“A sort of noble purpose”

A professor of management practice at Harvard Business School recently asked a provocative question about the drug industry: “Is the role of leading large pharmaceutical companies to discover lifesaving drugs or to make money for shareholders through financial engineering?”

His question was aimed at a company that was, obviously, more interested in the money, but adept at disguising that fact. In researching the issue, Andrew Ross Sorkin, at The New York Times, focused on Mike Pearson, the chief executive of Valeant Pharmaceuticals, who spoke about his company’s “sort of noble purpose” in pursuing the development of life-saving drugs.

Finding such drugs is difficult of course, as it is impossible to know in advance if the expensive research will pan out. But Sorkin looked into Valeant’s record and found some disturbing facts. “Valeant [spends a mere] 3 percent [of its revenue on R&D], and has said it plans to cut around 20 percent of the combined companies’ 28,000 jobs.”

By comparison, another drug company, Allergan, spends 17 percent on R&D. Valeant is trying to take over Allergan, and Sorkin quotes a report of an investment firm: “The Allergan executive team is one of the best and most shareholder-focused in the pharmaceutical industry.” He comments: “And so what we’re left with isn’t a tale about a brilliantly innovative drug company trying to buy a mismanaged fixer-upper; it’s quite the opposite. Valeant, desperate for ways to increase its revenue, needs a cash cow to milk until it can find the next one.” (See, “Do Drug Companies Make Drugs, or Money?”)

Sorkin continues: “In case there is any question about Valeant’s slash-and-burn strategy, here is Mr. Pearson in his own words from last week on the value of research and development: ‘There has been lots and lots of reports, independent reports, talking about how R.&D. on average is no longer productive. I think most people accept that. So it is begging for a new model, and that is hopefully what we have come up with.’”

If the goal is sheer profit for investors, Mr. Pearson’s “new model” hardly resembles the “sort of noble purpose” he claims. Yes, R&D is expensive. But what is the alternative? If new drugs are just too costly to be developed, does that mean they will they not be developed? Who else could step in to do that? And how will we find the new medications we need?

This seems to be another example of how the short-term focus on investment returns is strangling long-term economic growth and development. Our economic system has been highly successful in stimulating and rewarding new enterprises. But now the drive for ever-greater returns by the financial industry is pushing us into a place where we can no longer rely upon private enterprise to produce the new drugs, services, and the other costly innovations we need – not to mention jobs.

Driven by the dominant role now occupied by finance in our society, which seems split off from the rest of the economy, have we become so fragmented and specialized that no one can see the consequences? And are CEOs now required to engage in double talk to conceal the frightening truth?