“The butcher, the baker and the drugmaker don’t produce and sell us the things we want out of benevolence, but out of their own self-interest.”
Whenever you have allergic reaction due to insect bite, food, medication etc., effective medicine for it is Epinephrine. Mylan Pharma had developed an autoinjector called EpiPen which helps in injecting Epinephrine.
“That $608 is a list price (of EpiPens) …What Mylan takes from that, our net sales is $274, so $137 per pen…Mylan has costs that include manufacturing the product, distributing the product, enhancing the product, investing.”
-Heather Bresch, CEO Mylan
To improve profits the company decided to increase price by 500%. US does not have any price controlling mechanism. This improved profit of company and CEO of the company Heather Bresch got 600% salary hike.
“To me the drug was woefully underpriced,” he said. “It is not a question of ‘Is this fair?’ or ‘What did you pay for it?’ or ‘When was it invented?’ It should be more expensive in many ways.”
Martin Shkerli was a fund manager who founded a company called Turing Pharmaceutical. He acquired drug called Daraprim, it was an old drug whose patent had expired, but no generic version of it was available. Daraprim is used to treat parasitic infection in case of HIV patients, so it is a critical drug for HIV patients.
Martin decided to tightly control distribution of Daraprim, and increased price from $ 13.5 per pill to $ 750 per pill. Lifesaving drug became money making racket for Turing pharma.
This act of hiking prices beyond reasonable limits is called as price gouging. It is exploiting customers to earn windfall profits.
CEO of Valeant Pharma, Michael Pearson, used combination of price gouging and financial frauds to take company to dizzy heights and then whole thing collapsed.
Diabetic patients use metformin tablets to keep their blood sugar under control. Valeant pharma manufactures metformin tablet called Glumetza. Valeant decided to increase price by 800%. It also increased prices of other drugs in range of 300%-1600%.
“I don’t think you’d want your son to grow up and run a company in the manner that Valeant was run,”
Michael Pearson had worked with McKinsey & Company for two decades, before taking over as CEO of Valeant Pharma. Michael came up with strategy for growth of company. He decided to slash cost of R & D (from nearly 12-15% of sales to 3%), instead of spending money on research he decided to buy smaller companies with better track record.
To make it more profitable he decided to move the company to Canada to save taxes. He slashed manpower of acquired companies. He then went for price gouging to improve the sales.
Acquisition combined with price gouging and cut in manpower and R & D cost made Valeant darling of Wall Street. Since compensation of Pearson was skewed towards stock options, he too benefited from rise in share price.
One of the major shareholder of Valeant Pharma was American investor William Ackman. Ackman fulling supported Pearson and kept buying shares of Valeant.
But year of year growth based on price gouging and cost cutting was not sustainable.
Soon Valeant started getting negative press due to price hikes. Citron Research accused Valeant of creating a network of phony pharmacies to generate “phantom sales”. Valeant recorded sales when drugs where shipped to pharmacies not when drugs were actually dispensed to patients. Citron said that Valeant dumped medicines in pharmacies, which lay unsold, but were shown as sales by Valeant. This created fake sales and profits for Valeant. Besides acquisition of companies resulted in debt of $ 30 billion.
Philidor is an online pharmacy, it was used by Valeant to push its drugs instead of giving patient freedom to choose from cheaper generic drugs. In some cases, the drugs prescribed by doctors were altered and patients were instead sold drugs manufactured by Valeant.
Unethical practices, fake accounting and huge debt resulted in sharp fall in prices of Valeant, as a result Ackman suffered huge loss. Ackman confessed that hiring Pearson was a mistake and Pearson was sacked. He was replaced by pharma industry veteran Joseph Papa. Joseph Papa is now busy undoing the damages done by aggressive Pearson.