Drug company executives faced tough questions from Congress on Tuesday as they attempted to explain why, thanks to high drug prices, per capita spending on pharmaceuticals in the United States is double the average of other advanced countries. For decades, American drug makers have justified these high prices by asserting that the higher profits they generate fund research that accelerates the development of new medicines. Our data shows, however, that these companies spend every penny of their profits on distributions to shareholders in the forms of cash dividends and stock buybacks.
Because the greater part of management compensation is linked to stock price, the prime beneficiaries of this abuse of corporate profits are the executives who claim that high drug prices redound to the common good. At the same time, drug giants such as Merck and Pfizer seem to have become focused more on buying companies with successful new drugs rather than developing their own.
Congress has been raising alarms over drug prices for years. In 1985, Representative Henry Waxman, a California Democrat who was chairman of the House health subcommittee, accused the pharmaceutical industry of “gouging the American public,” driven by “greed on a massive scale.” But the escalation of drug prices has only gotten worse, as documented in various Senate investigations.
Despite their claims, the big American drug companies have not been using profits from high prices to ramp up investment in drug development. Our research shows that for 2008 through 2017, 17 pharmaceutical companies in the S. & P. 500 distributed just over 100 percent of their combined profits to shareholders, $300 billion as buybacks and $290 billion as dividends. These distributions were 12 percent greater than what these companies spent on research and development.
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