Question

Accounting and Finance in International Business

The opening case explores four large pharmaceutical companies and their role in the rising costs of healthcare particularly in the United States. The four companies, Pfizer, Novartis, Bayer, and GlaxoSmithKline, all date back to the mid-1800s and have annual revenues of at least $39 billion and assets of at least $77 billion. Taken together, the four companies employ around 400,000 people and serve customers in 195 countries. Discussion of the case can begin with the following question:

Why have companies like Pfizer, Novartis, Bayer, and GlaxoSmithKline recently come under so much fire in the United States? Why are prescription drug prices so high?

Answer 1

For years pharmaceutical companies like Pfizer, Novartis, Bayer, and GlaxoSmithKline have claimed the primary reason behind high drug prices in the country are the amount these businesses must spend on research and development. These companies argue they must maintain high drug prices to protect the strength of the industry. Essentially, these pharmaceutical businesses claim they must charge so much because, without it, they wouldn’t be able to develop and make new drugs.

However, research into the industry contradicts these companies’ claims. According to the research these companies use profits reaped from their exorbitant prices to wheel and deal with Wall Street instead of developing new and more effective medicines.

Pharmaceutical companies have increasingly focused on manipulating their stock prices over the last few decades in order to line the pockets of executives, hedge-fund managers and bankers. It has been also revealed that some of the biggest drug companies often take on debt to distribute well in excess of 100 percent of profits to shareholders in the form of stock buybacks and cash dividends.

Today, most of Big Pharma measures success by stock price and dividend yields. Profits seem to trump producing affordable medicines that Americans need.

Meanwhile, executives paid in stock are incentivized to use corporate cash to manipulate stock prices. The buyback is a favorite way to do this — a controversial practice in which a company buys its own stock in order to reduce the number of shares available and thus jack up the price of those that remain. Through this financial sleight-of-hand, executives basically take profits from high drug prices to pad their own paychecks.

This is especially scandalous given that U.S. taxpayers, in addition to ponying up for expensive drugs at the pharmacy, actually spend a tremendous amount on subsidies, patent and market protections for the benefit of drug companies. We also pay tens of billions each year in the form of government-funded basic and applied pharmaceutical research and drug development done at organizations like the National Institutes of Health (NIH) — all of which Big Pharma makes use of.

So why are drug prices continuing to rise? Here are a few reasons:

1. No competition. These companies are protected against generic competitors due to patents, and even when the patents expire, some generics are expensive to develop.
2. A lack of transparency in drug prices. Lack of transparency has been a point of contention for a long time. Patients never really know what drugs actually cost and cannot negotiate price or treatment choice due to this lack of transparency in pricing.
3. Less competitive drug markets stemming from mergers and acquisitions among manufacturers. When drug makers combine efforts and expand their drug portfolios, they have more bargaining power and can set prices higher. There is no transparency to these negotiations, and ultimately the costs are passed on to government, insurance payers, taxpayers and sadly – patients.
4. The limited ability of other parties, such as Medicare, to negotiate drug prices.
5. High Dividend Payout. This particular point is overall woe in the rising prices as the companies in this industry are maintaining a very high payout to its associates for years and hence their high profit margins lead to rise in prices.

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