If you thought Martin Shkreli was the poster boy for the unethical price gouging of prescription drugs, allow me to introduce Michael Pearson, CEO of Valeant Pharmaceuticals. Pearson’s price gouging puts Shkreli to shame . . . and the Trump team at the Securities and Exchange Commission (SEC) appears poised to do a big, big favor for the likes of him, Shkreli and other unethical corporate fat cats.
Pearson, the most egregious price gouger in recent years, used a combination of price gouging and deceptive business practices to artificially inflate Valeant’s stock prices. Under Pearson’s leadership, Valeant aggressively acquired other companies with established drug lines and then increased their prices while slashing spending on research and development. While investing virtually no money in improving or creating new drugs, Valeant nonetheless raised prices on its brand-name pharmaceuticals an average of 66% in 2015 alone - about five times more than its industry peers. These aggressive price increases were paired with deceptive pricing and reimbursement, fake accounting, and secretly controlled pharmacies.
These sham business practices not only devastated patients — they also undermined the company’s reputation and finances. And soon, people who’d invested their savings in what they’d thought was a legitimate, reputable pharmaceutical company were losing their shirts as well.
But now, just as investors are on their way to successfully holding Valeant and Pearson accountable, the Trump administration is threatening a dramatic policy reversal to allow the Pearsons and Shkrelis of the world to commit fraud – and screw over investors - with virtual impunity.
As other securities fraud cases have shown, the most realistic way to hold companies like Valeant accountable for their deceptions is a class action brought by investors – since consumers and workers are so often barred from bringing claims in court. It would be nearly impossible for every individual investor to sue Valeant by themselves, and history has shown that enforcement actions by government regulators rarely lead to a full recovery for investors, even under administrations that cared about enforcing securities laws. For instance, while the SEC recovered penalties and fees totaling $1.8 billion against Enron, WorldCom, Tyco, Bank of America and Global Crossing, private securities class actions returned $19.4 billion to defrauded investors – more than ten times as much. So it’s no wonder that investors led by Teachers Insurance and Annuity Association of America and the City of Tucson have already filed a class action against Valeant and several of its directors, and have prevailed over several motions to dismiss.
Having never met a rich corporate CEO they didn’t want to help out, however, the Trump’s SEC is threatening to wipe away any ability for investors to recover against fraud through class actions. The SEC is hinting that it will soon reverse long-standing policies and allow corporations to add a forced arbitration clause to an initial public offering (IPO) that would ban investors from joining together in a class action. Forced arbitration is already ubiquitous in the consumer and employment space, which is why companies like Valeant so often get away with their crimes. If Valeant had been able to use such a rip-off clause, they would almost certainly have prevented the current investor action from going forward as well. That action is not only the most important route to recourse for investors, but serves as a powerful and comprehensive summation of Valeant’s underhanded and fraudulent method of conducting business.
Valeant’s aggressive price hikes were revealed to the public in a series of press pieces in the fall of 2015, in the same coverage that brought Shkreli into the public spotlight. Subsequent reports revealed its secret control of a network of pharmacies and its deceptive accounting, leading the Senate to announce an investigation of the company. Thousands of investors, including regular citizens who had invested their IRAs and 401(k)s in Valeant, as well government pension plans, lost money when the company’s stock collapsed, from a high of over $262 to less than $25 per share. The stock’s crash wiped out retirement funds, education investments, and pension funds.
Yet as shocking as the collapse was, the extent and brazenness of Valeant’s business practices were even more outrageous.
As cited in court documents, in May 2010, 100 capsules of Syprine and 100 capsules of Cuprimine were priced at approximately $650 and $450, respectively. By July 2015, Valeant had raised the U.S. prices of Syprine to over $21,000 for 100 capsules (a more than 3,200% increase) and Cuprimine to over $26,000 for 100 capsules (a more than 5,800% increase). Meanwhile, Valeant sold Cuprimine for approximately $240 in Brazil and $350 in Canada, roughly 1% of its price in the United States. Both Syprine and Cuprimine are the standard treatment for Wilson’s disease, a rare inherited disorder which prevents the body from metabolizing copper, and must be taken for life. The disease effects about one in 30,000 people, and if left untreated can lead to neurological issues and fatal liver failure. One sufferer of Wilson’s successfully took Syprine for nearly 30 years under coverage from her insurance until one day, in 2014, she was denied coverage for the drug as a direct consequence of Valeant’s acquisition of the drug’s manufacturer and its subsequent price gouge.
Valeant concealed this type of price gouging through the use of patient assistance programs and the creation of a secret network of specialty pharmacies. While independent pharmacies serve as a check against exorbitant prices, Valeant rerouted prescriptions to pharmacies it secretly controlled. Valeant even placed employees in at least one of the pharmacies to work under fake names, including “Peter Parker” and “Jack Reacher.” These pharmacies illegally altered prescriptions to prevent generic drugs being used rather than brand-name, and filling prescriptions prior to insurance approval.
These deceptive practices were essential to CEO Pearson’s strategy of using massive short-term profits from price gouging to drive up stock prices—which his personal compensation was directly tied to. And they were in direct contradiction to Valeant’s own “Organizational Design and Philosophy” which stated “Healthcare companies are held by society to the highest possible ethical standard – and they should be. Adhering to this extremely high ethical bar supersedes any financial or other objective.” But, as we all know, nothing supersedes financial objectives on Wall Street.
If Trump’s SEC follows through on its threat to wipe away the one, best tool investors have to protect their retirements and nest eggs there will be many more Martin Shkrelis and Michael Pearsons who feel empowered to line their own wallets while leaving retirees and sick patients holding the bag. It’s a sick move by the administration, and it must be stopped.
Image by Images Money, via Flickr/TaxRebate.org.uk