The Valeant case: A question on corporate ethics by Chiranshu Kumar
Valeant Pharmaceuticals International Inc., Canada’s largest pharma company, recently came under fire for its practice of buying smaller drug developers and then hiking prices on the medicines developed by that company. At the same time, the company’s profits have been skyrocketing as it slashed spending on research into new drugs. A short seller researcher firm accused Valeant of using a specialty pharma company to create a network of “phantom pharmacies” to steer managers toward Valeant’s more expensive drugs, instead of lower-priced alternatives.
Investigations during October uncovered Philidor Rx, a Pennsylvania-based specialty pharmacy that had barely been mentioned by Valeant, but was at the center of a $69 million trade dispute. The investigations revealed Valeant’s close ties to Philidor, but Valeant responded by confirming the business was a consolidated VIE, something that hadn’t previously been disclosed to investors.
Valeant further went on to clarify that it had an option to buy Philidor and consolidate the company’s finances into its financial statements. It paid $100 million in late 2014 to acquire the option, which could be exercised for a cost of $0. At the time the option was acquired, Philidor’s year-to-date net sales were $111 million, far below a 10% consolidated revenue threshold that would make the entity material. Thus, the option purchase and consolidation wasn’t independently disclosed. Philidor represented less than 1% of total assets and 7% of consolidated revenue.
Philidor was on the brink of becoming a larger part of Valeant’s operations. Those plans were squelched after reports about tactics Philidor allegedly used to sell Valeant medicines, including altering doctors’ prescriptions to gain more insurance reimbursements. Valeant cut ties with Philidor following accusations that it was a “phantom pharmacy” used solely to artificially boost sales.
A similar case happened in November with the CEO of Turing Pharmaceuticals, Martin Shkreli. Shkreli’s company obtained rights to sell Daraprim, the only U.S.-approved treatment for a deadly parasitic infection called toxoplasmosis. Shkreli, a former hedge fund manager, promptly raised the price of Daraprim, which had cost $13.50 for years, by 5,000 percent. Valeant came under scrutiny for similar tactics after it bought the life-saving heart drugs Nitropress and Isuprel in February and almost immediately increased their prices, tripling one and raising the other sixfold.
Regardless of the business model employed, the fact remains that we have a long way to go toward ensuring better transparency and public accountability. The research-based pharmaceutical industry has had long-standing questionable practices for drug pricing where controls are lacking or are easy to game. There is very little transparency in the research and development process, which the industry uses to its advantage to justify how much it charges for medicines. Developing new drugs is indeed risky, time consuming and costly, but there are vast differences in what the companies say about costs.
We need tighter government oversight. Companies, need to be held accountable and punished for unethical practices in a meaningful way. The bigger issue is whether it is perfectly fine to treat pharmaceuticals as ordinary market commodities or whether they should rather be recognized as essential public goods. Should governments allow the private sector alone to determine the dynamics and, therefore, the access issues that confront health systems around the world ?