prescription drug market should be highly conducive to innovation in drug development (Lazonick and Tulum 2011). This paper asks whether less-financialized European pharma companies, which are subject to price regulation in their home markets, can make use of U.S. business conditions to engage in innovation by tapping into the immense knowledge base in the United States and selling their products in the United States at high, unregulated, prices. Making use of Lazonick’s social conditions of innovative enterprise framework, the analytical approach employed in this research inquiry is twofold. First, the sources of innovative capabilities within the top seven European pharma companies are examined. Second, for the purpose of this particular paper, the top innovation performer among the seven companies is identified for a firm-level case analysis to explore how a non-financialized company can make better use than financialized companies of capabilities and incentives available in the US drug market to achieve greater productivity. As the top performers in the US drug market, Novartis, Hoffmann-La Roche, GlaxoSmithKline, AstraZeneca, Bayer, Merck KGaA, and Sanofi-Aventis are selected for product analysis. The analysis reveals the geographic origins of pharma products and geographic sources of pharma revenues of these European companies. Identified as the top performer by various different productivity attributes, the case-analysis of Swiss-based Roche (Hoffman-La Roche) explains how a non financialized outsider to a national economy can gain competitive advantage by operating in that economy in ways that financialized insiders, undermined by MSV, cannot

Apple's changing business model: what should the world's richest company do with all those profits?

Apple Inc. stands out as the world’s most famous, and currently richest, company. To the general public, Apple is known for three things: its intriguing CEO Steve Jobs, who has achieved iconic status in death as in life; its amazing iOS products, especially the iPhone and the iPad, and their predecessor the iPod, which have literally placed sophisticated technology in the hands of the masses; and its stratospheric stock price, which even when in March 2013 it had dropped to 63 percent of its September 2012 peak, gave Apple the highest market capitalization of any company in the world. As a result of its phenomenal success, at the end of fiscal 2012 Apple had $121 billion in liquid assets. In April 2013 the company committed to distributing as much as$100 billion to shareholders in stock buybacks and cash dividends by the end of fiscal 2015. By employing the theory of innovative enterprise to analyze how over the course of its 37-year history Apple became so profitable, we argue that there is no economic justification from a risk-reward perspective for this distribution to Apple’s shareholders. Taxpayers and workers have superior claims on these profits. In analyzing by whom value is created as a basis for considering for whom value should be extracted, we raise the implications of Apple’s changing business model for the future of innovation at this heretofore exceptional American company and even in the U.S. economy as a whole