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. 2009) with subsequent reviews of the literature such as Van der Zwan’s (2014) 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 (2019) 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 2019: 2). What is more, the sector has a track record as a harbinger for financialized corporate strategy (Andersson et al. 2010; Froud et al. 2006).

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.

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 2018; Baranes 2017; 2016; Jo and Henry 2015). 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.

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.

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 2016). 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 2013). 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 2011). 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 (2007: 102) has observed:

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 2017). By comparing the scientific co-publication and patent co-ownership of Roche, Pfizer and Novartis, Rikap (2019: 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 2016: 201; Froud et al. 2006: 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 (2016) 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. (2010: 362):

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. 2006). 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 2006). Large M&As during the 1990s and 2000s, as documented by Montalban and Sakinç (2013: 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.

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 2017). 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.