Canadian company’s story shows why Trump might succeed in lowering drug prices
Don’t write off The Donald when it comes to big pharma.
Public policy analysts on both sides of the border have been quick to dismiss U.S. President Donald Trump’s meeting with pharmaceutical executives this week as a failure.
Trump, they noted, promised less regulation and demanded that drugmakers move manufacturing to the U.S., two things that will likely increase rather than reduce the cost of medicines.
But the president’s tough talk on pharma — he recently said the industry was “getting away with murder” for the way it charges for medicines — could actually help stem a financial practice that’s helped send drug prices through the roof, said Dimitry Khmelnitsky, an investment analyst at Toronto-based Veritas Investment Research.
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The practice Khmelnitsky refers to is the one that he claims drove the skyrocketing growth and subsequent crash of Laval, Que.-based Valeant Pharmaceuticals: Buy other pharmaceutical companies or some of the drugs they make, jack up the price of those drugs, reap quick returns for executives and shareholders, repeat.
In February of 2015, Valeant famously acquired two heart-disease medications from Northbrook, Ill.-based Marathon Pharmaceuticals, only to increase the price of both drugs by 212 per cent, in one case, and 525 per cent in the other, the very day the acquisition closed. A couple of months later, it implemented similarly steep price increases after buying Raleigh, N.C.-based Salix Pharmaceuticals. The company’s stock rose nearly 80 per cent between January and July of that year. Then-CEO Mike Pearson was Canada’s top paid executive in 2015, earning nearly $183 million, according to the Canadian Centre for Policy Alternatives. The previous year, Pearson’s compensation stood at $10.8 million, according to the CCPA.
This sort of financial engineering gained “massive traction” some five years ago, said Khmelnitsky. It was then the industry seemed to realize it could take advantage of low interest rates to finance debt-fuelled acquisitions and use price gouging to drive profits without investing much in research and development, often a large and risky expense, according to Khmelnitsky.
This kind of growth strategy is unsustainable in the long term, as Valeant’s meltdown last year demonstrated, but it has been a significant factor in pushing up drug prices in recent years, said Khmelnitsky.
Cue Martin Shkreli, the infamous entrepreneur who bought a lifesaving HIV drug and increased its price by 5,000 per cent. In an interview with the Financial Times last year, he said the increase was needed because the drug was “woefully underpriced.”
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Reformulating old drugs in order to extend patents or sell them as new products is another questionable business model the industry has turned to. EpiPen maker Mylan is currently under federal antitrust investigation in the U.S. for allegedly relying on this practice, known as product-hopping.
The company has denied taking any inappropriate or unlawful action to prevent competition from manufacturers of generic drugs and notes that EpiPen competes with multiple products on the market.
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What Valeant, Shkreli and Mylan have in common is that all three were publicly shamed by lawmakers.
Which brings us to Trump.
“Trump is a populist, which means at any point he might criticize a company for an outrageous price increase,” said Khmelnitsky.
And that might be a “very effective tool” to discourage exorbitant price increases, he added.
“When you shame companies publicly and you start dragging them to Congressional hearings, that takes an enormous toll on companies’ reputations and management’s time.”
Generally, drugmakers that found themselves under the microscope changed course, said Khmelnitsky.
That’s what happened with Valeant. The Canadian drugmaker’s quick journey from Wall Street darling to pariah started in August 2015, when U.S. senator, and then-presidential hopeful, Bernie Sanders demanded information on the reasons behind the company’s steep price for the two heart drugs it had bought from Marathon, according to Forbes.
A few months later, the company had received a federal subpoena related to its pricing strategy.
In March 2016, Hillary Clinton, then in the running for the Democratic primary race, said she would be “going after” the company for its “predatory pricing” in one of her campaign ads.
In an emailed statement to Global News, a Valeant spokesperson said in May of last year the company formally committed to single-digit percentage annual price increases for its prescription drugs and to keep those increases “below the 5-year weighted average of increases within the branded biopharmaceutical industry.”
In addition, Valeant noted it has hired a new executive team and said it has increased investment in research and development by 38 per cent over the last year.
Khmelnitsky, whose firm was a lone early critic of Valeant in Canada, believes Valeant’s is a cautionary tale that will quickly spring to the mind of whatever pharmaceutical CEO Trump decides to target for outrageous price increases.