Research Shows that Drug Companies Don’t Use Profits from High Prices to Fund Innovation — They Pad the Pockets of Corporate Shareholders

House Committee on Oversight and Reform: “Leading drug companies have spent more on stock buybacks, dividends to investors, and executive compensation than on research and development.”

In order to stall President Joe Biden from moving forward with crucial legislation to lower the costs of prescription drugs for hard-working Americans, some lawmakers have raised concern that without being able to charge high prices, the pharmaceutical industry won’t be able to invest in research and development, thwarting innovation.

Research makes clear that this argument is nothing more than a pharmaceutical industry talking point — profits from high drug prices don’t go toward research and development. Instead, the data shows that profits go to corporate shareholders, padding the pockets of the wealthy.

Despite their claims, drug companies don’t use the profits from high drug prices to fund research and innovation – they use it to maximize shareholder value.

  • Pharmaceutical companies use the profits from high drug prices to manipulate their stock prices through buybacks and boost executive compensation.

  • From 2016 to 2020, the 14 leading drug companies spent $56 billion more on stock buybacks and dividends than they did on research and development.

    • Amgen spent nearly six times as much on buybacks, dividends, and executive compensation as it did on research and development in 2018.

  • This is a longstanding trend. From 2006 through 2015, the 18 drug companies in the S&P 500 distributed 99 percent of their profits to shareholders.

    • Combined, those companies spend $51 billion more on buybacks and dividends than they did research and development during that time period.

    • In 2015, three companies covered or nearly covered their research spending for the year with the premium earned on their top-selling product alone.

  • Drug prices have risen sharply — meanwhile, Pharma CEOs are raking in multi-million dollar salaries.

    • From 2016 to 2020, compensation for the 14 companies’ top executives totaled $3.2 billion, with annual compensation growing by 14% over that five-year period.

    • In 2015, the average direct compensation for the highest-paid pharma executives was $10 million higher than the average direct compensation of the top paid CEOs across all U.S. corporations.

Drug companies’ research and development costs on a drug represent a tiny fraction of their net revenue.

  • Investment in research and development is becoming increasingly smaller for some drug companies, while other expenditures have become increasingly large.

    • From 2009 to 2018 AbbVie, the maker of best-selling drug Humira, invested just 4.2% of its worldwide Humira net revenue in research and development.

    • While AbbVie has decreased investment in research and development since 2013, other expenditures, such as direct-to-consumer advertising and executive compensation, grew significantly.

Large drug companies could earn significantly less profit and maintain their current research and development investments – all while still leading the market in returns.

  • Our current system lets large drug companies enjoy astronomically higher profit margins than other major companies by charging Americans high prices on medications.

    • From 2000 to 2018, the median annual profit margins of pharmaceutical companies (76.5%) were significantly greater than those of other S&P 500 companies (37.4%).

    • If big pharmaceutical companies’ profits were 11% lower from 2011 to 2019, they still would have maintained the highest returns of any sector during that period.