Nick Shaxson ■ Big Pharma companies: extracting wealth from every angle they can find


Valeant(Updated with a reference to Google’s scary “Patent Purchase Promotion” initiative.)

From the Wall St. Journal, a story entitled Pharmaceutical Companies Buy Rivals’ Drugs, Then Jack Up the Prices:

“On Feb. 10, Valeant Pharmaceuticals International Inc. bought the rights to a pair of life-saving heart drugs. The same day, their list prices rose by 525% and 212%. Neither of the drugs, Nitropress or Isuprel, was improved as a result of costly investment in lab work and human testing, Valeant said. Nor was manufacture of the medicines shifted to an expensive new plant. The big change: the drugs’ ownership.”

The story is as the headline suggests: an investigation into how large pharma corporations eliminate rivals in order to be able to control markets better, giving them power to raise prices without competitors undercutting them. Monopoly and oligopoly has been a problem for markets – and for the societies that underpin those markets – since the dawn of market economies.

In the world of high-tech medicine, there are often only a very small number of competitors to a particular drug, so this behaviour – “highway robbery,” in the words of one WSJ interviewee –  is relatively easier to do in high-tech pharma than in a market with low barriers to entry and many competitors. One can imagine that as medicine becomes more high-tech, the problem will get worse. In fact, the story suggests that things are going downhill, fast:

“There were as many as 50% drug-price increases during the previous 2½ years as there were in the prior decade.”

This is classic wealth extraction (or, if you’re an academic, rent-seeking) rather than wealth creation.

But there is another aspect of this story that is not mentioned: tax.

We have pointed out many times that oligopolistic behaviour by large multinationals is often driven, at least in part, by tax. Sometimes the company itself gets relocated to a tax haven, but often it is only the drug that gets bought up. What happens is that a predator company spots a competitor’s drug that is undervalued because it has been “insufficiently offshored” (and thus not contributing as much to corporate net profits as the wealth extractor thinks is possible).

So in general terms the wealth extractor (and in the WSJ’s story, Valeant is the lead culprit, having  lifted list prices by at least 20% some 122 times since the beginning of 2011) finds an ‘insufficiently offshored’ drug somewhere, buys it up, then relocates its ownership to a tax haven. A drug that was previously contributing to taxable profits is now taken out of, or largely out of, tax. (For example of the kinds of games pharma cos use, see writings by Jesse Drucker, here, for instance.) The potential after-tax profits rise. Again, nobody has produced a better or cheaper drug: it’s more expensive, in fact.

So the companies get to extract wealth at both ends: first, from the consumer, through monopolistic practices; and second, from the taxpayer, through ‘enhanced’ tax strategies.

The companies involved even admit that this is not about wealth creation:

“Neither of the drugs, Nitropress or Isuprel, was improved as a result of costly investment in lab work and human testing, Valeant said. Nor was manufacture of the medicines shifted to an expensive new plant. The big change: the drugs’ ownership.”

And this is the way global capitalism is going. Tech companies do it too, of course: Google, for instance, has bought up all sorts of start-ups, not just because they’re exciting and interesting, but because they are potential competitors – and, of course, that all-important tax angle. Just look at the scale of what Google are up to. And Google’s boss Eric Schimdt has even said that he is proud of wealth extraction. It’s “just capitalism”, he said. (Which it is: as we’ve noted, Schmidt must take a pretty dim view of capitalism.)

One last thing. It used to be the case that economists uniformly decried monopolistic practices. But that changed in the 1960s (in fact we can identify the moment when it changed: a dinner in 1960 involving U.S. economists Ronald Coase, Milton Friedman and their host Aaron Director: take a look at that fascinating little episode, which we learned about from Will Davies’ book The Limits of Neoliberalism.) The WSJ story cites a free-market think tank, which still parrots the party line that dates back all those years:

“Profits help pay for companies’ research, says Paul Howard, director of health policy at the Manhattan Institute. Increases help bring the prices more in line with the value the medicines provide to patients and hospitals, and the returns pay for manufacturing the drug, “in marketing it and even researching additional indications for the product that deliver more value to patients,” he said.”

This 65 year old pro-monopoly argument is silly, of course: to assume it’s a beneficial process, you have first to assume that the company will stop price-gouging the moment they have enough for their research needs (and if you believe that is generally the case, we at TJN have a bridge to sell you); and second, even if you were to get over that hurdle you would still have to show that the costs to consumers elsewhere are worth the research benefits.

In this case, are the profits going to fund more research? Or are they flowing into the pockets of already wealthy shareholders?  A Valeant spokeswoman kind of answers that question:

“Our duty is to our shareholders . . .”

And fortunately, a commentator under the story points out that the shareholder value story is a nonsense. Read more about that here.

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