Pharma Companies Have Spent Billions Buying Back Their Own Stock

Sa’Ra Skipper was diagnosed with Type 1 diabetes when she was five years old, which means she needs insulin to stay alive. But even though she has a full-time job that gives her health insurance, she’s among the 25 percent of patients who has had to "ration" the drug at times because she can't afford it—sometimes relying on free samples from her doctor. On Friday, she described to members of the House Oversight and Reform Committee as part of a hearing on drug pricing that her sister, who also has diabetes, is in an even worse situation than she is. Once, Skipper left insulin on her nightstand in hopes that her sibling would find it and take some. She didn’t, and ended up hospitalized for four days as a result. "The veins in her body blew," as Skipper put it. "And she had to have a pick line in her neck, and almost went into a diabetic coma."

The high price of insulin is a well-known scourge, but after Skipper's testimony at the hearing, Democratic Congresswoman Alexandria Ocasio-Cortez targeted a sometimes-obscure cause: stock buybacks, the practice of companies spending money to purchase their own shares, thereby raising the price of their stock. From 2006 to 2015, Ocasio-Cortez said, "$465 billion was spent on research and development. The amount that pharmaceuticals spent in that same time to buy their own stock for the sole purpose of driving up the price was $516 billion."

Her comments are part of a trend of politicians pushing back against corporate practices they say are intended to make investors richer rather than creating real value. As Ocasio-Cortez highlighted, CEO pay is often linked to stock price, meaning that sometimes executives who propose buybacks may be looking to enrich themselves at the expense of the long-term health of their companies. When the company in question is responsible for medicine like insulin, then, these decisions could be matters of life and death.

When publicly traded companies have money to spend, they can use that money to make investments in their workforce or services. Or they can purchase their own stock off the open market, reducing the number of traded shares. This makes the shares still on the market more valuable for shareholders, so investors are generally happy about buybacks.

Up until 1982, buybacks were illegal. People who oppose them say that the practice is essentially stock manipulation—moving money around to create the perception of value being generated, rather than actually investing in the company in a way that would create value (and eventually raise stock prices as a result). But during the 80s, regulations on the financial industry were slashed by the Reagan administration, and the idea that corporations had to maximize "shareholder value" gained traction. In recent decades, buybacks have become a popular option for corporations with money to burn. Buybacks have surged, especially after Donald Trump's tax cut.

Proponents of buybacks argue that companies only engage in them when they can't make other investments, and say they can always issue new stock should they need money down the road. This argument becomes more morally complicated when it comes to drug companies, however, because the public hopes those companies are making investments that don't just increase stockholder value, but reduce the price of their medicines.

The CEOs of pharmaceutical companies frequently claim that they need to raise drug prices in order to pay for more research and development. By making drugs more efficient or coming up with competitive products, they say, the prices of drugs will ultimately come down. That’s the line Martin Shkreli, the disgraced "pharma bro" who became famous for having raised the price of a drug used to treat AIDS patients, deployed to defend himself against his many critics.

Three large companies control the insulin market in the U.S., meaning that their decisions about how to spend money have a huge effect on the lives of more than a million patients, including Skipper and her sister. Insulin prices doubled between 2002 and 2013, creating a crisis widely covered in the media; in January, a 26-year-old died after being kicked off his parents’ health insurance because he couldn’t afford his dosage.

Meanwhile, Eli Lilly, one of the three drug giants that sells insulin in the U.S., announced a plan to buy back $8 billion worth of stock in the middle of last year. Someone like Ocasio-Cortez would argue that they could have used that money to offset lower insulin costs. (Though Eli Lilly did offer a lower-price generic product in March after public outcry, patients stay it’s still unaffordable at $137.35 a vial, pointing at places like Canada, where that same amount costs a fraction of that price.)

But there's a broader argument against buybacks, which is that they don't help anyone who doesn't own stock—and stock owners tend to be wealthier than average Americans. Money that could go to developing helpful new products or services instead winds up in the pockets of the rich. As Ocasio-Cortez pointed out at the hearing: "Stock price doesn’t always immediately, or directly, correlate to the actual value of the product that I’m selling," she said. "It’s not as though my product is getting more valuable if the stock price increases."

CEOs are often compensated based on stock price, so they have an incentive to boost the price through buybacks. Although no one’s proposed a fix for that, 20 Democrats sent a letter to the Securities and Exchange Commission (SEC) chairman in June of last year questioning whether "insiders" should be able to sell their shares in a company right after it announces a buyback plan. More recently, at least five Democratic presidential candidates, most notably Elizabeth Warren and Bernie Sanders, have said that they want to curtail corporate buyback spending—which is set to hit a record $940 billion this year—by at the very least putting a ceiling on how much companies can do it. But no reform will be likely until Democrats win the White House back. Until then, all they can do is hold hearings to denounce the practice.

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