Abstract

"The Tension between Innovation and Financialization in the U.S. Biopharmaceutical Industry: Merck, Sharp & Dohme Co."

Oner Tulum, Academic-Industry Research Network (onertulum@gmail.com)

The U.S. pharmaceutical industry has undergone a fundamental transformation since the 1990s, driven by the ideology of Maximizing Shareholder Value (MSV) and the subsequent adoption of a highly financialized business model. This model prioritizes key metrics such as stock price and earnings per share, which are dependent on aggressive value extraction via dividends and stock buybacks. Executives, incentivized by stock-based compensation, have prioritized financial distributions over productive investment in drug innovation.
This phenomenon creates a profound paradox: despite foundational government support through the National Institutes of Health, strong intellectual property protections, and high, unregulated drug prices—all highly conducive to innovation—the U.S. pharmaceutical sector faces a deep and persistent R&D productivity crisis, manifested by stagnation in the generation of New Molecular Entities, and, as a result, exponentially rising costs per approved therapy. While seminal business history works on the industry (e.g., Chandler, Galambos, Sturchio) provide essential context, they predate and overlook the systemic impact of MSV on productivity dynamics. The broad objective of this research is to close this analytical gap, enabling current insight into the productivity crisis to "catch up with history."
Applying William Lazonick's Theory of Innovative Enterprise (TIE) framework, this paper conducts a detailed historical analysis of Merck, Sharp & Dohme (MSD). The research documents the historical transition of MSD from an exemplary innovative enterprise during the 1950s-1980s into a striking example of financialization in the decades thereafter. MSD, as a result, provides an important case study for understanding the mechanisms by which MSV, as a mode of corporate resource allocation, undermines the social conditions of innovation that TIE identifies as the basis for sustained productivity growth.