"Transformation from Innovation to Financialization at Merck, Sharp & Dohme"

Driven by maximizing shareholder value (MSV) ideology, since the 1990s the US pharmaceutical industry has adopted a highly financialized business model. Its key performance metrics are stock price, earnings per share, and dividend yield, supported by distributions to shareholders in the form of dividends and stock buybacks. Incentivized by stock-based executive pay, this value extraction can be at the expense of productivity in drug innovation. Yet with government support for drug development through the National Institutes of Health combined with intellectual property protection, financial subsidies, and unregulated drug prices that can provide high profits for reinvestment in drug development, US economic institutions are highly conducive to innovation in drug development. Nevertheless, many US pharmaceutical companies face a deep productivity crisis. Seminal works of Alfred Chandler, Louis Galambos, and Jeffrey Sturchio represent significant contributions to understanding the dynamics of the US pharmaceutical industry, but they all ignore MSV and its impact on productivity. A broad objective of this research is to analyze the impact of financialization so that current insight into the productivity crisis in this industry can “catch up with history.” With a study of Merck, Sharp & Dohme (MSD), this paper will analyze its historical transformation from innovation to financialization from the 1980s. The research for the paper applies the “theory of innovative enterprise” framework to provide a thorough and coherent understanding of when, why, and how MSD went from being the beacon of innovation in the global pharmaceutical industry in the 1950s through 1980s to become the most striking example of a financialized pharmaceutical company. The historical transformation of a major US pharmaceutical company presented here is part of a larger-scale project that, eventually, seeks to integrate the findings on innovation, financialization, and productivity from in-depth case studies of all of the world’s major pharmaceutical companies.