The Inflation Reduction Act marked an important step on the path to reducing prices for key prescription drugs in the United States. But fresh analysis from the New Institute for Economic Thinking finds that the status quo will remain largely intact unless pharmaceutical companies sever executive pay from stock price performance and the companies are banned from stock buybacks, among other reforms. The authors of the analysis argue that “regulation of the industry needs to go way beyond [drug] price regulation.”
WILLIAM LAZONICK; william.lazonick@gmail.com
Lazonick is a professor emeritus of economics at the University of Massachusetts and co-founder and president of the Academic-Industry Research Network.
This week, Lazonick co-authored a piece with Öner Tulum describing how pharmaceutical industry lobbyists have argued since the 1980s that “they need high pricing to yield enough profit to reinvest in innovation, and that you can’t regulate pricing because that will hinder innovation.”
But Lazonick and Tulum’s work finds just the opposite to be true: “Rather than devoting the high profits from high drug prices to augmenting and accelerating investment in drug innovation, U.S. pharmaceutical companies burden U.S. patients and taxpayers so that, through massive distributions to shareholders, the senior executives who make these allocation decisions can boost the yields on the companies’ publicly traded shares.”
Lazonick told the Institute for Public Accuracy that “hundreds of millions of dollars are spent per day to manipulate [the companies’] stock prices” through buybacks. Data from the 474 corporations included in the S&P 500 Index shows that the companies distributed $5.7 trillion as share repurchases from 2012 to 2021, the vast majority as open-market repurchases that work to manipulate company stock prices. Lazonick and Tulum also found that distributions to shareholders are used to pad executives’ take-home pay. During the course of the pandemic, Pfizer and Moderna, two of the companies most involved in the development of the mRNA Covid-19 vaccines, have done no differently.
Lazonick noted that buybacks were never actually vetted by Congress. Instead, in 1982 the Securities and Exchange Commission adopted a rule, often referred to as the safe-harbor provision, that allowed buybacks. Since 2018, a group of House representatives has put forward a bill with bipartisan support that would ban the practice. Lazonick and Tulum argue that alongside executive pay reforms and the banning of stock buybacks, reforms must also focus on reforming corporate tax policy and placing representative stakeholders in corporate board positions.
