Skip to main content

Presidential candidates Hillary Clinton, Bernie Sanders and Donald Trump were outraged last fall when Turing Pharmaceuticals jacked up the price of Daraprim, a drug used to fight parasitic infections often found in AIDS patients, to $750 (all currency in U.S. dollars) a pill from $13.50. Yes, even The Donald.

Clinton tweeted that Turing's move was "price gouging" and promised to find ways "to control the cost of skyrocketing prescription drugs." That tweet knocked almost 5 per cent off the Nasdaq biotechnology index, and it has kept falling. Turing's co-founder and former CEO Martin Shkreli, who was later arrested for securities fraud in a case unrelated to the price of Daraprim, became the industry's instant bogeyman.

Shkreli is odious, but it was unfair to single him out, because price gouging has been a Big Pharma staple for decades, and it's getting worse. In March, U.S. pharmacy benefits manager Express Scripts revealed that the average wholesale price of patented prescription drugs climbed by 16 per cent in 2015, and has doubled over the past five years. By comparison, prices of generic drugs – which have had patent protection expire – fell by an average of 20 per cent last year.

Story continues below advertisement

Why do prices of name-brand drugs keep soaring? The simple answer is: Because they can. Drugs protected by patents are, by definition, monopolies, and U.S. prices are unregulated. Canadian prices are regulated and are at roughly the median of U.S. and Western European prices.

The more sophisticated answer is that governments and consumers have been brainwashed into thinking that endless double-digit price increases are necessary to fund world-class research and development programs for dazzling products that will make us all healthier and happier. This rationale, apparently, has allowed U.S. giant Gilead Sciences to charge $84,000 for a 12-week treatment course – about $1,000 a pill – for Sovaldi, an antiviral treatment for hepatitis C. Médecins Sans Frontières called that price "shocking," noting that it would cost $227-billion to treat the 2.7 million Americans with hep C, let alone the rest of the world.

The argument – sumptuous prices for sumptuous R&D – is a fraud. Among the largest pharmaceuticals companies in the Standard & Poor's 500 Index, the most prominent financial activity is not R&D spending. It is spending on share buybacks and dividends. Dividends are a tolerable expense for executives – they give investors income and reward them for hanging onto their shares over the long term. Buybacks are sheer greed. Investors profit by selling their shares back to the company, and the reduction of the number of shares outstanding pushes up the price. As a result, pharma CEOs now use buybacks with alacrity. Their compensation has become dominated by share options and awards. The more buybacks there are, the higher the share price and their pay. When Laval, Que.-based Valeant Pharmaceuticals' share price peaked last summer – before a big plunge in the fall – the value of CEO Michael Pearson's stock holdings and options swelled to close to $3-billion.

A paper written by the Academic-Industry Research Network (known as theAIRnet), a group of mostly U.S. academics who study industrial innovation issues, outlines how the cult of shareholder value has permeated the life sciences industry. The paper was submitted in February to the United Nations Secretary-General's high-level panel on access to medicines, and it pretty much destroyed the argument that R&D programs would fall apart without high prices for drugs. In the 10 years from 2005 to 2014, the 19 pharmaceuticals companies in the S&P 500 Index – including Johnson & Johnson, Pfizer, Merck and Amgen – distributed the equivalent of 97 per cent of their net income to shareholders through buybacks and dividends.

The authors, among them Canadian economist William Lazonick of the University of Massachusetts Lowell, highlighted Gilead for setting the "gold standard" for price gouging while also leading the explosion of executive pay. Gilead, which bills itself as a "research-based biopharmaceutical company," spent $27-billion on share buybacks between 2006 and 2015, about 60 per cent more than it spent on R&D. In 2015 alone, the company spent $10-billion on buybacks, which was 250 per cent more than its R&D outlay. Not surprisingly, Gilead has been a stock market star, with a five-year share price gain of 360 per cent. In 2014, CEO John Martin received 97 per cent of his compensation from stock-based pay, and he earned $193-million.

Last year, Jeffrey Sachs, director of Columbia University's Earth Institute, condemned Gilead for "unquenchable greed" for its sky-high hep C treatment prices. Gilead and its rivals still boast about their bold, risky and innovative R&D efforts, even though breakthroughs are now relatively rare. With no regulatory controls on either U.S. pharmaceutical prices or the flow of wealth to shareholders, drugs will get ever more expensive. This is American-style capitalism at its ugliest.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter