The pharmaceutical industry's rationale that it needs high prices to afford the research has been turned on its head by Valeant's business model of spending less than 3 percent on research & development (R&D) and paying less than 3 percent in taxes. Under CEO Mike Pearson's leadership, Valeant attracted many investors and increased its stock-market value to more than $90 billion by last August. Since then, serious operating problems and questions about its business practices have contributed to a 60 percent share- price decline.
Pearson, a former management consultant, says 3 percent is sufficient because Valeant R&D is much more efficient than the big pharmaceutical companies. As a longtime medical technology executive, I find this assertion preposterous, because no pharmaceutical company can create breakthrough drugs for just 3 percent of revenues. The most productive pharmaceutical companies such as Merck, Eli Lilly, and Roche, spend 17 percent to 24 percent on R&D. They have deep internal expertise and take on scientific risk, rather than just acquiring small drugs and marketing them.
As egregious as these price increases may be, they are just the tip of the iceberg. A much deeper problem threatens the financial viability of the Affordable Care Act (ACA), known as Obamacare. When President Obama's former chief of staff Rahm Emanuel was putting together ACA back in 2009, he negotiated deals with leading pharmaceutical companies. For their support of ACA and $70 billion in payments to the federal government, the pharmaceutical industry obtained legal guarantees that the government could not negotiate drug prices. Now the chickens are coming home to roost for the government and private health plans as pharma makers regularly increase prices 6 percent to 10 percent — and many go far higher.