Pharmaceutical Industry Ethics

By: Rachel Thomas

Part 2 of the Valeant Pharmaceuticals Series

In a capitalist free market, the goal of business is to sell a product to satisfy demand. The company’s objective is to maximize profit, without breaking the laws of the land. This profit motive is generally accepted as a characteristic of the free market and rarely raises ethical questions. However, there are industries where social good may take precedent over profit. The pharmaceutical industry presents one instance.

The pharmaceutical industry is a unique and significant component of the international economy. It faces ethical issues distinct from other industries. There are a few powerful players controlling the supply of arguably the most critical products in an economy.

A pressing ethical issue for pharmaceutical companies is whether they ought to be held to a higher standard than those in other industries due to their role in serving the public good. How can earning a profit be a company’s single most important concern if this goal prevents a consumer from purchasing a lifesaving drug? Do pharmaceutical companies have a moral duty to invest in treatment research, a societal good, even if they lose money in the process?

Pharmaceutical companies can profit from patent laws intended to promote social good but which instead create perverse incentives, or fail to adequately incentivize. Even if patent protection secures exclusive rights to sell a product, it still may not be profitable for a company to invest in certain drug development.

Inevitable patent laws, the consequent lack of competition, and crucial public interest in accessing these drugs are distinctive characteristics of the pharmaceutical industry. As such, policies ought to encourage companies in this industry to keep drug prices low and to develop new treatments for humanitarian rather than pure profit motives.

Controversies surrounding one of the industry’s most powerful companies, Valeant Pharmaceuticals International Inc., demonstrate the financial and social consequences of the current system. With actual human lives on the line, pharmaceutical companies should be held to a higher standard. Thus, pharmaceutical companies have a duty to serve the public. This idea of moral duty is the foundational principle of deontological ethics.

Characteristics of the Pharmaceutical Industry

In many industries, a consumer will simply not participate in the market if his demand is lower than the market price. However in the case of vital medication, demand is so inelastic the supplier could charge an exorbitant price and demand would remain steady. Essentially, pharmaceutical suppliers can put a price on human life – and that price can be high.

A controversial example of extreme price setting by Turing Pharmaceuticals occurred in 2015. Turing acquired Daraprim, a drug used to treat life-threatening parasitic infections called toxoplasmosis (NY Times). The infection is most deadly for AIDS patients and some cancer patients. Almost immediately after acquiring the drug, CEO Martin Shkreli raised the price per tablet from $13.50 to $750. While the drastic increase caused public outcry, the operation was legal and could potentially earn Turing millions in profits (NY Times). Although insurers have the option to continue to pay for the drug, they will likely turn to a cheaper, less effective treatment after this price hike.

Patent laws and monopolistic pricing

Many industry features intended to promote development and distribution of drugs lead to perverse incentives for suppliers. Operating costs for pharmaceutical companies are extremely high especially: funding research and development, fighting legal battles, and distributing through insurers. However, the creation of new treatments for diseases is a public good, so governments tend to incentivize research through patent laws and subsidies. After investing in developing a new drug, a company has the exclusive right to sell and profit from the product. While these laws aim to promote medical progress, they create a monopoly over potentially lifesaving drugs, allowing suppliers to charge monopolistic (high) prices.

Although patent laws are necessary to incentivize the development of new drugs, they support monopolies and prevent competition in the industry. A monopoly over products allows a company to fix prices, helped by inelastic demand, earning the company substantial profits. By definition, monopolistic markets do not offer free access to competitors. Competition causes the price of goods to reach equilibrium, limiting the opportunity to profit. In a monopolistic industry, new firms cannot freely enter and exit the market, so there is always a potential for existing firms to profit enormously.

The lure of high profits motivates companies to continuously develop new drugs, but also creates an incentive to unscrupulously mark up prices. It is more expensive and challenging than ever to create new drugs approved for the market, making it unprofitable to invest time, money, and personnel on research and development. One of the top four pharmaceutical companies, Pfizer, earned $22 billion in profits while spending only $6.6 billion on research and development (thinkprogress.org).

The pharmaceutical company Valeant recognized this dilemma, and began slashing research in favor of acquiring smaller companies to make a profit. This practice allows companies to take advantage of patent laws and the monopolistic profit characteristics of the industry while avoiding the burden of investing in treatment research, a public good.

Ethical Issues in the Pharmaceutical Industry

After acknowledging the pharmaceutical industry possesses unique elements that give a few powerful companies control over drug creation and distribution, we soon recognize there are inherent ethical problems with the structure of the industry.

The most pressing concern is whether, for humanitarian purposes, pharmaceutical companies have a moral responsibility to supply affordable drugs and to invest in developing new treatments. The current system provides incentives for research by exchanging patent protection for introducing new drugs to market, but there are few enticements to keep prices low. Public and investor relations can motivate companies to reduce prices and they are required by law to provide drugs to Medicaid at discounted rates (Vanity Fair).

From both consequentialist and deontological perspectives, the current system is unethical. Although a consequentialist would consider making a large profit a positive outcome, depending on the value he places on a human life, the burdens will outweigh the benefits. Patients unable to afford medication will suffer a lower quality of life or even death if faced with a life threatening condition. Despite the positive outcome of large profits for companies, the overall consequence is negative due to suffering inflicted on people.

Deontologists would view extraordinary price increases of necessary drugs as unethical. Kant’s categorical imperative states that we should “act in such a way that you treat humanity, whether in your own person or in the person of another, always at the same time as an end and never simply as a means” (Seven Pillars Institute). By raising drug prices to expensive levels, the companies are treating patients as the means to an end. These firms know that patients, or their insurance providers, will continue to pay for treatment regardless of the price, as the demand is inelastic. However, taking advantage of another human in order to promote one’s self-interest violates the moral duty to “seek an end that is equal for all people” (Seven Pillars Institute). Using a deontological framework, pharmaceutical companies have a moral duty to keep drug prices fairly priced. Price gouging is immoral as it exploits disadvantaged individuals to the benefit of the firm.

Valeant Pharmaceuticals International Inc.

, a multinational pharmaceutical company, has been the subject of multiple public controversies since 2015. Once celebrated for its innovative business approach, Valeant’s stocks and reputation have plummeted in the past year. The company has been accused of “price gouging, a secret network of specialty pharmacies, and fraud” (Fortune). The company is under investigation by the U.S. Securities and Exchange Commission (SEC) and the U.S. Congress (Fortune).

When former CEO Michael Pearson joined Valeant in 2008, he forged a new way to operate in the pharmaceutical industry (Vanity Fair). Pearson decided that rather than invest billions of dollars into developing new drugs that may never be approved by the Federal Drug Administration (FDA), he should acquire the companies currently holding drug patents. He theorized that by buying these companies and drastically raising the prices of their products, he could greatly increase profits. Since the company held a patent, there would be no market competition to keep the price low. Pearson severely cut Valeant’s research and development spending, instead focusing on acquisitions to make a profit.

Valeant worked closely with a “specialty pharmacy” called Philidor in order to distribute the company’s drugs more effectively. Philidor’s role was to distribute Valeant’s drugs to patients through insurers, who would have to foot the bill for the overpriced products. The fraud allegations arose from Valeant’s relationship with Philidor, as some employees reported altering doctor’s prescriptions from generic products to Valeant’s brand (Vanity Fair).

Pearson’s plan worked at first, raising Valeant’s stock to a high of $262 (Vanity Fair). However, in order to purchase these companies, Valeant accumulated substantial debt. This debt, along with scrutiny into the company’s unorthodox practices by Congress and the SEC, pushed Valeant’s shares down to $94 by November 2015 (fortune.com).

Valeant’s initial success and eventual failure highlight the unique characteristics of the pharmaceutical industry, as well as the likely consequences from failure to recognize these unique and potentially destructive features.

Pearson’s only objective as CEO was to increase profits, reduce costs, and placate shareholders. Without a humanitarian incentive to keep drug costs low, Pearson raised prices to the extreme limit of demand for the products. In another industry, the fall of a powerful company would only hurt investors and possibly the general stock market. However, Valeant’s shady business practices may have prevented individuals from receiving lifesaving treatments.

A crisis of this magnitude would not have even been possible in most other industries, as the limited competition in pharmaceuticals (caused by strict patent laws) allowed Valeant to grow powerful and to manipulate prices to excessive degree.

The Future of Pharmaceutical Policy

Policymakers must weigh the potential benefits and costs of a policy to determine whether it will make the public better off. In the pharmaceutical industry, policies should promote research and development while ensuring citizens can easily access the drugs they need. In theory, the current environment encourages companies to invest in developing new drugs by promising a temporary monopoly over the product. Although this increases the market price, the benefit of new research outweighs that cost.

The Valeant and Turing cases demonstrate the failures of current policies. Companies are manipulating patent laws to make a profit without investing in new research and development. There are also few regulations in place to limit extreme price increases, which allowed Turing to increase the price of Daraprim by 500 percent (NY Times). Policymakers need to determine a way to protect people’s ability to buy medications while promoting innovation.

The Clinton Plan for Lowering Prescription Drug Costs

Hillary Clinton, the 2016 Democratic presidential nominee, is an outspoken advocate for reducing prescription drug costs by increasing regulations on the pharmaceutical industry ().

During the campaign, Clinton wanted to  “to promote competition and leverage our nation’s bargaining power to lower drug costs on behalf of Americans.” Her plan was to “[encourage] competition to get more generics on the market and create a Federal backstop for when there are excessively high-priced drugs that face no competition.” She also demanded a “stop to excessive profiteering and marketing by denying tax breaks for direct-to-consumer advertising and demanding that drug companies invest in R&D in exchange for taxpayer support” (HillaryClinton.com).

Clinton’s plan addressed the lack of investment in research, misdirection of government research subsidies towards advertising, and absence of competition in the market. By ensuring subsidies are used only for research and “[funding] the FDA’s Office of Generic Drugs to clear out their multi-year generic drug approval backlog,” drug prices will decrease and competition in the industry will increase. Additionally, allowing Americans to import prescriptions from other developed countries increases competition in the United States (HillaryClinton.com).

Healthcare Reform to Make America Great Again

The President-elect Donald Trump, also plans to reduce healthcare costs by limiting the power of drug companies. Trump claims that “though the pharmaceutical industry is in the private sector, drug companies provide a public service,” reflecting the deontological view that pharmaceutical companies have a moral obligation to serve the public (Donald J. Trump).

Both Trump and Clinton believe the industry needs to become more competitive to lower drug prices. Trump agrees with Clinton that “allowing consumers access to imported, safe and dependable drugs from overseas will bring more options to consumers.” He also believes the lobbying power of big drug companies has prevented reform, stating: “Congress will need the courage to step away from the special interests and do what is right for America.” As drug companies spend more money on lobbying than any other industry, about $229 million in 2014, Trump claims the pharmaceutical industry holds significant influence over lawmakers ().

According to Trump, “it is the moral responsibility of a nation’s government to do what is best for the people and what is in the interest of securing the future of the nation” (Donald J. Trump). Therefore, the government would be obligated to prevent companies from using patients as a means to profit without recognizing that their survival depends on their ability to purchase a drug. 

Conclusion and Policy Recommendation

The Valeant controversy demonstrates the necessity of restructuring the pharmaceutical industry. Encouraging and protecting monopolistic pricing fails to promote innovation. Instead, policies such as patent laws discourage research and allow companies to earn massive profits while patients are forced to bear excessive costs for essential drugs.

From a deontological perspective, pharmaceutical firms have a moral obligation to provide fairly priced drugs lest they use their consumers as a means to a profit rather than prioritizing fair access to medication.

The central problem with the pharmaceutical industry is its lack of competition, a characteristic protected by current drug patent laws. The potential to profit that arises from the monopolistic protection of new drugs incentivizes companies to raise prices to obscene levels, preventing patients from accessing the medication they need to survive. This perverse incentive fails to promote research and innovation, and instead increases healthcare costs and government spending, while drug companies profit.

In order to increase competition in the industry, policymakers should follow the plans set forth by both Clinton and Trump who believe that allowing Americans to import drugs (that meet FDA standards) from other countries promotes competition. Clinton also supports reducing the time it takes to approve generic drugs and limiting companies’ use of government subsidies towards marketing. Trump claims that due to the industry’s lobbying efforts, Congress has prioritized protecting drug companies over patients.

Implementing these policies should be the first steps towards fair pricing of drugs. The consequences of the current system extend beyond limited access to healthcare. The current scheme also places financial burdens on people requiring medicines, government, and ultimately, taxpayers (Think Progress). Until pharmaceutical companies embrace their moral duty to provide drugs as an end (public good) rather than as a means (to profit), there will be a need for government intervention.

Editor: Eric Witmer

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