Specialty Pharma Pricing – Striking the Right Balance in Fact and Appearance Through Sound Governance

By Steve Vincze

Specialty pharmaceutical drug pricing has exploded as a top headline this week. The comments and decisions of Turing Pharmaceuticals CEO, Martin Shkreli, the former CEO of Retrophin Pharmaceuticals, and a former hedge fund manager has triggered this most recent flurry of outrage directed at the pharmaceutical industry. Mr. Shkreli stated that the 5,000 % price increase from $13.50 to $750 per pill of its recently acquired drug, Daraprim, is “not outrageous at all” and that he does not intend to lower the price. Daraprim is a 62-year old drug used as a treatment for toxoplasmosis, an infection caused by a parasite. Daraprim was recently acquired by Turing with the new pricing announced in August. With this price hike, the average cost of treatment for patients rose from about $1,130 to $63,000. Many of these patient have AIDS and/or other autoimmune disorders. Presidential candidate Hillary Clinton tweeted, “Price gouging like this in the specialty drug market is outrageous.” This issue has thrust specialty pharma into the heat of the national spotlight.

As the co-chair of the first Compliance Congress focused on Specialty Pharmaceutical Products held just last week in Boston, it’s fascinating to observe how, yet again, one example by one company and one CEO can create such havoc so fast for a whole industry. I lived through it with the TAP case 14 years ago. Once again, the lesson, “Appearance matters” is reinforced. It’s a small world. What one specialty pharma company does may affect all of pharma. To underscore that point, Brent Saunders, CEO of Allergan, and PhRMA, the association representing pharmaceutical manufacturers, made separate public statements this week distinguishing their positions from Turing’s on pricing, clearly looking to distance themselves from the controversy. Mr. Shkreli and Turing have most recently announced that they will now be lowering the price if Daraprim in response to the strong public criticism.

What is the lesson here? Without taking sides on a hot political and emotional issue, it is important to understand how specialty pharma companies can avoid triggering this type of situation. It starts with good corporate governance. But perhaps, more fundamentally, it may be as simple as recognizing a basic fact: Health care is different. Applying economic principles, financial analysis and legal tests that may not adequately take the specific public policy and political context of healthcare into account runs the risk of underestimating the potential for the type of explosive reaction we witnessed this week.

Other CEO’s of other specialty pharma company have and will continue to struggle with these type of difficult issues. As independent observers whose profession it is to advise and assist specialty pharma and life science companies, we share the following insights:

  • First, CEO’s of specialty pharma companies need to understand that they are personally more vulnerable and exposed to individual and personal risk. This was made loud and clear by a panel of Assistant U.S. Attorneys I co-moderated at the conference in Boston last week. By the very nature of their role and of their company, specialty pharma CEOs are very hands on, very engaged with nearly every aspect of their company. Many are scientists, physicians and driven by their relentless passion to help patients and their families that are suffering from a rare disease that is currently untreated. They are also under great pressure to raise enormous sums of money to conduct clinical trials that take years and which often fail or require further testing. The pressures to succeed, both self-imposed and external, are enormous. Nevertheless, to avoid a tendency to focus on pure science and finances, CEO’s would be wise to invest early in a governance structure – a support system — that provides them the arms-length wisdom and advice to make good, sound decisions consistently and that take into account the unique health care public policy and political considerations that are an inherent part of their world. In retrospect, Mr. Shkreli, as a relative new-comer to the industry, likely underestimated the combustible nature of these issues and, how, with the spark from a brewing presidential campaign, this mix can explode. Corporate history in and out of healthcare is riddled with unfortunate examples of “smart” executives that, in retrospect, may have had both a tin ear and a blind spot for the larger public policy implications of their decisions. “Just because it’s legal, doesn’t make it right” and “How does this affect patients?” should be two guiding principles etched in granite for every pharmaceutical company. In this volatile environment, it’s not enough to be smart in what you know; you must also apply wisdom to what you don’t know.
  • The second key take-away is: It is never too early to put in place an effective governance process. The key is scale and timing, i.e., how much is needed and when? As specialty pharma company’s evolve getting FDA approval and bringing products to market, with associated commercial decisions surrounding that process, one of several necessary components of an effective governance process is an effective ethics and compliance program. Again the key is scale and timing. Perceived egregious examples of questionable behavior by one company, whether justified or not, touches every company. We saw it with the TAP case, where the rules for commercial interactions with physicians were literally re-written for the entire pharmaceutical industry. In this case, specialty pharmaceutical companies and their CEO’s can certainly anticipate increased enforcement and regulatory scrutiny by the DOJ, OIG, and FDA, even beyond what prosecutors shared at our conference last week.
  • Finally, this controversy will likely taint, at least temporarily, the whole specialty pharmaceutical industry with a negative broad brush, affecting all specialty companies despite any sincere passion for science, medicine and discovering new treatments and cures for patients with rare diseases and unmet needs. Stocks have already taken a hit. Investors see the writing on the wall, and are pulling much-needed capital to fund new discoveries. Specialty pharmaceutical companies and their CEOs should invest in an appropriately scaled level of governance and ethics and compliance processes to help avoid the type of negative outcome we’ve seen this week. Perhaps even more importantly, such investment will help build trust proactively with everyone – from investors to patients to regulators and enforcers – and allay the skittishness evidenced by the market’s reaction to the Turing circumstances. Everyone assumes this kind of scrutiny won’t happen to them. But it happens all too often to all too many. The tsunami of scrutiny is growing. It’s important to get ahead of this wave and appreciate the factors that will cause it to grow in the foreseeable future.

We at Polaris pride ourselves on understanding our clients, their companies, and the life science industry from a governance, risk and compliance perspective. We understand the importance of a governance structure that integrates compliance processes, among others, through a system of checks and balances that consistently produce the right outcomes. In today’s complex regulatory life science environment, it is important to harness every means available to consistently make the right decisions that reflect a sincere and tangible commitment to protecting the well-being of patients, consumers and taxpayers. Whether it’s through the thoughtful application of sound, wise advice grounded in years of experience or cutting edge technology solutions that ensure consistent, efficient and compliant physician interactions and reporting, Polaris is committed to helping and serving its life science clients and CEOs navigate these tough issues appropriately, in fact and appearance.

Ultimately, it comes down to trust – can patients, their families, the public and enforcement agencies trust what a pharmaceutical company says and does? Do the company’s words and actions reflect a sincere commitment to the welfare of patients? This is the simple question that lies at the heart of both the current debate and the solutions to it. We can help answer that question recognizing that the true bottom-line and final take-away is that you have to be accountable – no matter what. It’s about the lives of patients. It matters.

L. Stephan Vincze
Boston Managing Partner
Polaris Management Partners & Polaris Solutions
svincze@polarismanagement.com
Tel: +1 617 444 8762

For more about Polaris Management Partners and Polaris Solutions, please visit our website at www.polarismanagement.com