Financialized Corporations in a National Innovation System: The U.S. Pharmaceutical Industry

There are widespread claims that a productivity crisis afflicts the U.S. pharmaceutical industry despite the fact that the U.S. institutional environment provides unique advantages for drug R&D. We argue that the explanation for this productivity paradox is the “financialization” of the U.S. pharmaceutical industry. Driven by shareholder-value ideology, the U.S. pharmaceutical industry has adopted a highly financialized business model. Its key performance metrics are stock-price yield and dividend yield, supported by distributions to shareholders through large-scale stock buybacks and cash dividends. With this financial behavior incentivized by stock-based executive pay, value extraction from corporations for the sake of distributions to shareholders comes at the expense of drug innovation. Simultaneously, however, a number of less-financialized European companies are making use of the U.S. innovation system to outcompete the U.S. companies at home. Arguing that all business enterprises face a tension between innovation and financialization, this article employs the theory of innovative enterprise as a framework for analyzing the evolution of this tension for pharmaceutical companies operating in the United States. We provide evidence of the highly financialized character of the major U.S. pharmaceutical companies in the S&P 500 Index, focusing on distributions to shareholders and the stock-based pay of pharmaceutical executives. After documenting the evolution of the U.S. innovation system for drug R&D since the 1980s and summarizing the U.S. product strategies of seven major European pharmaceutical companies, we pose the hypothesis that under a system of corporate governance supporting innovation, the U.S. innovation system could result in a more innovative pharmaceutical industry.