value creation versus value destruction: the

VALUE CREATION VERSUS VALUE DESTRUCTION: THE FINANCIALIZATION OF BIG PHARMA?

Mustafa Erdem Sakinç* ([email protected])& Pauline Gleadleᵟ ([email protected])

Alternative Accounts Europe Conference virtual conference, 5 January, 2021

*Université Sorbonne Paris Nord, France & ᵟVisiting Professor, The Open University (FASS), UK

mailto:[email protected])*

Structure of presentation

1. Our starting point: Tomaskovic-Devey et al (2015)

2. Justification for our focus

3. Implications of following up on Tomaskovic-Devey et al (2015)

4. Value created, value extracted and value destroyed

5. Existing studies

6. Our findings against existing studies

7. Our contributions.


Our starting point:

• Tomaskovic-Devey et al (2015, p.541-2) argue that financialization, the shareholder value movement and perhaps neo-liberalism

‘…can all be interpreted through the lens of competition

over the distribution of surplus in the society.’


Our comments on Tomaskovic-Devey et al (2015) quote

• Definition of financialization itself is highly contested.

• We are focusing on the financialization of the NFC, specifically a number of Big Pharma firms during 2000-2019 inclusive.

• We’re adopting a political economy approach to financialization.


Justification for our focus

• Why study Big Pharma (yet again?)

• Why focus on the 20-year period 2000-2019?

• Why adopt a political economy approach to financialization?

-we are influenced by Scherer and Cooper (1984):

“ ‘better’ accounting systems might eventually be designed.”


Implications of following up on Tomaskovic-Devey et al. (2015)• Financialization and related phenomena

‘…can all be interpreted through the lens of competition over the distribution of surplus in the society.’

• This necessitates a stakeholder analysis

• Rather than ‘value distribution’ we prefer the term ‘value extraction’ given the importance of power relationships in determining the shares of surplus allocated to different stakeholder groups.


Value Creation, Extraction, Destruction


Creation: Non-labor input to be processed:-Financial funds-Suppliers’ goods & services-Government subsidies

Creation: Non-labor inputalready processed (became asset):-Capex-M&As

Creation: Labor input to be processed:-Labor (including R&D)-Contract work-Government services

Extraction before VR:-Wages & salaries-Interest-Payments to suppliers

Destruction:-Stock buybacks-Any other excessive extraction (VCⁱ << VEⁱ)Extraction after VR:

-Taxes-Dividends-Payments to suppliers

VC VR VE VD

Existing studies: financialization + Big Pharma (1)• Froud et al (2006) on GSK

• Lazonick & Tulum (2011)

• Montalban & Sakinç (2013)

• Gleadle, Parris, Shipman & Simonetti (2014)

• Baranes (2017)

• Tulum & Lazonick (2018)

• Klinge, Fernandez & Aalbers (2020)

• Collington (2020)


Existing studies: financialization + Big Pharma (2)Common themes from these studies-BB business model as damaged: Montalban and Sakinç, 2013; Klinge et al, 2020.

-Shareholder pressures for short-term returns: Froud et al, 2006; Montalban and Sakinç, 2013.

-Increased pay-outs to shareholders: Collington, 2020; Gleadle et al, 2014; Lazonickand Tulum, 2011; Montalban and Sakinç, 2013; Tulum and Lazonick, 2018

-Increased dependence on financial markets & on BB model: Baranes, 2017; Montalban and Sakinç, 2013.

-Increased volume of early stage R&D outsourced: Gleadle et al, 2014.

-R&D innovation problems: Gleadle et al, 2014; Tulum and Lazonick, 2018

-Role of other actors in the supply chain: Collington, 2020.


Our contributions

• Analysis of the financialization of selected Big Pharma firms over 2000-2019 inclusive.

• Two-level analysis:• 1) A sources and uses of funds analysis

• 2) A stakeholder analysis


Sources and uses of funds (1)


Sources and uses of funds (2)


Stakeholder analysis


Note: Sanofi’s 2004 numbers are not available

0%

10%

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Bayer Merck

Dividends

Interest Paid

Taxes Paid

TotalPersonnelRemuneration

GSK AstraZeneca

Stock Buybacks

Dividends

Interest Paid

Taxes Paid

Total PersonnelRemuneration

0%

10%

20%

30%

40%

50%

60%

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80%

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100%

Sanofi

Our findings against existing literatureIncreased payouts to shareholders with certain intra-firm differences

Continuing high share of R&D expenditures addressing rather a qualitative problem of innovation

Important share of acquisitions and high share of borrowing to fund them

The relation between the ability to repay the debt without recurring to further borrowing and productive M&As

Minimal importance of share issuance and the extractive role of stock market

Unequal power distribution: taxes paid to government vs payouts & interest payments

Some evidence supporting arguments of comparative capitalisms literature although all of these companies are highly internationalized

In summary: Continued financialization and unequal value extraction*Université Sorbonne Paris Nord, France &

ᵟVisiting Professor, The Open University (FASS), UK

ANY QUESTIONS AND COMMENTS PLEASE?

Thank you,

Erdem Sakinç and Pauline Gleadle.


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