Tags: Big Pharma | Shareholders | Drugs | Investors

Big Pharma Bites Its Own Shareholders

Big Pharma Bites Its Own Shareholders
(Dollar Photo Club)

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Wednesday, 07 October 2015 07:51 AM Current | Bio | Archive

America is addicted to drugs, the legal kind. We’re bankrupting ourselves to finance our habits and our drug companies are gladly helping.

Drug prices entered the headlines suddenly last month when one small company hiked the price on an old but still very effective drug by over 5,000%. They decided to charge what the market would bear. As good capitalists, we can’t blame them, can we?

Yes, we can. There is no “market” for prescription drugs. It would be a market if buyers and sellers could interact directly and make voluntary choices. That is not how drug pricing works.

The first problem is the Food & Drug Administration. Its Byzantine drug approval process supposedly protects the public from dangerous drugs. Maybe it does, but it also protects the public from perfectly safe drugs whose makers can’t afford to cross every “t” and dot every “i.”

The buy side is not a free market, either. The biggest drug purchaser in the United States is Medicare Part D, and federal law forbids it from negotiating lower prices. Medicare pays whatever the drug companies demand. So quite naturally, they demand a lot.

“That’s crazy,” you might say. You are correct. Ask your representative why they approved a system that enriches drug companies and threatens to bankrupt everyone else, if you’re curious.

Drug companies must charge high prices to pay for the research that gives us these life-saving treatments, right? Sometimes, yes, but often we see companies raising prices simply because they can.

Valeant Pharmaceuticals specializes in this business model. It does almost zero original research. It simply buys the rights to existing drugs with no other alternatives and no approved generic versions, and then raises the price as high as it can.

Valeant CEO J. Michael Pearson calls this practice his “duty to shareholders.” He told Wall Street analysts earlier this year, “If products are sort of mispriced and there’s an opportunity, we will act appropriately in terms of doing what I assume our shareholders would like us to do.”

Pearson “assumes” his shareholders want him to milk Medicare (i.e., taxpayers), insurers and patients for as much blood as they have to give. He thinks by doing so he acts “appropriately.”

I see a flaw in Pearson’s logic. The shareholders about whom he makes this giant assumption are also patients and taxpayers. He may put money into one of their pockets, but he pulls money out from at least one other pocket.

However, maybe shareholders still like what he does. There is a very simple way to find out: just ask them.

Valeant shareholders should vote on whether they think the firm’s best long-term odds of success lie in squeezing money out of sick people and overburdened taxpayers.

The vote should “look through” the mutual funds and pension funds to the actual human beings whose money is at stake. Let them say what they think.

Of course, I’m fantasizing here. No such vote will ever happen. The last thing Pearson wants is for Valeant to compete in a fair and open playing field. He knows what would happen.

The sad part of all this is a truly free market in drugs would give everyone access to safe, effective treatments at a reasonable price. This is the only alternative we haven’t tried. At the rate we’re going, we never will.

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PatrickWatson
America is addicted to drugs, the legal kind. We’re bankrupting ourselves to finance our habits and our drug companies are gladly helping.
Big Pharma, Shareholders, Drugs, Investors
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2015-51-07
Wednesday, 07 October 2015 07:51 AM
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