Valeant/Turing just convenient scapegoats for big cap pharmas

by Daniel R. Hoffman, Ph.D.

Published May 10, 2016, 12:15 p.m. ET

Valeant is just an extreme form of the entire pharma industry's slavish groveling to Wall Street and its short-term demands.

Although the 500-5,000% price increases foisted on the public by Valeant, Turing and a few others made for sensational headlines, these companies have caused a far smaller problem for the affordability of health care than the annual 10-12% price increases posted by mainstream, Big Cap pharmas.

The pharma jackals and sycophants have been crowing about a recent report from IMS which contends that while the gross prices for prescription drugs have been increasing at 12%, net prices rose by only 2.8%. That soothing contention is belied by the fact that many Wall Street analysts fear the rise of drug costs will trigger activation of the Independent Payment Advisory Board (IPAB). IPAB is a little known and poorly understood provision of the Affordable Care Act that is mandated by law to take effect when drug costs to Medicare pass a certain threshold.

IPAB is a 15-member board, appointed by the president, which is charged with keeping Medicare spending inflation below certain annual target levels. It was explicitly given broad authority to make changes to Medicare without Congressional involvement, based on the fact that Congressional efforts to cut Medicare spending usually go nowhere as a result of bribery from special interests (e.g., pharmas and provider networks) and their lobbyists.

The law prohibits the Board from reducing the level or quality of care for Medicare beneficiaries or from raising their premiums. At the same time, particular healthcare stakeholders such as hospitals and physicians are protected from IPAB changes since their payments are tied to other, existing legislation.

That means containing Medicare costs would come in the form of cutting payments to healthcare stakeholders such as the pharmaceutical companies. IMS's rosy claim of a modest 2.8% price rise is contradicted by the fact that pharmas and their cheerleading analysts on Wall Street appear worried about the ballooning costs of drugs triggering an activated IPAB to cut the amount Medicare pays for medications.

Cutting the amount Medicare pays for drugs would pinch the industry. Last year Medicare paid approximately $100 billion for medications, which is one-third of all US drug spending. This makes Medicare the single biggest purchaser of drugs in the US by far.

The $300 that the U.S. currently spends for drugs accounts for approximately 40% of the $750 billion the world pays pharma for medications each year. Accordingly, Medicare accounts for 13% of worldwide drug spending and that's enough for pharma's lobby, PhRMA, to make IPAB repeal its top legislative priority.

Many political analysts claim that IPAB will never get activated because Republican chants about "death panels" would begin the moment its implementation becomes a possibility. With a weak president such as Barack Obama, that prediction may well be correct. Same thing if Hillary Clinton takes the White House because she has received more contributions from the pharmaceutical industry than any other candidate. It remains anyone's guess what Donald Trump would do if he wins the presidency.

But the looming specter of IPAB occurs at a time when pharma is trying to re-establish itself as a growth industry primarily on the basis of price increases, even as unit volume sales for its products decline. Pharma knows its premium pricing strategy represents a plan for a long walk down a short pier.

The industry also believes its longer-term future lies with the emerging markets and the industry's senior managers also are aware they must develop a volume-based business model or lose out to local drug companies in China, India and elsewhere. Alas, they remain content to follow the short-term strategy of price gouging – a modest version of the Valeant/Turing approach – that will permit current leadership to take its money and run before the piper must be paid.

These facts indicate that not only has pharma lost its moral compass, but it also maintains a muddled strategic sense of how to sustain returns on capital over the long haul. Instead of starting work on that long road, pharma's leadership has fallen back on its tried and true method of using political influence and payoffs to shield itself from judgments by the marketplace. That doesn't make pharma unique. It's just that other sectors such as the defense industry, fossil fuels, financial services and agribusiness which also depend on the political fix are less susceptible to public animosity than pharma and the economy can only tolerate so many crooked arrangements of heads-we-win, tails-you-lose before it cracks.

So once again, the public must either break pharma's influence and reform the entire, rotten structure or bring the whole damn economy crashing down with it.

In the meantime, Valeant and Turing are convenient scapegoats for the Ian Reads, Ken Frasers and Joe Jiminezes who can point to them and say, "They're not like us." But the Reads and Frasers are the real villains and only a corporate whore as president will save them.