Monday, April 3, 2017

Valeant Pharmaceuticals: Price Increases on Over 50 Medications (2015)

Based on a paper by Kimberly Logan
Summary by Kimberly Logan

Nitropress and Isuprel-two of the drugs
that had significant price increases.
In 2008, Valeant Pharmaceuticals, a Canadian based company, hired a new CEO, Michael Pearson. Once hired, Pearson decided to break away from the traditional business strategy for pharmaceutical companies which is to spend most of their money on research and development and hope the drugs become successful. Pearson's new strategy was to dramatically cut Valeant's research and development costs, let other companies develop the new products, and then acquire the other companies. Valeant planned to focus of the distribution of medication and medical devices. After acquiring a company, Valeant would lay off a large percentage of the employees, sometimes over 50%, to cut costs. They would also increase the price of the drugs they just bought if the executives thought they were under priced. In 2015 alone, Valeant increased the price of over 50 medications with no justification as to why they increased the price. Two of the most notable drugs were heart drugs, Nitropress and Isuprel, which saw increases of 525% and 212% respectively (Stash 2016). Nitropress is used to help lower blood pressure and Isuprel is used to treat patients who have had a heart attack or have other heart problems, such as congestive heart failure. Some of the other drugs that had price increases were used by cancer patients or people who were at risk of getting cancer. The other part of the controversy is that Valeant had a complicated relationship with a mail order pharmacy, Philidor Rx Services. One of the Valeant executives, Gary Tanner, would push Valeant business to Philidor and Philidor would help people "get insurance coverage for the higher priced Valeant drugs instead of cheaper alternatives" (Egan 2016). In some cases, Philidor would not allow people to use non-Valeant drugs. Part of the controversy over the relationship was that Valeant claimed there was no relationship. It was later revealed that Valeant had control of Philidor and Philidor was on Valeant's financial statements. There was also some questionable accounting regarding Philidor and other areas of Valeant. Since the controversy was revealed, Valeant has closed down Philidor. Gary Tanner, and the CEO from Philidor, were arrested for fraud and Valeant is currently being investigated for fraud and accounting errors. Michael Pearson has stepped down as CEO, however, he still owns a significant portion of the companies stocks. Valeant has claimed they are going to change their strategy back to one of research and development and they are cooperating fully with the investigation. Nothing Valeant has said or done has helped the value of their company at this point. Before the controversy was revealed, the stock price was at a high of $262.52 on August 5, 2015. The stock price is now only $11.03, as of March 31, 2017.
Valeant's stock price: March 2015-March 2016

The stakeholders are those people whom are affected by the actions of the company. One important group of stakeholders is the patients taking Valeant medications. As the price of the medications went up, it was harder to get insurance coverage so people had to pay more out of pocket. In some cases, Philidor was able to get insurance coverage for patients, therefore, the insurance companies are another group of stakeholders. The insurance companies are also stakeholders because they had to pay more for the medication which led to them increasing the costs of their insurance plans. Valeant and its employees are more stakeholders. Many of the executives' compensation was tied to the stock price so they worked to maximize it. When the stock price fell, executives did not get as much money. The stockholders are also stakeholders; they want a higher return on their investment and the stock price is effected by everything Valeant does. One last important group of stakeholders is the companies Valeant acquired and the employees of those companies. The companies had to do the work to develop new products but then never saw the benefits because Valeant took control. The employees of these companies feared they would be laid off after the company was bought by Valeant. There were many people that Valeant should have considered when making their decisions.

Michael Pearson-former Valeant CEO
The theory of individualism states that the only goal for businesses is to maximize profits for the stockholders and to do so legally. While increasing the prices of drugs is not illegal, what Valeant did is not ethical according to individualism. In the short term, Valeant maximized profits for the stockholders, but, as soon as the controversy was revealed, the stock price dropped. Valeant has also claimed they are going to give refunds for the heart drugs and give money to hospitals that were effected by the price increases; both of these things will add to their loses from the case. As of right now, what Valeant did was legal, however, they are currently being investigated for fraud and accounting errors. Depending on the result of the trial, Valeant's actions could be illegal. Individualism looks at the end and not the means to an end. In the end, Valeant did not maximize profits, and therefore they did not act ethically according to individualism.

Utilitarianism looks to maximize happiness to all beings that can feel happiness. According to utilitarianism, what is right and wrong depends on the people involved and the happiness the actions bring people. A utilitarian would say that this case is not ethical. Like individualism, utilitarianism looks at the end, not the means. There is more unhappiness than happiness as a result of this case. The company itself and the stockholders are unhappy because the stock price dropped and the firm lost significant value and the trust of consumers. The stockholders potentially lost a lot of money which would cause them to be very unhappy. The patients and the insurance companies were not happy because they had to pay more for the medications than was necessary and justified. Valeant was never working to maximizing the happiness of all the stakeholders; they were only concerned with their own happiness. Once the controversy was exposed, no one was happy. This controversy is unethical according to utilitarianism because happiness was not maximized.

The ethical theory of Kantianism is about rationality and doing the right thing, because it is the right thing to do. Four of the basic principles of Kantianism are to act rationally but do not consider yourself exempt from rules, allow and help people to make their own rational decisions, respect people and their ability to be rational, and be motivated by Good Will (Salazar). Kantianism also states that people should always be treated as an end, not merely a means to an end. Valeant's actions were not ethical according to Kantianism. In order for someone to make a rational decision, they must have all the information. Valeant withheld that they were increasing the prices of their drugs and that they had a relationship with Philidor. Because they withheld information, Valeant did not allow others to make rational decisions and did not respect their ability to make those rational decisions. People also could not make rational decisions when Philidor pushed the Valeant medications to patients. By not respecting people's ability to make rational decisions, Valeant used them as a means instead of treating them like an end.
Valeant Headquarters in Laval, Quebec

Virtue Theory
While the first three ethical theories look at the actions of the company, virtue theory analyzes the people that made the decisions. Virtue theory examines different characteristics to see if a person is flourishing and living up to their potential. The four main characteristics of virtue theory are courage, honesty, temperance, and justice. Valeant executives did not display any of these virtues. The characteristic of courage means to take risks and stand up for the right ideas and actions. The executives at Valeant showed the vice of rashness instead of the virtue of courage. Valeant executives took too many risks by buying other companies instead of developing their own drugs. The second characteristic is honesty. Businesses should behave "honestly in agreements, hiring and treatment of employees, customers, and other companies" (Salazar). The Valeant executives were not honest about their prices; they never told the customers that they increased the prices without proper justification. The third virtue is temperance. Temperance refers to having realistic expectations and desires. Valeant executives had an unreasonable desire to be profitable and they had unrealistic expectations for their business strategy. They could not just continue to acquire other companies without putting in any research and development themselves; this strategy could not last and be profitable in the long run. The last characteristic is justice. The virtue of justice means to be hard working, have good ideas, and fair practices. Valeant executives did not display justice because they were not hard working. Arguably the hardest part of the pharmaceutical industry is researching and developing new drugs. Valeant did not put in the work to come up with these products on their own, therefore, they did not display justice.

Valeant's actions of increasing the price of the medications they sell is unethical according to all four ethical theories. I also believe Valeant's actions were unethical. They did not consider that some of their medications were crucial for the people taking them. Valeant used the customers and the insurance companies to make a quick profit but failed to realize that it could not be sustained. In the end, no one was better off because of what Valeant did and now they must go back and try to repair the relationship with consumers and the value of their company. Valeant should lower the prices of their medications and focus more on the customer. They need to show that they are working to be a more ethical company and to help those who need their products. Valeant should actually give the refunds they claimed they would and they should consider partnering with a company like UNICEF. If Valeant takes step to rebuild their reputation, they can be profitable in the future.

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