Ethical Issues With US Pharmaceutical

Companies’ Pricing of Drugs

Prepared By:

Navya Sree Arra

Abhinay Reddy Gudimetla

Alicia Pajda

For:

Dr. Spurlock

EMGT 5111

On:

December 9, 2015

Ethics is defined as the “study of moral issues and choices. It is concerned with right

versus wrong, good versus bad, and the many shades of gray in supposedly black-and-white

issues” (Kreitner and Kinicki). We are faced with decisions every day that have ethical

implications. In the corporate world, though, these decisions can be harmful to a company or

many others if they are not well thought out. This is expressed in the idea of corporate social

responsibility.

Corporate social responsibility (CSR) is “the notion that corporations have an obligation

to constituent groups in society other than stockholders and beyond that prescribed by law or

union contract” (Kreitner and Kinicki). CSR challenges companies to think about more than just

making a profit and to really consider the consequences of their actions. This can be observed in

Archie B. Carrol’s global CSR pyramid.

The pyramid implies that all organizations should first focus on making a profit

consistent with expectations for international businesses. If they do not make profiting a priority,

there may be no organization left to take the next step in the pyramid. The next priority for

companies should be to obey the law of host countries as well as international law. Again, it is

important to fulfil legal responsibility to keep any business alive. Now, corporations also need to

make sure they are being ethical in their practices, taking host-country and global standards into

consideration. Morals and ethics can vary from place to place, so it is important to know ethical

standards of all places you may do business with. Finally, all organizations in the global

economy should be a good corporate citizen, especially as defined by the host country’s

expectations. Each level of the pyramid needs to be solid to keep standing, so it is vital to start at

the bottom and work your way up (Kreitner and Kinicki).

One example of an ethical issue in the corporate world can be seen in US pharmaceutical

companies’ pricing of drugs. Valeant Pharmaceuticals International, Inc. is a multinational

specialty pharmaceutical company based in Laval, Quebec, Canada. Valeant sells a wide range

of drugs including over-the-counter medications and medical devices, as well as prescription

drugs. This company came under attack from Democratic lawmakers in late September 2015

over massive price increases. Valeant had tripled the price of Isuprel and raised the price for

another heart drug, Nitropress, nearly six-fold after buying them in February (Pierson and

Berkrot). People were upset with the price hikes, but raising drug prices is technically not illegal

in the US.

Valeant received a subpoena from the US Attorney’s Office in Massachusetts and another

from the Manhattan US Attorney’s Office seeking more information on drug distribution, pricing

decisions, and its patient assistance programs. The drugmaker defended themselves saying they

had hired a consultant, and the consultant said there was considerable room for price increases on

both of these drugs. CEO Michael Pearson also says that Valeant has made large investments in

manufacturing in the United States. Pearson has turned this company into one of the largest

pharmaceutical companies in the world by acquiring many smaller companies and cutting

research spending for these companies (Cordeiro).

Another pharmaceutical company currently undergoing scrutiny is Turing

Pharmaceuticals. In August 2013, Turing bought the rights to the drug Daraprim from Impax

Laboratories, Inc. This drug is the standard drug used to treat a parasitic infection,

toxoplasmosis, which can be life threatening for people with compromised immune systems,

such as AIDS and cancer patients (Vaughan). After acquiring the rights to Daraprim, founder and

CEO, Martin Shkreli, raised the price of the drug from $13.50 a tablet to an insanely high $750 a

tablet, almost a 5000% price increase. The same medicine is sold in Britain by GlaxoSmithKline

for 43 pence (66 cents) a pill (Pierson and Berkrot).

Infectious disease specialists immediately protested this ridiculous overnight price

increase. Doctors worried that the drug would be too expensive and hospitals would be forced to

use other, less effective alternatives to treat toxoplasmosis. After much criticism and media

exposure, Shkreli agreed to lower the price of the tablet, but has not stated the new price or when

the change would take effect. It still has not been lowered to this date.

The New York attorney general has recently begun an inquiry into Turing

Pharmaceuticals, not based on the price increase, but actually looking into whether Turing has

violated antitrust rules. People are speculating that Turing may have violated these antitrust rules

by trying to restrict competition by taking Daraprim off the regular distribution channels. This

would mean that it would be much harder for companies who make generic versions of drugs to

acquire a sample to be able to make a new generic version of the drug (Vaughan). This is a

completely different situation in itself, but also highly unethical as it would make it even harder

for everyone to acquire the drug.

There are many more cases similar to Valeant and Turing that have been smaller price

spikes or just drawn out over longer periods of time and seem less dramatic. Still, the rising cost

of drugs is becoming a major issue. A Mayo clinic study found that from 2000 to 2012, the

average annual cost of cancer drugs increased from around $10,000 to over $100,000. Several

breakthrough specialty medications and orphan drugs recently approved by the Food and Drug

Administration (FDA) have entered the pharmaceutical market with hefty price tags. “Consider

Biogen Idec’s multiple sclerosis drug, Tecfidera, which costs $54,900 per patient per year;

hepatitis C cures from Gilead Sciences, with a sticker price of $84,000 per patient; and

Orkambi, a cystic fibrosis drug from Vertex Pharmaceuticals approved this month, priced at a

whopping $259,000 per year” (Islam). Prices are even rising drastically in generic drugs from

year to year.

The increase in drug prices on average is estimated to have been 12.6% in 2014 alone

(Islam). This is far higher than just inflation levels that hovered between zero to two percent

in the past three years. It is also much higher than the growth in any other medical costs. It

appears to be that these drug manufacturers are just taking advantage of the American

healthcare system, milking insurance providers for all they’re worth. A poll last month found

that 73% of Americans believe that the cost of drugs is unreasonably high, and most blamed

the drugmakers for setting these prices (Islam).

From the information revealed so far in both the Valeant and Turing cases, the purchases

and price increases all seem to be legal. So Valeant and Turing are fulfilling the bottom two

blocks of the corporate social responsibility pyramid, but are failing at the next block. Ethics is a

matter of opinion since there are no written rules, but this does not seem ethical. There is an

unwritten social contract where you can have a degree of pricing power, but only if you engage

in substantial funding of research as a percentage of your sales. At least with Valeant, that does

not seem to be the case since they are cutting funding for research. Questions arise as to where

the money is going and why the steep price increases were necessary in the first place.

One problem is these are not new drugs; Daraprim has even been available for 62 years.

In some cases, when there is a shortage of a particular drug, price increases will result. However,

in other cases, the increase in price is due to a strategy of companies which buy the rights to

older drugs and turn them into a “specialty” drug. Drugmakers' patient assistant programs, a

main aspect of the recent subpoenas, help patients cover co-pays for their medicines, but can

sometimes be deemed improper inducement to drive up sales. There does not appear to be a good

reason yet for the dramatic price increases in these drugs from Valeant and Turing, which is

causing many problems.

Shares of many pharmaceutical companies have fallen quite a bit since these scandals and

since Democratic presidential hopeful Hillary Clinton proposed ways to prevent industry

profiteering. The recent skyrocketing of these drug prices has become a big enough issue to be

acknowledged by new presidential candidates, hopefully solving some of these problems.

Dramatic price increases for several medicines are also scheduled to be the subject of a

congressional hearing in the coming week. The increases have prompted investigations by

congressional committees, and House Democrats have established a task force to look into this

unethical drug pricing. On Wednesday, the Senate Special Committee on Aging is scheduled to

hold a hearing further exploring the matter (Rockoff).

“’There’s a line at which these huge price increases for prescription drugs go from

rewarding innovation to price gouging and this hearing will set the stage for an examination of

whether that line is being crossed. We’ll hear from experts about why these huge price spikes are

occurring and what this looks like for patients and providers on the front lines,’ said Sen. Claire

McCaskill (D., Mo.), the Aging committee’s ranking member” (Rockoff). Thankfully, there are

maybe people who agree that this “price-gouging” seems unethical and needs to be stopped.

Analysts believe that a financial settlement within two to three years is the likely outcome of all

of this debate. The companies will probably settle with paying a fine, but probably will not admit

guilt.

Going forward, it may seem like market intervention is the cure, that government should

have control over drug prices. Pharmaceutical firms in America currently enjoy not being

governed by laws about drug pricing, which is not how it is in most of the world. Medicare is

actually barred from negotiating prices with manufacturers and the FDA does nothing with the

cost when approving medicine. Meanwhile, government agencies in Canada, Australia, and

European countries can negotiate drug prices after evaluating therapeutic benefits. If the United

States did implement laws to control drug pricing, though, it could hurt the “research-and-

reward” economy that currently exists; it could negatively impact future innovations in medicine

(Islam).

It all seems to be one giant gray area. Maybe in the eyes of the CEOs and higher up

people at these companies, they do not realize that what they are doing just to make a profit is

unethical and should not happen. Maybe there is more good being done with the money beneath

the surface that not everyone can see yet. Maybe government should be involved in drug pricing

somehow and maybe they shouldn’t. Maybe some people do not care about price increases

because the insurance companies are the ones usually paying the premiums, while patients

usually just pay a small co-pay. Maybe there should be new laws implemented to limit the price

increases, but still give enough room to raise the price just enough to help with research. It is

hard to draw the line and will probably be a subject of debate for years to come. All we can do is

hope that the decisions fall into the hands of people with strong ethics and morals intact.

ReferencesCordeiro, Anjali. Valeant Slumps as U.S. Prosecutors Issue Subpoenas on Prices. 14 October

2015. 2 November 2015.Link: http://www.bloomberg.com/news/articles/2015-10-15/valeant-receives-subpoenas-from-u-

s-prosecutors-on-drug-pricing

Islam, Ifrad. Rising Cost Of Drugs: Where Do We Go From Here? 31 August 2015. 2 November 2015.

Link: http://healthaffairs.org/blog/2015/08/31/rising-cost-of-drugs-where-do-we-go-from-here/

Kreitner, Robert and Angelo Kinicki. Organizational Behavior. New York: McGraw-Hill/Irwin, 2013.

Pierson, Ransdell and Bill Berkrot. Valeant subpoenaed by U.S. prosecutors; shares drop. 15 October 2015. 2 November 2015.

Link:http://www.reuters.com/article/us-valeant-pharms-subpoena-dUSKCN0S90XO20151015

Rockoff, Jonathon. Rising Drug Costs to Be in Focus at Congressional Hearing. 5 December 2015. 6 December 2015.

Link: http://www.wsj.com/articles/rising-drug-costs-to-be-in-focus-at-congressional-hearing-1449311407

Vaughan, Joann. Ethical Discussions: The ethics of drug pricing. 13 October 2015. 2 Novemeber 2015.

Link: http://blog.spcollege.edu/general-education/ethical-discussions-the-ethics-of-drug-pricing-spcethics/