Acquisitions and Share Buybacks Could Lead to Limited Medication Access

A recent study examined how pharmaceutical manufacturers employ a practice of acquisitions, increasing prices and profits, and share buybacks that could potentially effect access to medications.

The financial practices used for newer hepatitis C virus (HCV) drugs shows how breakthrough drugs developed with public funding can be acquired by large pharmaceutical companies, who then increase prices, according to a study published by the British Medical Journal. The researchers outlined how Gilead Sciences acquired the HCV drug sofosbuvir, set a high price, and then invested their profits into their own stock, rather than funding additional research.

The drug, which costs up to $86,000 per patient in the United States, caused most insurers and payers to only cover the treatment for the most advanced cases of HCV. Many large pharmaceutical companies, like Gilead, rely on a strategy of acquisitions and buybacks.

These companies rely heavily on innovation by public institutes, universities, and start-ups, and then acquire their experimental compounds, rather than use internal research and development, according to the study. Investigators said this causes patients to pay for initial research, and then again for the patented, costly medications.

“Large pharmaceutical companies rarely take a drug from early stage research all the way to patients. They often operate as regulatory and acquisition specialists, returning most of the subsequent profits to shareholders and keeping some to make further acquisitions,” said lead researcher Victor Roy.

The researchers said that the trial and error process of creating new drugs can take too long for large pharmaceutical companies to profit from them, so they resort to acquisitions. The study noted that sofosbuvir was acquired from the start-up company Pharmasset once it proved to be more promising the Gilead’s experimental HCV drugs.

Gilead purchased the drug for $11 billion, and while Pharmasset originally thought the price should be set at $36,000, Gilead set the price at $84,000. In 2 years, Gilead’s HCV drugs created more than $35 billion in revenue, of which $27 billion will go towards share buybacks to increase the value of the remaining shares.

“Share buybacks are a financial maneuver that emerged during the early 1980s due to a change in rules for corporations by the Reagan administration,” Roy said. “The financial community now expects companies to reward shareholders with buybacks, but directing profit into buybacks can mean cannibalizing innovation.”

The researchers found that Gilead increased their research investments by $900 million from 2013 to 2015. In 2014, Merck spent $8.4 billion to acquire a drug for staph infections, fired 120 staff members, and then spent $10 billion in buybacks, according to the study.

To counteract the current practices, researchers suggest that health systems should have increased bargaining power to negotiate deals, and share buybacks should be limited. The researchers also believe that grants and prizes should be used to allow promising treatments to be used for wider applications, which may stop drug prices from including development costs.

“The treatments for hepatitis C may portend a future of expensive therapies for Alzheimer's to many cancers to HIV/AIDS. Health systems and patients could face growing financial challenges," senior author Lawrence King, PhD, concluded. “We need to recognize what current business models around drug development might mean for this future.”