ARTICLE / ARTÍCULO

THE FINANCIALIZATION OF BIG PHARMA

LA FINANCIARIZACIÓN DE LAS GRANDES EMPRESAS FARMACÉUTICAS

Tobias J. Klinge

KU Leuven

tobiasjohn.klinge@kuleuven.be

ORCID iD: https://orcid.org/0000-0001-9845-8658

Rodrigo Fernandez

Centre for Research on Multinational Corporations (SOMO)

R.Fernandez@somo.nl

ORCID iD: https://orcid.org/0000-0003-0241-2730

Manuel B. Aalbers

KU Leuven

manuel.aalbers@kuleuven.be

ORCID iD: https://orcid.org/0000-0001-6640-0988

CONTENTS

1. INTRODUCTION Top

Financialization has become an increasingly popular yet fuzzy concept to frame and investigate a wide range of developments in society. Its growing scope has seen scholars note its ambiguity in application more than a decade ago (Lee et al. 2009Lee, R., G. L. Clark, J. Pollard and A. Leyshon. 2009. "The Remit of Financial Geography - before and after the Crisis". Journal of Economic Geography 9(5):723-747. https://doi.org/10.1093/jeg/lbp035.) with subsequent reviews of the literature such as Van der Zwan’s (2014Zwan, N. van der 2014. "Making Sense of Financialization". Socio-Economic Review 12(1):99-129. https://doi.org/10.1093/ser/mwt020.) narrowing it down to three overarching themes: the emergence of a post-Fordist regime of accumulation propelled by the growth of finance, the rise of the shareholder value orientation and the financialization of everyday life. More recently, Aalbers (2019Aalbers, M. B. 2019. "Financialization". In The International Encyclopedia of Geography: People, the Earth, Environment, and Technology (2nd ed.), edited by D. Richardson, N. Castree, M. F. Goodchild, A. Kobayashi, W. Liu and R. A. Marston. Oxford: Wiley. https://doi.org/10.1002/9781118786352.wbieg0598.pub2.) provided a classification of financialization into seven themes: financialization as a historically recurring process signalling the autumn of hegemonic powers in the world system; the financial services revolution regarding the emergence of new financial institutions and changes in the behaviour of the existing ones; the increasing dominance of the financial sector in terms of size; financialization of non-financial firms around new financial narratives, practices and measurements; financialization as assetization of commodities; financialization of the state; and financialization of households.

In this article, we present the evidence for the financialization of non-financial firms, taking the global pharmaceutical sector as an example. Our interest is primarily in this sector as a possible field of corporate financialization rather than in pharmaceuticals per se. The reason to focus on this sector is two-fold. On one hand, pharmaceuticals have a strong social significance because of their life-sustaining functions and the modes of their production are hence vital to understand, especially given the fundamental role of publicly-funded research in developing medicine. On the other hand, the global pharmaceutical market is one of growing economic significance as it has seen more than a 200 percent rise in revenue between 2001 and 2018, which in 2018 amounted to more than USD1.2 trillion and is projected to grow (Statista 2019Statista 2019. Global Pharmaceutical Industry. Dossier. https://www.statista.com/study/10642/global-pharmaceutical-industry-statista-dossier/.: 2). What is more, the sector has a track record as a harbinger for financialized corporate strategy (Andersson et al. 2010Andersson, T., P. Gleadle, C. Haslam and N. Tsitsianis. 2010. "Bio-Pharma: A Financialized Business Model". Critical Perspectives on Accounting 21(7):631-641. https://doi.org/10.1016/j.cpa.2010.06.006.; Froud et al. 2006Froud, J., S. Johal, A. Leaver and K. Williams. 2006. Financialization and Strategy: Narrative and Numbers. London, New York: Routledge.).

We dissect the financial accounts of the global pharmaceutical oligopoly or “Big Pharma” as represented by the sector’s largest firms. Rather than focusing on one key element of corporate financialization as most of the previous empirical studies have done, we scrutinize the three main trends: the expansion of the balance sheet, the growing reliance on intangible assets and the increasing use of corporate funds as financial payouts. Only when combining these three dimensions can we come to a rigorous assessment of the level of corporate financialization in firms and sectors. On all three accounts, we find evidence of a Big Pharma business model that generates returns for shareholders which are supported by monopolized knowledge through intellectual property rights, capitalized future earnings potential and rising debt burdens. In sum, we argue that the operating mode of Big Pharma increasingly resembles that of a private equity fund.

This operating mode builds on a Veblenian understanding of business dynamics, which underlines the tendency of corporations to obstruct competition and thus attain higher prices for their products. Intangible assets are one prime lever to do so and have become a crucial element of the pharmaceutical sector. They enable corporations to derive incomes—or borrow against these assets to get disposable cash—to pass on payouts to shareholders and corporate executives. At the same time, intangible assets represent capitalized future earnings that inflate the balance sheet and hence propel corporate strategies to pursue whatever operations seem the most profitable, sparking new rounds of intangible asset formation. Although corporate strategies vary, the degree to which corporations rely on intangible assets can be significant for multiple reasons. For example, if a corporation has a high degree of intangible assets, this may be a sign that it is prioritizing investment in expensive specialized medicine over cheap mass products, which may have important, broader distributional consequences (e.g. access to medicine by consumers).

The article is structured as follows. In section 2, we review corporate financialization trends more broadly and revisit the work of Veblen in order to provide a framework for analysis. In section 3.1, we present the methods that led us to the empirical results that are presented in section 3.2. In section 4, we discuss these results in their relation to the existing body of work and conclude in section 5.

2. WHAT IS CORPORATE FINANCIALIZATION? Top

The literature on corporate financialization tends to be inspired by different heterodox economics frameworks. Keynesian and, to a lesser extent, Marxian frameworks feature predominantly, but recently we can also witness the emergence of Veblenian analyses of financialization (Baranes and Hake 2018Baranes, A. I. and E. R. Hake. 2018. "The Institutionalist Theory of Capital in the Modern Business Enterprise: Appropriation and Financialization". Journal of Economic Issues 52(2):430-437. https://doi.org/10.1080/00213624.2018.1469895.; Baranes 2017Baranes, A. I. 2017. "Financialization in the American Pharmaceutical Industry: A Veblenian Approach". Journal of Economic Issues 51(2):351-358. https://doi.org/10.1080/00213624.2017.1320895.; 2016Baranes, A. I. 2016. An Original Institutionalist Approach to the Structure, Conduct, and Performance of the Pharmaceutical Industry: The Importance of Intangible Assets. Kansas City: University of Missouri. PhD Thesis.; Jo and Henry 2015Jo, T.-H. and J. F. Henry. 2015. "The Business Enterprise in the Age of Money Manager Capitalism". Journal of Economic Issues 49(1):23-46. https://doi.org/10.1080/00213624.2015.1013877.). To us, Thorstein Veblen’s institutionalist understanding of the business enterprise serves as a useful starting point to analyze the different components of corporate financialization, as they are, to some extent, already identified in Veblen’s work. In this section, we will briefly summarize our reading of Veblen before relating it to ongoing debates in the financialization literature more widely.

2.1. Veblenian conceptualizations of assets and differential advantage

Veblen’s institutionalist theory of the business enterprise positions industry and business as opposite and antagonistic poles. While industry represents the side of the material production of goods and is concerned with the perpetual improvement of the interplay between different production stages, business is its modern “pecuniary” (i.e. profit-driven) counterpart, subordinating the industrial process to its imperatives and thereby both intentionally and unintentionally disrupting or enhancing it according to the specific circumstances (Veblen 1958Veblen, T. 1958 [1904]. The Theory of Business Enterprise. New York: Mentor. [1904]).

Veblen’s conceptualization of assets is closely related to the distinction between industry and business.[1] Through the development of a non-individualistic theory of production, he emphasized that societies develop according to accumulated knowledge that increasingly outgrows any individual’s capacity. As soon as this occurs and the accumulated knowledge is materialized in the form of machinery and technology, it can be enclosed and withheld from society for pecuniary gain, secured by nothing but legal entitlements and the state power which ensures them. For Veblen, such enclosure—privatized social knowledge—is the defining trait of capitalism (Veblen 1908aVeblen, T. 1908a. "On the Nature of Capital". The Quarterly Journal of Economics 22:517-542.).

In this context, a business enterprise’s investment becomes first and foremost a pecuniary transaction, designed to facilitate the “extensive engrossing of the community’s industrial efficiency” (Veblen 1908bVeblen, T. 1908b. "On the Nature of Capital: Investment, Intangible Assets, and the Pecuniary Magnate". The Quarterly Journal of Economics 23:104-136.: 105), either by seizing materialized or immaterial knowledge. Only under such circumstances does Veblen speak of “assets” as such. To the owner of these assets, they become a means of exerting a differential advantage over competitors insofar as they serve to enhance the price of the final product. The capacity to increase earnings is capitalized and revalued on a recurring basis, constantly imputing the value of assets anew. Therefore, assets only exist under a set of social relations, namely general commodity production and wage labour. As tangible assets, they “owe their productivity and their value to the immaterial industrial expedients which they embody or which their ownership enables their owner to engross” (Veblen 1908aVeblen, T. 1908a. "On the Nature of Capital". The Quarterly Journal of Economics 22:517-542.: 539). As intangible assets, the theoretical “immaterial industrial expedients” are legally formalized and serve to obstruct competition through growing market power and to maintain enhanced prices by “locking out” society from its “stock of knowledge” (Veblen 1908aVeblen, T. 1908a. "On the Nature of Capital". The Quarterly Journal of Economics 22:517-542.: 519). To gain access to this stock of knowledge, monetary returns are demanded by the proprietors. Less exposed to competitive pressures, intangible assets can thus be utilized to generate rent incomes (Baranes and Hake 2018Baranes, A. I. and E. R. Hake. 2018. "The Institutionalist Theory of Capital in the Modern Business Enterprise: Appropriation and Financialization". Journal of Economic Issues 52(2):430-437. https://doi.org/10.1080/00213624.2018.1469895.; Veblen 1908aVeblen, T. 1908a. "On the Nature of Capital". The Quarterly Journal of Economics 22:517-542.). However, the power to do so is not only reflected in the imputed value of these assets but also of “goodwill” (Veblen 1958Veblen, T. 1958 [1904]. The Theory of Business Enterprise. New York: Mentor. [1904]).

Crucially, when credit systems are well-developed, the relation runs in both directions. Business enterprises that attain a level of market power and differential advantage through intangible assets are likely to have easy access to credit due to their asset-base, while easy credit also facilitates the investment in or the acquisition of intangibles to enlarge their market power (Veblen 1958Veblen, T. 1958 [1904]. The Theory of Business Enterprise. New York: Mentor. [1904]). This is precisely what Baranes and Hake (2018Baranes, A. I. and E. R. Hake. 2018. "The Institutionalist Theory of Capital in the Modern Business Enterprise: Appropriation and Financialization". Journal of Economic Issues 52(2):430-437. https://doi.org/10.1080/00213624.2018.1469895.: 434; emphasis in original) describe: “[t]he ability for managers to generate returns for their shareholders depends on their ability to increase not the productive capacity of the enterprise, but the earning capacity of the enterprise – more specifically, the perceived earning capacity”.

Finally, the aims of the business enterprise (i.e. pecuniary gain) and Veblen’s “community” at large (i.e. serviceable output) usually diverge from each other but clash even stronger when business ownership and the enterprise’s operations are steered towards short-term financial gains. Here again, as credit systems grow more sophisticated, so do the opportunities to utilize their channels and means to obtain these gains (Jo and Henry 2015Jo, T.-H. and J. F. Henry. 2015. "The Business Enterprise in the Age of Money Manager Capitalism". Journal of Economic Issues 49(1):23-46. https://doi.org/10.1080/00213624.2015.1013877.).

2.2. Veblen meets 21^st century financialization

Veblen’s theoretical framework, as briefly introduced above, helps us to read some of the recent trends in the financialization of the economy. In a more structural sense, financialization can be defined “as a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production” (Krippner 2005Krippner, G. R. 2005. "The Financialization of the American Economy". Socio-Economic Review 3(2):173-208. https://doi.org/10.1093/SER/mwi008.: 174). Broken down further, it is constituted by “the increasing dominance of financial actors, markets, practices, measurements, and narratives, at various scales, resulting in a structural transformation of economies, firms (including financial institutions), states, and households” (Aalbers 2019Aalbers, M. B. 2019. "Financialization". In The International Encyclopedia of Geography: People, the Earth, Environment, and Technology (2nd ed.), edited by D. Richardson, N. Castree, M. F. Goodchild, A. Kobayashi, W. Liu and R. A. Marston. Oxford: Wiley. https://doi.org/10.1002/9781118786352.wbieg0598.pub2.: 4). In other words, financialization can be understood as a number of interdependent processes connecting several economic agents and objects, which entail transformations in their relations (Durand 2017Durand, C. 2017. Fictitious Capital: How Finance Is Appropriating Our Future. London, New York: Verso.; Lapavitsas 2013Lapavitsas, C. 2013. Profiting Without Producing. How Finance Exploits Us All. London, New York: Verso.). Strongly bound up with neoliberal restructuring policies following the collapse of the post-war Bretton Woods framework, financialization processes—such as the rising importance of the FIRE (finance, insurance and real estate) sectors, growing global debt levels and the powerful discourse about the importance of shareholder value for firms—have placed financial actors and financial logics at the heart of economic activity (Hofman and Aalbers 2019Hofman, A. and M. B. Aalbers. 2019. "A finance- and real estate-driven regime in the United Kingdom". Geoforum 100:89-100.; Hudson 2015Hudson, M. 2015. Killing the Host. How Financial Parasites and Debt Bondage Destroy the Global Economy. Dresden: ISLET.).

Corporate financialization developments can accordingly be defined as “traditionally nonfinancial firms becoming dominated by financial narratives, practices, and measurements, and increasingly partaking in practices that have been the domain of the financial sector” (Aalbers 2019Aalbers, M. B. 2019. "Financialization". In The International Encyclopedia of Geography: People, the Earth, Environment, and Technology (2nd ed.), edited by D. Richardson, N. Castree, M. F. Goodchild, A. Kobayashi, W. Liu and R. A. Marston. Oxford: Wiley. https://doi.org/10.1002/9781118786352.wbieg0598.pub2.: 3). The outcomes of these developments have been quantified in a wide range of studies but can roughly be grouped in three sets of trends: the expansion of the balance sheet, the growing reliance on intangible assets and the rise in financial payouts. It is worth discussing each of these trends in turn.

First, both the asset and liability sides of corporate balance sheets grow. On the asset side, firms grant or receive greater levels of credit (through receivables, various current assets or payable accounts), increase their holdings of cash and short-term investments (stocks or other commercial paper) or even move towards investing in long-term investments (bonds). As a result, liquid assets grow in relative importance to fixed assets, representing one of corporate financialization’s most widely noted trends (Davis 2018Davis, L. E. 2018. "Financialization, Shareholder Orientation and the Cash Holdings of US Corporations". Review of Political Economy 30(1):1-27. https://doi.org/10.1080/09538259.2018.1429147.; Tori and Onaran 2018bTori, D. and Ö. Onaran. 2018b. "Financialization, Financial Development and Investment. Evidence from European Non-Financial Corporations". Socio-Economic Review, mwy044. https://doi.org/10.1093/ser/mwy044.; Davis 2016Davis, L. E. 2016. "Identifying the “Financialization” of the Nonfinancial Corporation in the U.S. Economy: A Decomposition of Firm-Level Balance Sheets". Journal of Post Keynesian Economics 39(1):115-141. https://doi.org/10.1080/01603477.2015.1116370.; Tomaskovic-Devey, Lin, and Meyers 2015Tomaskovic-Devey, D., K.-H. Lin and N. Meyers. 2015. "Did Financialization Reduce Economic Growth?". Socio-Economic Review 13(3):525-548. https://doi.org/10.1093/ser/mwv009.; Lapavitsas and Powell 2013Lapavitsas, C. and J. Powell. 2013. "Financialisation Varied: A Comparative Analysis of Advanced Economies". Cambridge Journal of Regions, Economy and Society 6(3):359-379. https://doi.org/10.1093/cjres/rst019.; Bates, Kahle, and Stulz 2009Bates, T. W., K. M. Kahle and R. M. Stulz. 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?". The Journal of Finance 64(5):1985-2021. https://doi.org/10.1111/j.1540-6261.2009.01492.x.; Orhangazi 2008Orhangazi, Ö. 2008. "Financialisation and Capital Accumulation in the Non-Financial Corporate Sector: A Theoretical and Empirical Investigation on the US Economy: 1973-2003". Cambridge Journal of Economics 32(6):863-886. https://doi.org/10.1093/cje/ben009.; International Monetary Fund 2006International Monetary Fund 2006. World Economic Outlook April 2006. Globalization and Inflation, World Economic Outlook 2006, April. Washington, DC: International Monetary Fund.). While influential early contributions (Orhangazi 2008Orhangazi, Ö. 2008. "Financialisation and Capital Accumulation in the Non-Financial Corporate Sector: A Theoretical and Empirical Investigation on the US Economy: 1973-2003". Cambridge Journal of Economics 32(6):863-886. https://doi.org/10.1093/cje/ben009.; Krippner 2005Krippner, G. R. 2005. "The Financialization of the American Economy". Socio-Economic Review 3(2):173-208. https://doi.org/10.1093/SER/mwi008.) underscored the importance of financial incomes derived from these liquid assets for nonfinancial firms, more recent work (Rabinovich 2019Rabinovich, J. 2019. "The Financialization of the Non-financial Corporation. A Critique to the Financial Turn of Accumulation Hypothesis". Metroeconomica 70(4):738-775. https://doi.org/10.1111/meca.12251.; Fiebiger 2016Fiebiger, B. 2016. "Rethinking the Financialisation of Non-Financial Corporations: A Reappraisal of US Empirical Data". Review of Political Economy 28(3):354-379. https://doi.org/10.1080/09538259.2016.1147734.) has called this into question. Nevertheless, rising shares of liquid—though not necessarily financial assets—have been generally documented. At the same time, fixed capital shares have often fallen (Tori and Onaran 2018bTori, D. and Ö. Onaran. 2018b. "Financialization, Financial Development and Investment. Evidence from European Non-Financial Corporations". Socio-Economic Review, mwy044. https://doi.org/10.1093/ser/mwy044.; Stockhammer 2004Stockhammer, E. 2004. "Financialisation and the Slowdown of Accumulation". Cambridge Journal of Economics 28(5):719-741. https://doi.org/10.1093/cje/beh032.) although the causal relationship is still contested and might not be universally valid (Kliman and Williams 2015Kliman, A. and S. D. Williams. 2015. "Why “financialisation” Hasn’t Depressed US Productive Investment". Cambridge Journal of Economics 39(1):67-92. https://doi.org/10.1093/cje/beu033.).

On the liability side, the 1990s and early 2000s saw the corporate sector in the Global North deleveraging and decreasing its debt levels (International Monetary Fund 2006International Monetary Fund 2006. World Economic Outlook April 2006. Globalization and Inflation, World Economic Outlook 2006, April. Washington, DC: International Monetary Fund.). However, since the global financial crisis and subsequent years of unprecedented loose monetary policy (Fernandez, Bortz and Zeolla 2018Fernandez, R., P. Bortz and N. Zeolla. 2018. The Politics of Quantitative Easing. A Critical Assessment of the Harmful Impact of European Monetary Policy on Developing Countries. Amsterdam: SOMO. https://www.somo.nl/the-politics-of-quantitative-easing/.), corporate indebtedness has again been on the rise, in particular in countries of the Global South (International Monetary Fund 2019International Monetary Fund 2019. Global Financial Stability Report: Lower for Longer. Washington, DC: International Monetary Fund. https://www.imf.org/en/Publications/GFSR/Issues/2019/10/01/global-financial-stability-report-october-2019.; Kaltenbrunner 2018Kaltenbrunner, A. 2018. "The Financialisation of Non-Financial Corporations in Brazil". Pp. 53-71 in Debt Vulnerabilities in Developing Countries: A New Debt Trap? Volume I: Regional and Thematic Analyses, edited by UNCTAD. New York, Geneva: United Nations. https://unctad.org/en/PublicationsLibrary/gdsmdp2017d4v1_en.pdf.; Karwowski and Stockhammer 2017Karwowski, E. and E. Stockhammer. 2017. "Financialisation in Emerging Economies: A Systematic Overview and Comparison with Anglo-Saxon Economies". Economic and Political Studies 5(1):60-86. https://doi.org/10.1080/20954816.2016.1274520.; Durand 2017Durand, C. 2017. Fictitious Capital: How Finance Is Appropriating Our Future. London, New York: Verso.; Davis 2016Davis, L. E. 2016. "Identifying the “Financialization” of the Nonfinancial Corporation in the U.S. Economy: A Decomposition of Firm-Level Balance Sheets". Journal of Post Keynesian Economics 39(1):115-141. https://doi.org/10.1080/01603477.2015.1116370.). Large firms in the Global North have also taken on more debt, mostly to sustain high financial payouts to shareholders without having to repatriate profits stashed away in offshore accounts (Fernandez and Hendrikse 2015Fernandez, R. and R. Hendrikse. 2015. Rich Corporations, Poor Societies: The Financialisation of Apple. Amsterdam: SOMO. https://www.somo.nl/wp-content/uploads/2015/10/Rich-corporations-poor-societies.pdf.; Lazonick 2013Lazonick, W. 2013. "The Financialization of the U.S. Corporation: What Has Been Lost, and How It Can Be Regained". Seattle University Law Review 36(2):857-909.). Hence, we find rising debt levels for different reasons.

Second, intangible assets have become more relevant to many—and especially large—firms’ business models, signifying a shift in firms’ capital stock from fixed capital to intangible capital. The obvious question then arises how firms generate their returns (Crotty 2003Crotty, J. 2003. "The Neoliberal Paradox: The Impact of Destructive Product Market Competition and Impatient Finance on Nonfinancial Corporations in the Neoliberal Era". Review of Radical Political Economics 35(3):271-279. https://doi.org/10.1177/0486613403255533.). Part of the answer might be found in intangible assets including intellectual property rights (IPRs), such as patents and brands, market rights or customer relations which constrain competition and facilitate monopolization (Serfati 2008Serfati, C. 2008. "Financial Dimensions of Transnational Corporations, Global Value Chain and Technological Innovation". Journal of Innovation Economics 2(2):35-61. https://doi.org/10.3917/jie.002.0035.; Zeller 2007Zeller, Ch. 2007. "From the Gene to the Globe: Extracting Rents Based on Intellectual Property Monopolies". Review of International Political Economy 15(1):86-115. https://doi.org/10.1080/09692290701751316.). These enable firms to exert more power over value chains and hence capture greater shares of the total value generated, as demonstrated by Orhangazi (2018Orhangazi, Ö. 2018. "The Role of Intangible Assets in Explaining the Investment–Profit Puzzle". Cambridge Journal of Economics 43(5):1251-1286. https://doi.org/10.1093/cje/bey046.) and Durand and Milberg (2020Durand, C. and W. Milberg. 2020. "Intellectual monopoly in global value chains". Review of International Political Economy 27(2):404-429.). As such, the massive growth of intangible assets is very much related to one of the longest-standing debates in political economy between “earned” and “unearned” income, i.e. between profit and rent (Serfati 2011Serfati, C. 2011. "Transnational Corporations as Financial Groups". Work Organisation, Labour & Globalisation 5(1):10-38. https://doi.org/10.13169/workorgalaboglob.5.1.0010.; 2008Serfati, C. 2008. "Financial Dimensions of Transnational Corporations, Global Value Chain and Technological Innovation". Journal of Innovation Economics 2(2):35-61. https://doi.org/10.3917/jie.002.0035.; Zeller 2007Zeller, Ch. 2007. "From the Gene to the Globe: Extracting Rents Based on Intellectual Property Monopolies". Review of International Political Economy 15(1):86-115. https://doi.org/10.1080/09692290701751316.). Such themes have recently resurfaced in both academic and policy circles (Christophers 2019Christophers, B. 2019. "The Rentierization of the United Kingdom Economy". Environment and Planning A: Economy and Space. September, 0308518X1987300. https://doi.org/10.1177/0308518X19873007.; UNCTAD 2018UNCTAD. 2018. Corporate Rent-Seeking, Market Power and Inequality: Time for a Multilateral Trust Buster?, UNCTAD Policy Brief 66.; 2017UNCTAD. 2017. "Market Power and Inequality: The Revenge of the Rentiers". Pp. 119-145 in Trade and Development Report 2017. New York, Geneva: UN. https://doi.org/10.18356/584caae1-en.). Another important type of intangible assets is goodwill, which is an “accounting artefact” (Leaver 2018Leaver, A. 2018. "Intangible Concerns: Goodwill and the Risk of pro-Cyclicality in Corporate America". SPERI. 18 June 2018. http://speri.dept.shef.ac.uk/2018/06/19/intangible-concerns-goodwill-and-the-risk-of-pro-cyclicality-in-corporate-america/.) on a firm’s balance sheet reflecting the difference between what an acquiring firm pays for another firm on top of the latter’s book price. As capitalized earnings capacity purely generated by financial markets, goodwill is a representation of what a firm is considered to yield in the future according to its assessment in financial markets, in accordance with “fair value” accounting principles (Serfati 2011Serfati, C. 2011. "Transnational Corporations as Financial Groups". Work Organisation, Labour & Globalisation 5(1):10-38. https://doi.org/10.13169/workorgalaboglob.5.1.0010.; Perry and Nölke 2006Perry, J. and A. Nölke. 2006. "The Political Economy of International Accounting Standards". Review of International Political Economy 13(4):559-586. https://doi.org/10.1080/09692290600839790.). By inflating the balance sheet further, the future prospects impact upon a firm’s strategy by lowering key financial indicators of performance (Andersson, Haslam, and Lee 2006Andersson, T., C. Haslam and E. Lee. 2006. "Financialized Accounts: Restructuring and Return on Capital Employed in the S&P 500". Accounting Forum 30(1):21-41. https://doi.org/10.1016/j.accfor.2006.01.001.).

Third, firms have channelled a growing share of their cash flow—or even newly acquired debt—to shareholders and corporate executives in the form of dividends or share operations (together known as payouts), in line with the shift towards shareholder value orientation from the 1980s onwards (Ireland 2009Ireland, P. 2009. "Financialization and Corporate Governance". Northern Ireland Legal Quarterly 60(1):1-34.; Froud et al. 2000Froud, J., C. Haslam, S. Johal and K. Williams. 2000. "Shareholder Value and Financialization: Consultancy Promises, Management Moves". Economy and Society 29(1):80-110. https://doi.org/10.1080/030851400360578.). Through dividends, firms hand cash directly to shareholders; through share operations such as share repurchases, shareholders and corporate executives potentially benefit at the same time. In the case of share repurchases, active shareholders receive higher dividends per share due to the reduced number of outstanding shares while exiting shareholders realize capital gains by selling their shares at boosted prices. In addition, corporate executives who receive performance-related pay or stock options also benefit from increased prices (Froud et al. 2006Froud, J., S. Johal, A. Leaver and K. Williams. 2006. Financialization and Strategy: Narrative and Numbers. London, New York: Routledge.). The staggering extent of these practices has been well documented for US firms in particular (Lazonick and O’Sullivan 2000Lazonick, W. and M. O’Sullivan. 2000. "Maximizing Shareholder Value: A New Ideology for Corporate Governance". Economy and Society 29(1):13-35. https://doi.org/10.1080/030851400360541.). As corollaries, firms that engage in large-scale financial payouts are observed to neglect crucial long-term goals such as investment in fixed capital, research and development (R&D) or employment relations (Lazonick 2013Lazonick, W. 2013. "The Financialization of the U.S. Corporation: What Has Been Lost, and How It Can Be Regained". Seattle University Law Review 36(2):857-909.; 2014Lazonick, W. 2014. "Profits Without Prosperity". Harvard Business Review. 1 September 2014. https://hbr.org/2014/09/profits-without-prosperity.).

By combining Veblen’s theoretical framework with the trends of corporate financialization, key relations become more visible. The noted trend towards intangible assets helps to “lock out” society from its products, and keeps competition at bay. The contribution of intangible assets to a firm’s earning capacity can then be capitalized on the balance sheet, in the form of clear elements such as patents or more ambiguous categories such as goodwill. To some extent, replacing tangible, fixed assets with intangibles can free up financial resources which can then either be hoarded as financial resources (e.g. to engage in further expansion through mergers and acquisitions (M&As), invested elsewhere, or—and this appears to have become the preferred mode—distributed to shareholders and corporate executives.

3. EMPIRICAL ANALYSIS Top

Having developed a basic understanding of corporate financialization processes, this section presents our data and methods which we use to evaluate whether we find instances of it in the pharmaceutical industry.

3.1. Data and methods

In order to complement the existing literature, we offer a multi-faceted view on Big Pharma’s past financial dynamics. In particular, we have delved into the annual financial accounts of 27 of the largest pharmaceuticals and biotech corporations worldwide, based on 2018 market capitalization, for the years 2000 to 2018 (Table 1). Initially we selected the 30 largest ones but needed to drop three (Abbvie, China Resources Pharmaceutical Group and Otsuka Holdings), as they have only existed in their current form since 2010 or later. Furthermore, we expand the geographical scope of studies into Big Pharma, which tend to focus on the US and, to a lesser extent, the UK (Baranes 2017Baranes, A. I. 2017. "Financialization in the American Pharmaceutical Industry: A Veblenian Approach". Journal of Economic Issues 51(2):351-358. https://doi.org/10.1080/00213624.2017.1320895.; Lazonick and Tulum 2011Lazonick, W. and Ö. Tulum. 2011. "US Biopharmaceutical Finance and the Sustainability of the Biotech Business Model". Research Policy 40(9):1170-1187. https://doi.org/10.1016/j.respol.2011.05.021.; Andersson et al. 2010Andersson, T., P. Gleadle, C. Haslam and N. Tsitsianis. 2010. "Bio-Pharma: A Financialized Business Model". Critical Perspectives on Accounting 21(7):631-641. https://doi.org/10.1016/j.cpa.2010.06.006.; but see Montalban and Sakinç 2013Montalban, M. and M. E. Sakinç. 2013. "Financialization and Productive Models in the Pharmaceutical Industry". Industrial and Corporate Change 22(4):981-1030. https://doi.org/10.1093/icc/dtt023. for a larger sample). Still, US corporations (10) dominate the dataset and are only equalled in number by all European—EU and non-EU—corporations combined (10). Beyond these two blocs, only one country (Japan) is represented in the dataset with more than one corporation (3).

Table 1. List of corporations [Descargar tamaño completo]

We contribute to the existing literature by expanding the list of examined indicators and provide an update on the years following the global financial crisis (GFC). Selected data (Table 2) were obtained from the Worldscope database operated by Refinitiv, which is used widely in the literature (e.g. Tori and Onaran 2018aTori, D. and Ö. Onaran. 2018a. "The Effects of Financialization on Investment: Evidence from Firm-Level Data for the UK". Cambridge Journal of Economics 42(5):1393-1416. https://doi.org/10.1093/cje/bex085.; 2018bTori, D. and Ö. Onaran. 2018b. "Financialization, Financial Development and Investment. Evidence from European Non-Financial Corporations". Socio-Economic Review, mwy044. https://doi.org/10.1093/ser/mwy044.). Where possible, individual missing values for some variables were retrieved from corporations’ annual reports. However, for total intangible assets and, more importantly, goodwill as a separate variable, some missing values remained (Table 2). In addition, the standardized data[2] contained values of zeros for several variables. While for some variables (e.g. common dividends and share operations), actual values of zero are perfectly possible and logical, for others (e.g. short- and long-term debt) they are probably inaccurate. Selective cross-checking with published annual reports revealed that in such cases, the reports lacked more granular data categories, thus explaining the zeros in the standardized Worldscope database. We are aware of the resulting data limitations but do not consider them significant enough to considerably limit its explorative findings. Unless stated otherwise, all calculations included zeros but excluded missing values. It should be noted that because our goal was to picture the sector as a whole, both the nominal values as well as the ratios were calculated by summing up all values rather than calculating mean or median values.

Table 2. List of variables [Descargar tamaño completo]

3.2. Results

We constructed indicators which allow us to validate the three financialization trends identified in the literature. First, we examine financial reserves and liabilities to see how strongly the balance sheet has grown and what broad fragilities might exist as a consequence. Second, we consider financial payouts (i.e. dividends and share operations) to understand the level to which shareholders have been benefitting from Big Pharma’s current financialized business model. Third, we track the rising importance of intangible assets in general and goodwill in particular to assess potential shifts towards a financialized business model.

Expanding the balance sheet

Both sides of the balance sheets have grown over recent years for the 27 corporations as a whole. Cash and short-term investments, representing the most liquid of corporate assets, have increased nominally by more than 160 percent from USD83 billion to 219 billion during the years 2000 to 2018 (Figure 1). When measured as share of net fixed capital, we see a general rise from 0.87 to 1.09 in the same period, peaking as high as 1.29 in 2014 (Figure 2).

However, these aggregate numbers conceal important differences. If we compare US- and European corporations (Table 1)[3], only the former exhibit a strongly rising ratio of cash and short-term investments as share of net fixed capital and mainly since 2009. European corporations, on the other hand, have maintained a largely stable ratio (Figure 2). The fact that the aggregate numbers show an upward trend merely indicates the heavy weight of the US corporations’ financial reserves. In nominal terms, these ten corporations have expanded their cash and short-term investment holdings by some 380 percent, from USD28 billion in 2000 to 137 billion in 2018, while their European counterparts only recorded an increase of 53 percent from USD42 billion to 64 billion in the same period. Further differences can be made visible if the corporations are subset by size into three groups of nine each (Table 1). Over the course of the period studied, both the top and bottom nine corporations have not grown their reserves, unlike the middle ones (Figure 3).

Figure 1. Cash and short-term investments for all 27 corporations combined [Descargar tamaño completo]

Figura 2. Cash and short-term investments as share of net fixed capital for all (n = 27), US (n = 10) and European (n = 10) corporations [Descargar tamaño completo]

Figura 3. Cash and short-term investments as share of net fixed capital for three groups of nine corporations by size [Descargar tamaño completo]

These results suggest a shift towards a business model less rooted in expanding physically productive capacity for some (and especially US) corporations, providing support to scholarly claims that changes in corporate operating modes entail sluggish fixed investment dynamics. Generalizations, however, need to be made cautiously. Our results for corporations’ liquid asset ratios are in line with trends known from other sectors such as Big Tech (Bryan, Rafferty, and Wigan 2017Bryan, D., M. Rafferty and D. Wigan. 2017. "Capital Unchained: Finance, Intangible Assets and the Double Life of Capital in the Offshore World". Review of International Political Economy 24(1):56-86. https://doi.org/10.1080/09692290.2016.1262446.; Fernandez and Hendrikse 2015Fernandez, R. and R. Hendrikse. 2015. Rich Corporations, Poor Societies: The Financialisation of Apple. Amsterdam: SOMO. https://www.somo.nl/wp-content/uploads/2015/10/Rich-corporations-poor-societies.pdf.) and—although on a much lower level—machinery (Orhangazi 2018Orhangazi, Ö. 2018. "The Role of Intangible Assets in Explaining the Investment–Profit Puzzle". Cambridge Journal of Economics 43(5):1251-1286. https://doi.org/10.1093/cje/bey046.). It should be noted, however, that these studies focus exclusively on the US.

Beyond financial reserves, the 27 pharmaceutical corporations have recorded surging liabilities. These have escalated by more than 750 percent from USD61 billion to 518 billion (Figure 4). Most of this growth can be attributed to long-term debt. The recent levels are thus in line with rising corporate debt burdens globally in the wake of quantitative easing policies. Such levels would not have to be a source of concern by themselves if it were not for the rising debt burden in relation to corporate performance. However, we see a sharp hike here with debt growing from 20 percent of sales to 72 percent between 2000 and 2018 (Figure 5). Generally, the decade following the GFC has seen Big Pharma progressively drifting towards higher levels of indebtedness. By and large, this trend holds across groups of corporations. US and European corporations only show the slightest differences in their ratio of total debt as share of net sales. At the same time, the largest nine corporations have incurred less debt than the corporations below them (Figura 6).

Figure 4. Short- and long-term debt for all 27 corporations combined [Descargar tamaño completo]

Figure 5. Short- and long-term debt as share of net sales for all (n = 27), US (n = 10) and European (n = 10) corporations [Descargar tamaño completo]

Figure 6. Short- and long-term debt as share of net sales for three groups of nine corporations by size [Descargar tamaño completo]

Offloading profits to shareholders

Big Pharma has had more funds at its disposal over time, either through financial reserves, or newly-incurred debt. While these funds could have been used to primarily expand both physically and intellectually productive capacity, what we also see is concomitant growth in financial payouts. Through both dividends and so-called “share operations” (which include purchases, retirements, conversions and redemptions of shared and preferred stock), pharmaceutical corporations have channelled large amounts of funds out of corporate coffers. In 2000, USD30 billion were paid out to shareholders through dividends and share operations. By 2018, however, this had risen to USD146 billion (Figure 7). To be sure, there has been some fluctuation but this can almost exclusively be attributed to the waves of share operations that most corporations do not conduct annually. In addition, it took just four years for payouts to regrow to pre-GFC levels. Following the crisis, there has been a steady rise.

To contextualize the level of payouts, we examine them against capital expenditures (representing physically productive capacity) and R&D expenses (representing intellectually productive capacity). What we see is that there has been a general upward development, peaking at a ratio of 0.94 in 2018 (Figure 8). Again, up and down trends exist but, generally, the post-crisis decade has seen the pharmaceutical corporations conduct payouts at a higher level than before. Big Pharma has used an increasing portion of its financial resources to line the pockets of shareholders rather than increasing its investments into productive capacity. Especially for share operations, the growing debt we noted above is likely to have played some part in benefitting shareholders.

Throughout this period US corporations have exceeded the payout levels of their European counterparts, but the movement has largely occurred in parallel. Importantly, we see that post-GFC payout levels are even higher than before the crisis (Figure 8). European pharmaceutical corporations have been especially generous in terms of dividends. Starting from a ratio of 0.31 in 2000, they paid out a share of 0.49 in 2018 to their shareholders. Generally, dividends have increased in tandem for the top and middle corporations and stagnated for those at the bottom of the cohort (Figure 9). The other channel, share operations, has remained relatively stable over time across sizes.

Figure 7. Dividends and share operations for all 27 corporations combined [Descargar tamaño completo]

Figure 8. Dividends and share operations as share of capital expenditures and R&D expenses for all (n = 27), US (n = 10) and European (n = 10) corporations [Descargar tamaño completo]

Figure 9. Dividends and share operations as share of capital expenditures and R&D expenses for three groups of nine corporations by size [Descargar tamaño completo]

Monetizing market power: the rise of intangibles

While payouts have grown in relation to productive investments, the latter have not fallen as could be expected from much of the literature. Instead, they have fallen between 2006 and 2011 for both US and European corporations and have only recently slightly surpassed their pre-GFC levels (Figure 10). This suggests that a significant part of the incurred debt has been used to retire equity and pay shareholders rather than to invest in productive capacity. What has this meant for Big Pharma’s business model?

Figure 10. Capital expenditures and R&D expenses as share of net sales for all (n = 27), US (n = 10) and European (n = 10) corporations [Descargar tamaño completo]

Falling, stagnant or only moderately rising investment in physical and intellectual productive capacity has been linked to the concomitant growth of intangible assets across industries (Orhangazi 2018Orhangazi, Ö. 2018. "The Role of Intangible Assets in Explaining the Investment–Profit Puzzle". Cambridge Journal of Economics 43(5):1251-1286. https://doi.org/10.1093/cje/bey046.). “Intangible assets” is an ambiguous residual category that may represent anything from codified and uncodified market power (i.e. brands, patents, licenses or customer relations) to the differences between accounted assets and share prices (i.e. goodwill). As detailed data on the distinct elements of intangible assets are hard to obtain even for large corporations like those analyzed here, the best approximation is arguably the balance sheet item of total intangible assets. While coverage is incomplete (Table 2), the existing data suggest tremendous growth. With 23 corporations reporting total intangible assets of USD48 billion in 2000, this number has grown to USD857 billion for all 27 corporations in 2018 (Figure 11). Some of this growth can presumably be explained by better reporting and data coverage, but there is no reason to believe it could explain most, let alone all, of it. Despite these limits, the data highlights the prominent role of goodwill in particular. In 2000, 18 corporations reported goodwill of USD18 billion; in 2018, 25 of them reported USD438 billion. Bearing in mind the incomplete data, the actual share of goodwill of total intangibles is likely higher than 50 percent. On the whole, the rising share of intangible assets to the whole corporate asset base signifies changes in Big Pharma’s business model. While 23 corporations’ intangible assets only stood at a ratio of 0.13 to total assets, they have skyrocketed to a ratio of 0.51 for all 27 corporations (Figure 12). In sum, Big Pharma’s asset base is now dominated by intangible assets and goodwill.

Figure 11. Total intangible assets and goodwill for all 27 corporations combined [Descargar tamaño completo]

This assessment does not change if the corporations are grouped by region (Figure 12) or size (Figure 13). The fact that US corporations report a lower ratio of intangible assets, including goodwill, than their European peers must be considered in the light of their higher shares of cash and short-term investments presumably diluting the intangible ratio (Figure 2).

Figure 12. Total intangible assets as share of total assets for all (2000: n = 23; 2001-2002: n = 25; 2003-2012: n = 26; 2013-2018: n = 27), US (2000: n = 6; 2001-2002: n = 8; 2003-2012: n = 9; 2013-2018: n = 10), and European (n = 10) corporations [Descargar tamaño completo]

Figure 13. Total intangible assets as share of total assets for three groups of nine corporations by size (top: n = 9; middle: n = 8 (2000), otherwise n = 9; bottom n = 6 (2000), n = 7 (2001-2002), n = 8 (2003-2012), n = 9 (2013-2018)) [Descargar tamaño completo]

The heavier weight of intangible assets on corporate balance sheets has important ramifications. Since corporate performance is often measured in terms of its total return on assets (ROA), an expanded asset base runs the risk of driving down profitability. We find rough evidence for such trends in our data: the ROA ratio of all corporations has fallen from 0.16 in 2000 to 0.07 in 2018, dipping as low as 0.04 in 2017 (Figure 14). However, it also becomes clear that the ROA ratio has not fallen at the same rate as the intangible asset ratio has risen. Possible reasons for this could include the growth of net income and the substitution of fixed assets by intangible assets, thus slowing the expansion of total assets and the deterioration of the ROA ratio.

Figure 14. Net income as share of total assets for all (n = 27), US (n = 10) and European (n = 10) corporations [Descargar tamaño completo]

4. DISCUSSION Top

Having investigated Big Pharma’s financial accounts in relation to three key dimensions of corporate financialization, we can now relate our findings to the existing literature on the pharmaceutical sector. Fundamentally, this sector is comprised of an unbalanced market structure in which a small number of large pharmaceutical corporations dominate the value chain (Baranes 2016Baranes, A. I. 2016. An Original Institutionalist Approach to the Structure, Conduct, and Performance of the Pharmaceutical Industry: The Importance of Intangible Assets. Kansas City: University of Missouri. PhD Thesis.). This enables them to increasingly generate rent incomes at the expense of firms located at the bottom of the value chain by utilizing their market power, as we demonstrated, by providing evidence of a surging intangible asset ratio among Big Pharma firms. These rent incomes can then be passed on in growing measure to shareholders, the latter of which are dominated by institutional investors (Montalban and Sakinç 2013Montalban, M. and M. E. Sakinç. 2013. "Financialization and Productive Models in the Pharmaceutical Industry". Industrial and Corporate Change 22(4):981-1030. https://doi.org/10.1093/icc/dtt023.). As a result, an overabundance of financial resources at the top coexists with a shortage at the bottom (i.e. small- and medium-sized biotech firms). At the bottom of the value chain, public investments, public guarantees and publicly funded research in universities dominate R&D (Lazonick and Tulum 2011Lazonick, W. and Ö. Tulum. 2011. "US Biopharmaceutical Finance and the Sustainability of the Biotech Business Model". Research Policy 40(9):1170-1187. https://doi.org/10.1016/j.respol.2011.05.021.). This collective and incremental knowledge production in the foundational stage is then enclosed, commodified and valorized in later stages of the value chain through IPRs by Big Pharma, as Zeller (2007Zeller, Ch. 2007. "From the Gene to the Globe: Extracting Rents Based on Intellectual Property Monopolies". Review of International Political Economy 15(1):86-115. https://doi.org/10.1080/09692290701751316.: 102) has observed:

“The markets created by the extension of the intellectual property monopolies connect the academic research institutes, the biotech companies often set up by university researchers, and the large pharmaceutical companies. The firms pursue different strategies to extract rents. In principle, monopolistic property rights can be established along the whole value-added chain. This market structure is important for the type of financialization that evolved in this sector.”

The unequal distribution of market power in the pharmaceutical value chain, whereby collectively produced and publicly financed fundamental knowledge is monopolized and acquired by corporations, with the ability to generate rent incomes, is a key characteristic of the contemporary pharmaceutical sector (Baranes 2017Baranes, A. I. 2017. "Financialization in the American Pharmaceutical Industry: A Veblenian Approach". Journal of Economic Issues 51(2):351-358. https://doi.org/10.1080/00213624.2017.1320895.). By comparing the scientific co-publication and patent co-ownership of Roche, Pfizer and Novartis, Rikap (2019Rikap, C. 2019. "Asymmetric Power of the Core: Technological Cooperation and Technological Competition in the Transnational Innovation Networks of Big Pharma". Review of International Political Economy 26(5):987-1021. https://doi.org/10.1080/09692290.2019.1620309.: 1006–7) identified “a subordination of the universities, public research organizations and start-ups that have a fundamental role in the former, but an almost negligible participation in the latter”. In contrast to the fundamental R&D carried out by actors at the bottom of the value chain, the pharmaceutical corporations’ internal R&D mainly covers clinical testing and regulatory approval (Baranes 2016Baranes, A. I. 2016. An Original Institutionalist Approach to the Structure, Conduct, and Performance of the Pharmaceutical Industry: The Importance of Intangible Assets. Kansas City: University of Missouri. PhD Thesis.: 201; Froud et al. 2006Froud, J., S. Johal, A. Leaver and K. Williams. 2006. Financialization and Strategy: Narrative and Numbers. London, New York: Routledge.: 173). Essentially, Big Pharma operates akin to private equity funds with special abilities to acquire, develop, market and extract value out of enclosed knowledge, as Baranes (2016Baranes, A. I. 2016. An Original Institutionalist Approach to the Structure, Conduct, and Performance of the Pharmaceutical Industry: The Importance of Intangible Assets. Kansas City: University of Missouri. PhD Thesis.) argued for the case of Pfizer. The unique abilities of large pharmaceutical corporations to transform ideas into monopolized commodities lie at the heart of their rent-seeking and financialization strategies.

Big Pharma corporations moreover compete in the acquisition of monopolized knowledge through the commodification of IPRs. Firms that possess IPRs—or merely exhibit the potential to create them—therefore become commodities on a marketplace. The value of these firms in the market for M&As is related to their portfolio of IPRs. As new potentially successful drugs are scarce and there is a constant pressure to replace patents that are approaching the end of their cycle, the price of firms increases with the stages of pharmaceutical development. In addition to the demand for IPRs, Big Pharma is equipped with financial reserves and access to easy credit, thereby driving up the price of firms in their competition to monopolize innovations. This intensifies risks in the sector, as future success is a “known unknown”. Yet Big Pharma depends on future rent income from IPRs, increasing the prices of firms at different stages of development. Or, in the words of Andersson et al. (2010Andersson, T., P. Gleadle, C. Haslam and N. Tsitsianis. 2010. "Bio-Pharma: A Financialized Business Model". Critical Perspectives on Accounting 21(7):631-641. https://doi.org/10.1016/j.cpa.2010.06.006.: 362):

“In this financialized business model, the investor is not participating in a marathon but instead, competing in a relay where handing the baton on to the next investor secures a (possible) realised gain on invested equity funds. Bio-pharma investment is a speculative bet on scientific discoveries and is similar, in this respect to oil, gas and mineral exploration where Federal Drug Administration (FDA) regulatory approval is like striking oil or finding the seam.”

The Veblenian theory of the firm resonates in fundamental ways with these empirical findings. The Veblenian firm’s bifurcation according to the logic of industry and business is central to understanding the financialization processes in the pharmaceutical sector. As Big Pharma has begun to operate increasingly like a private equity fund, the business logic is clearly in the driving seat of industry. The subordination of industry by business means that the economic triage—that is, the decision about what is allowed to proceed from the stage of concepts and fundamental research to be developed into marketable products—has come to be determined by a limited set of financial metrics.

The examination of 27 of the world’s largest pharmaceutical firms displays how a combination of ele­ments produced a particular demotion of industry by business, although the precise causal channels cannot be determined without in-depth study of management considerations (Froud et al. 2006Froud, J., S. Johal, A. Leaver and K. Williams. 2006. Financialization and Strategy: Narrative and Numbers. London, New York: Routledge.). Growing financial reserves and mounting debt provided fuel for M&A cycles while investments in productive capacity have not kept pace. Compounded by the pressure of expiring patents, these developments led to a sector-wide drive towards acquiring ‘blockbuster’ biotech firms which themselves became desirable commodities. The competition for the assets of such firms, big and small, has propelled prices upward and produced a large goodwill bubble in the sector.

As described above, goodwill reflects the premium payed in an M&A process between corporations and is an intangible asset, formally justified by potential future income that the underlying asset may generate. If this income is not generated, the value of the goodwill needs to be adjusted. A downward adjustment of goodwill is recorded as a loss in the income statement (i.e. a loss in the value of the assets of the firm). This means that the growing premium that corporations pay for the acquisition of others results in direct pressures to generate higher profit margins. Goodwill becomes a self-fulfilling prophecy: its outlook on potential future income shapes the actual business model (Andersson, Haslam, and Lee 2006Andersson, T., C. Haslam and E. Lee. 2006. "Financialized Accounts: Restructuring and Return on Capital Employed in the S&P 500". Accounting Forum 30(1):21-41. https://doi.org/10.1016/j.accfor.2006.01.001.). Large M&As during the 1990s and 2000s, as documented by Montalban and Sakinç (2013Montalban, M. and M. E. Sakinç. 2013. "Financialization and Productive Models in the Pharmaceutical Industry". Industrial and Corporate Change 22(4):981-1030. https://doi.org/10.1093/icc/dtt023.: 1010) have thus left their imprint on the balance sheets of Big Pharma. The ensuing drive to maintain stable corporate performance metrics might thus entail changes in the productive model (such as outsourcing) as well as higher charges for consumers.

It is important to understand the corporations’ predicament here: while growing intangibles, including goodwill, have the potential to adversely affect general profitability, corporations might hesitate to write them off. This is because writing off intangible assets would need to be balanced by writing off liabilities on the other side of the corporate balance sheet. Since debt cannot be written off, the burden would fall on equity, meaning retained earnings would be reduced. These earnings, however, are crucial to justify payouts, and reducing them would hinder corporations’ shareholder value policies. As a consequence, potentially disruptive volumes of intangible assets might be kept on the books to protect the benefits of shareholders.

Aimed at taking advantage of contextual monetary opportunities, this business logic is fundamentally unstable and severely undermines the logic of industry. This instability revolves around the levels of corporate debt that were not used productively but for payouts to shareholders and for excessive premiums in the acquisition of firms instead.

As the world stopped spinning in March 2020, when the Covid-19 pandemic found its way into financial markets and immobilized the daily life of billions of people around the planet, the underlying vulnerabilities of the model of corporate financialization have become increasingly evident. After a decade of cheap credit combined with high payouts and lower levels of investment, firms struggle to repay their debt. The subordination of industry by business has led to the primacy of short-term financial engineering over long-term stability, hollowing out the physical asset base of corporations in favour of intangible assets whose viability is jeopardized in times of receding market liquidity.

5. CONCLUSION Top

In this article, we have employed a Veblenian framework to analyze three dimensions of corporate financialization that provide a clearer assessment of the level of financialization in firms and sectors of the economy than existing analyses which pertain to merely one dimension. These three dimensions include the expansion of the balance sheet, the growing levels of financial payouts and the rising importance of intangible assets.

We examined these trends against the financial accounts of 27 of the largest pharmaceutical corporations, which enabled a new scale and scope of comparative analysis (e.g. US versus European firm dynamics). We note that some Big Pharma corporations have grown their balance sheets by turning towards higher shares of liquid assets and, more recently, significantly higher shares of debt. However, the trend towards liquid assets, and cash in particular, is much more pronounced for US corporations, which likely underscores the importance of tax avoidance on unrepatriated profits. In other ways, Big Pharma corporations from the US and from Europe exhibit similar dynamics, especially in terms of their shift from a business model focused on productive capacity (reflected by fixed capital and research and development (R&D)) to one focused on intangible assets (reflected by patents, brands and in particular goodwill). Here, intangible assets both reflect established patterns of market power and the capacity to extract rent incomes as well as the capitalized anticipated capacity to do so. Against this capacity, Big Pharma can then borrow to gather the financial resources that are needed to acquire new monopolizable knowledge or increase financial payouts to shareholders. The latter have increased drastically during the past two decades, in ways which erode Big Pharma’s funds and profitability metrics. Furthermore, more money is increasingly spent on shareholder enrichment relative to that which is invested in the development of pharmaceuticals, as seen by a deteriorating ratio of payouts to capital expenditures and R&D expenses. In its current state, access to debt strongly facilitates this business model.

In the pharmaceutical sector, revenue crucially depends on the acquisition of knowledge which can be monopolized in the form of intellectual property rights (IPRs), where the holder can demand rent payments for its use. While an important share of this knowledge is primarily generated outside of Big Pharma in the realm of publicly funded research and related operations, the corporations nevertheless act as conduits to acquire, enclose and valorize knowledge for shareholder gain. The enhanced market power of Big Pharma is reflected in the rise of intangible assets on the balance sheet of firms, both in general and in specific terms (e.g. goodwill).

This rentier aspect is related to the state-capture machinery of the pharmaceutical sector (UNCTAD 2017UNCTAD. 2017. "Market Power and Inequality: The Revenge of the Rentiers". Pp. 119-145 in Trade and Development Report 2017. New York, Geneva: UN. https://doi.org/10.18356/584caae1-en.). It reflects the structural power of Big Pharma over decision-making in the largest economies. Public institutions depend on pharmaceutical firms to guarantee access to medicine, while pharmaceutical corporations depend on state institutions to approve medicine and allocate public financial resources to fundamental research. This mutual dependency, combined with relatively high public expenditure on the purchase of medicine—often comparable to other major state expenses such as defence—has resulted in excessive influence on state-run bodies that regulate the market, approve medicine and allocate public funds for fundamental research. The exceptional degree of structural power is a vital political economic feature we need to consider if we are to assess the modern-day importance of the Veblenian understanding of privatized social knowledge and how it propels corporate financialization.

Our paper not only contributes to the literature on Big Pharma, but also to the debate on how to study corporate financialization. We have proposed a Veblenian analytical framework that allows investigations into a range of sectors and industries. Rather than focusing on one key measure of financialization, we have presented an integrated analysis of three main indicators of corporate financialization: the expansion of the balance sheet, the growing reliance on intangible assets and the increasing use of corporate funds for financial payouts. This framework allows future studies to be more balanced and conclusive regarding not only the extent but also the nature of corporate financialization. Or, in other words, it enables us to lift the lid of the black box by disentangling how various elements of financialization do (not) co-evolve over time, throughout and between industries, and between countries or global regions. Accordingly, the framework presented here suggests opportunities for sectoral as well as cross-sectoral and comparative analyses of corporate financialization across a broader geography.

NOTES Top

REFERENCESTop

ABOUT THE AUTHORSTop