Restructuring and innovation in pharmaceuticals and biotechs: The impact of financialisation

In this paper we explore whether a financialisation perspective can provide a more empirically satisfying account of recent developments in the pharmaceutical industry than the more commonly used resource-based or transaction cost approaches. Specifically, we note the evolution of the pharmaceutical industry structure from giant vertically integrated firms, selling patent protected blockbuster products at premium prices, to greater vertical disintegration. Big Pharma1 now sources a significant volume of early stage R&D activity externally, through outright acquisitions or alliances, especially with biotechnology firms. Much of the reason for such vertical disintegration is to be found in the fundamental tension experienced between the high R&D spend necessitated by the cost of pharmaceutical innovation and declining returns on this expenditure in terms generating new product sales and FDA approval rates, which have remained broadly constant at an average of 20–35 approvals per year. The new R&D outsourcing strategy has not delivered an increase in marketable drug discoveries or new ‘blockbuster’ profits. Instead, shareholder returns have been maintained through Big Pharma's decision to distribute cash back to shareholders via share buybacks and dividends (as advocated by Jensen). Thus we conclude that such developments within Big Pharma worldwide are best explained through the lens of a financialisation, as opposed to a resource-based or transaction cost framework.

► Discusses a financialisation perspective for the evolution of the Big Pharma business model.
► Assembles and explores empirical evidence supporting financialisation interpretations.
► Concludes that this perspective explains developments better than usual alternative frameworks.