Monthly Archives: September 2016

CNBC: Mylan CEO’s Testimony Was a Huge Blow to the Entire Pharma Industry

The disregard for children’s health that Mylan CEO Heather Bresch demonstrated in her testimony to the House Oversight and Government Reform Committee directly harms consumers.

Less directly, Mylan’s exceptionally high price increases erode public confidence in all medical companies, including those investing billions in research to help people suffering from life-threatening diseases.
When companies like Mylan, Valeant and Turing Pharmaceuticals — which have grown profits through financial engineering, not drug discovery — take advantage of loopholes in our health-care system, they create public outrage against all medical companies. I have a growing concern this outrage will have dire consequences for research-based pharmaceutical companies, and could even lead to price controls.

Rather than acknowledging her mistakes in raising EpiPen prices 500 percent from $100 to more than $600, Bresch has tried to obfuscate her actions by shifting the blame to health plans and pharmacy benefits managers that have instituted co-payment and high deductible plans to keep premiums low for strapped consumers. Mylan’s largest price increases came shortly after the FDA pulled its competitors off the market, leaving the firm with a monopoly.

Meanwhile, Bresch claimed Mylan was not making much money on EpiPens while admitting it earned $100 on a net selling price of $274 (after normal discounts). In her testimony she said Mylan earned $100 on a net selling price of $274 (after normal discounts). It turns out that Bresch misstated Mylan’s profit on Epipens – it’s actually $160, not $100, as the Wall Street Journal reported. That is a profit margin of 60 percent – exceptionally high by any standard. Yet she could not answer basic questions from Congress about revenues from EpiPens and their contribution to Mylan’s profits.

Bresch used EpiPen’s success to fuel her rapid rise to the CEO’s office, yet she proved in that testimony that she is not stepping up to the responsibilities her role demands. Publicly, she led with her chin by saying, “I am running a business to make money” as if she were running a financial fund.

Bresch may feel protected from the wrath of Congress and the public by Mylan’s highly unusual governance procedures, established when the company executed a tax inversion to The Netherlands in 2015 after it turned down a purchase offer from rival Teva valued at more than twice today’s stock price. Under its procedures shareholders don’t get to nominate board members; only the board can do that.
Authentic health-care companies from Mayo to Merck understand they are in business to restore people’s health, and if they did that well, profits would follow. Mylan seems to be ignoring Merck founder George Merck’s admonition, “Medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear.”

At Medtronic, our founder Earl Bakken charged us with “using biomedical engineering … to restore health.” As Medtronic revenues grew from $400 million in 1985 to $30 billion today, every CEO has faithfully followed Bakken’s mission through good times and difficult ones. Medtronic’s proudest achievement over these 31 years is not its growth in shareholder value from $400 million to $120 billion, but fulfilling its original mission by expanding the number of new patients restored each year from 150,000 to 30 million today.

In 1990 in response to public concerns over rising health-care costs, Medtronic instituted a “no price increase” policy. This put pressure on us to reduce our costs while spurring investment in more advanced products. It paid off with rapid growth and high profits, which were invested in research and development, expansion into emerging markets, and acquisitions to broaden the company’s base.
One of Bresch’s only defenders in this experience is disgraced former hedge-fund manager Martin Shkreli, who resigned as CEO of Turing after his outrageous 5,500 percent price increases on an AIDS drug fueled public anger. To Bresch’s credit, she tried to answer questions, while just Shkreli smirked in his Congressional appearance while taking the Fifth Amendment. He later arrogantly called the congressmen, “imbeciles.” The public furor these bad actors have stirred up will not subside soon, especially in this election year, and are stimulating legislative actions rather than market-based solutions.

Pharmaceutical companies have long argued that they need patent protection and pricing freedom in order to justify returns on large investments in research. Yet that argument falls flat in the cases of Mylan, Valeant and Turing, which historically have not invested in research. As long as these types of companies stay in news, public pressure will mount for government price controls or at least the ability to negotiate prices. The unintended consequence of such actions could be cutbacks in high-risk research aimed at curing and healing the most threatening diseases that require high returns to justify high costs.

In contrast, the major pharmaceutical companies base their success on high-cost, high-risk science with long lead times and no assurance of returns. In recent years some short-term investors have argued for cutting back research and simply buying drugs from others. Yet those who have committed to research without hesitation — Merck, Amgen, Genentech and Novartis, just to name a few – have created breakthrough drugs that saved millions of lives and generated high returns on their investments for their long-term shareholders.
With pharmaceutical prices now under public scrutiny, responsible leaders of medical companies should call for and demonstrate restraint in setting prices for their products, especially when they enjoy protected positions. Thus far, the only CEOs to speak out publicly against these abuses are GSK’s Andrew Witty, Merck’s Ken Frazier and Allergan’s Brent Saunders. They should be voluntarily joined by other CEOs and industry associations like PhRMA and AdvaMed.

The time for health care’s leaders to act is now, before Congress acts for them.

Commentary by Bill George, a senior fellow at Harvard Business School and the former Chairman and CEO of Medtronic. He previously served on the board of Novartis. He is also author of the book “Discover Your True North.” Follow him on Twitter @Bill_George.


This content was originally posted on CNBC.com on 9/27/16. 

Why CEOs Need to Make a Better Case for Free Trade

Business leaders have been far too quiet on this key issue.

With the presidential election looming, this much is clear: Populism is the big winner in 2016, and America’s global businesses may be the biggest loser.

Donald Trump claimed the Republican nomination on the strength of a candidacy opposed to free trade. Faced with the insurgent candidacy of Bernie Sanders, former Secretary of State Hillary Clinton, shifted her positions, most notably now opposing the Trans-Pacific Partnership (TPP).

Business leaders face a dilemma: what should they do when both candidates are spouting positions that are directly contrary to their interests? Thus far, they are remaining silent, assuming they can recover after the election through an inside game. This may be a historic misjudgment on their part.

For the past quarter-century, global trade has been the engine of American business growth and its dominance of numerous global markets. Rather than remain silent, business leaders should offer rebuttals, speaking out now to provide policy solutions for the new administration. Let’s look at some of the most vital areas:

Free Trade

Trade has created millions of jobs in the U.S., far more than jobs lost. The U.S. Chamber of Commerce points out that NAFTA alone created 5 million jobs. Other experts warn that the massive 45% tariff on Chinese imports that Trump proposes would cause a trade war with China striking back with excessive tariffs of its own or banning imports from the U.S. altogether. High tariffs on Chinese and Mexican goods would raise prices for U.S. consumers, hurting lower-incomes families who shop at Walmart (WMT) or Target (TGT).

As trade has opened up, American companies dominate the list of the world’s most valuable companies. At the end of 2015, 579 of the 2,000 largest companies are U.S.-based. Abandoning free trade risks both jobs and economic value creation.

Job Creation

Technology and productivity gains, not trade, have held down job creation during the last decade. For example, it takes only 10% as many workers to build a Ford as it did 20 years ago, thanks to automation. Meanwhile, the U.S. auto industry is booming, producing record numbers of vehicles as the Big Three have regained competitiveness with foreign makers. Communications advances have made global outsourcing easier for large U.S. firms who can offshore lower-value jobs, such as customer care or software QA, to cost-effective locations. At Medtronic, we found every factory worker added in our overseas plants created three new jobs in the U.S. in R&D, manufacturing processes, marketing and sales. Silicon Valley companies have an even greater ratio.

Watch Donald Trump’s speech on trade:

Corporate Taxes

U.S.-based companies hold more than $2 trillion of cash overseas, because they refuse to pay both overseas taxes and the higher U.S. corporate tax rate of 35% to repatriate the funds. Meanwhile, this money is not being reinvested in the United States. This dysfunctional system makes U.S. companies more valuable to foreign acquirers than their U.S. shareholders, and has caused several companies to relocate their legal headquarters outside of the U.S.

The U.S. could fix this problem by reducing corporate tax rates while eliminating loopholes in tax policy. Short-term, the government should create a foreign income tax repatriation holiday of taxes at 10-12% for companies with specific plans to reinvest the savings in the U.S. My Harvard Business School colleagues, Michael Porter and Jan Rivkin, would go a step further with territorial taxes that tax profits where they are earned. This would eliminate double-taxation of profits, thereby enabling American companies to redeploy capital in smart investments at home. At the same time, doubling investment tax credits for new tangible assets and increased research and development would strengthen the technology advantage for America’s global companies.

Education

While unemployment has dropped 50% since President Obama took office, millions of Americans that lost their jobs in the 2008-09 recession lack the skills for today’s positions. The failure of the U.S. Congress to authorize funds for job retraining after the 2008-09 recession has contributed to these problems. Our K-12 and higher education systems also do not produce the talent that innovative companies need to grow.

In addition to job retraining, the U.S. needs to strengthen its vocational and technical education system, encouraging more high school students to consider these alternatives. Some companies, such as AT&T, are partnering with schools like Georgia Tech to offer specialized online training. The U.S. could do much more to ensure that educational institutions provide the mentoring, faculty and facilities that produce the types of workers companies clamor to hire.

Isolationism Won’t Make America Great

Concerns about wage stagnation among U.S. workers are legitimate, but they are only part of the broader economic story. Suppressing free trade will harm these workers much more than the companies who can access overseas labor.

Corporate leaders need to take on the importance of making American companies fully competitive in global markets. A pro-growth agenda—one that educates workers for the future, incentivizes investment and allocates resources effectively through trade—is a far better way to navigate the next decade than practicing the politics of isolationism.

Business leaders have an important case to make. There are only two months left to speak out.

Bill George is Senior Fellow at Harvard Business School, former Chair & CEO of Medtronic and author of Discover Your True North.


This article was originally posted on 9/7/16 on Fortune.com.