Greed Part II

Within the past week, another drug company has been found to be jacking up prices in a price gouging manner: Valeant Pharmaceuticals International. It is headed up by an ex-McKinseyite – a former consultant, a group marginally better than hedge fund managers.

The company’s strategy is to buy up pharmaceuticals instead of investing in R&D.

“Valeant is known for buying companies and laying off their employees to achieve savings, while accumulating debt of about $30 billion. It spends an amount  equivalent to only 3 percent of its sales on research and development, which it views as risky and inefficient compared with buying existing companies. Traditional big drug companies spend 15 to 20 percent of sales on research and development. Valeant also pays extremely low taxes because it is officially based in Canada, although Mr. Pearson (its CEO) operates from New Jersey.” Andrew Pollack and Sabrina Tavernise at New York Times, Oct 4, 2015.

Note the litany of bad behavior: the company lays off employees, it is stingy on investments, and it avoids taxes by being based outside of the US even though its CEO resides in the US.

If all companies decided that making investments was too risky, we would not get any new technological advances. Talk about being a chicken.

All of this is done in the name of shareholders:

“Mr. Pearson, a former McKinsey & Company consultant, has said he has a duty to shareholders to wring the maximum profit out of each drug.” Stephen Gandel at Fortune, Oct 7, 2015.

We really need to change our value system from the kind of capitalism we have today that focuses on just shareholders to a capitalism that focuses on society in general. This is a standard fallback statement senior executives use when they do something especially egregious: we have to satisfy our shareholders. No, you don’t.

Bill Ackman, a hedge fund manager, realizing how bad the perception of this is, says Valeant is not being given enough credit for investing in research and development. Typically, drug companies say that they must have high prices to fund research and development. Valeant can’t use that argument because it cuts the R&D upon purchase. So Bill Ackman has come up with an innovative argument: by handing over money upon purchase of company, they are effectively giving entrepreneurs money to do more research and development.

So with that as a line of argument, we could say that all companies are doing research and development when they buy companies or parts of companies. Heck, I could say that I’m helping contribute to the R&D funding because I buy stuff.

[divider]If that is the best argument Bill Ackman can devise, then you know these companies are on really shaky grounds.[/divider]

The link to the articles are:

New York Times: Valeant’s Turn at Jacking Up Prices

Fortune: Bill Ackman’s Innovative Argument