Valeant Pharmaceutical’s Path of Destruction as Microcosm

By Jonathan Donald Jenner

The stock price of Valeant Pharmaceuticals, 1994-2016

The stock price of Valeant Pharmaceuticals, 1994-2016

Bethany McLean, in this summer’s issue of Vanity Fair, has done a terrific piece on the meltdown of Valeant Pharmaceuticals, a company led by a billionaire wonderkid who wasn’t. Before losing $81bn from a $90bn company that offshored its way to a meager 5 percent tax bill, Valeant price gouged sick people. McLean writes about Syprine and Cuprimine, the only drugs available to treat Wilson’s disease. The drugs were invented in the 1950s and formerly available for $1/dose, and now cost a stunning $300,000 for annual treatment after Valeant bought the patent. The piece highlights the terrible, inefficient system of drug distribution and development, as well as the scary behavior of corporations that puts all of us at risk. Read the whole thing here.

If Valeant Pharmaceuticals were one bad apple, we could leave the story at that. But the story reads more like a microcosm of our ‘recovering’ economy, and we should heed the warnings here of a system that puts short term shareholder return above all else.

First, McLean offers us a peek into the perverse incentives that hamper pharmaceutical distribution and development. We’ve written about this problem and possible solutions before – ‘Maximizing Shareholder Value Is (Literally) Killing Us,’ and ‘The National Pharmaceutical Development Agency (NPDA) Doesn’t Exist Yet, but It Should.’ K and her sister N, profiled in McLean’s piece, both started taking Syprine in 1987, and the drug was covered with no problem by their insurance until 2014,when they discovered that Valeant raised the price to $20,000 a month, and their insurance denied the purchase. K worries about her ability to have a healthy retirement, saying that “You are at the mercy of an abhorrent system.” Drug companies used to claim that exorbitant drug prices were to fund R&D, but Valeant completely abandoned this pretense, preferring to gouge existing drugs and cut out R&D. The company produced nothing, price gouged sick people, and all the while their CEO Michael Pearson was hailed by investors as a rogue, outside-the-box thinker who had a great new blueprint for the pharma industry.

On another level, the piece is an excellent insight into the crisis prone short-termism that has been the norm for corporations in the Neoliberal Era. On the business end, Valeant’s model was to buy up existing patents and companies, raise prices, cut out any and all research and development (too risky), and rake in income from sick people and the insurance companies that, in turn, raise premiums on all of us. On the accounting end, Valeant housed itself in Barbados and Luxemburg through subsidiaries to avoid US taxes, and charged its remaining American holdings interest on debt to wipe out the rest of profits made on American soil, further decreasing its tax liability (a tactic known as ‘earnings stripping,’). Shareholders, watering at the mouth to get in on Valeant’s returns, loved this model until they didn’t. It’s all gone up in flames now – the company lost 90 percent of its value in six months.

From the Vanity Fair piece:

Valeant was the pure expression of the view that companies are there to make money for shareholders, every other consideration be damned. It raises fundamental questions about the functioning of our health-care system, the nature of modern markets, and the slippery slope of ethical rationalizations. “It’s the dark side of capitalism,” says one prominent investor.

It’s almost eight years out from the crisis of 2008. Our ‘recovery’ exists only for the rich and has widened our income inequality (indeed, Valeant CEO Michael Pearson has had a terrific recovery). The Minneapolis Fed Chair is warning us that our financial sector is still too big to fail. The logic of our corporations is still not to produce and sell, but to own and price gouge. In this sense, Valeant is much more of a barometer than wayward entity, less capitalism’s dark side and more a representation of the direction of development of today’s capitalism. Have we not learned anything?