Problematic Pharmaceutical Pricing as an Investor Collective Action Problem?

The U.S. Senate Special Committee on Aging recently released its report Sudden Price Spikes in Off-Patent Prescription Drugs: The Monopoly Business Model that Harms Patients, Taxpayers, and the U.S. Health Care System (hereinafter Report).  Using four companies as case studies—Turing Pharmaceuticals, Retrophin, Valeant Pharmaceuticals International, and Rodelis Therapeutics—this Report specifically investigates one corner of recent drug pricing controversies: dramatically increased prices on old off-patent pharmaceuticals.  Per the Report, these companies pursued a business model that sought to “identify and acquire off-patent sole-source drugs over which they could exercise de facto monopoly pricing power, and then impose and protect astronomical price increases.”[1]

For a variety of reasons, these particular price increases are morally troubling.  It’s not just that these increases may be exploitative.  The plain human consequences of these businesses’ brazen, yet seemingly legal, decisions are gravely concerning.  These corporate actions harm patients in need of the companies’ drugs, the families and physicians who care for those patients, and the healthcare system that helps pay the tab.

What’s driving this morally concerning behavior?  A common refrain points to weak government regulation.  No doubt improvements can be made, but a significant and seemingly oft overlooked part of the answer may point to investors.  What role have investors played in pricing controversies and what role ought they to play?

The Report suggests that prominent shareholders were often in contact with the senior management of the investigated pharmaceutical companies.  These investors, even if not outright encouraging price increases, at least appear complacent.  Examples include:

  • A partner from Broadfin Capital, a major investor in Retrophin Inc., commented in an email to Retrophin’s then CEO: “‘Funny that these small companies still haven’t realized you can raise price aggressively and nobody gets too upset? Obviously depends on the product—but I figure this dynamic may not last forever, you need to maximize opportunities while you can….’”[2]
  • Citing press accounts, the Report notes that ValueAct Capital, a significant investor in Valeant Pharmaceuticals, appears to have “invested in Valeant because they saw an opportunity to turn the company into a profitable investment through aggressive acquisitions, cutting R&D, and increasing drug prices.”[3]
  • The CEO of Pershing Square Capital Management, a prominent Valeant shareholder, testified that “Valeant’s price increases on individual drugs were not transparent to him as only a shareholder….” Nevertheless the CEO of Pershing Square corresponded with the then CEO of Valeant on the handling of “‘the price increase question’”.[4]

To be fair, the partner from Broadfin testified that this correspondence, though including a discussion of a drug increase investigated by the Special Committee, was allegedly largely about another deal.  He further pointed out that Broadfin declined to invest in Turing Pharmaceuticals.  Both the partner from Broadfin and the CEO of Pershing Square testified that their firms make long-term investments.  The CEO of Pershing Square indicated during his testimony that he found the price increases taken at Valeant to be troubling.  It does not look like anyone from ValueAct testified.

Companies are highly sensitive to the expectations of their investors.  A dominant view in the academy and corporate America is that a company’s purpose, if not legal obligation, is to maximize shareholder value.  There’s some debate, however, as to what that means, and discretion in the mechanisms by which one could go about pursuing such an end.

Granted, not all shareholders necessarily share the same incentives nor are on equal footing with respect to the power they can exert.  Hedge funds, for instance, in contrast to retail investors and mutual funds, often can appear to “have the clear advantage, because they concentrate their investment portfolios into just a few securities. This means it is worth their while to spend the time and effort necessary to become involved in a particular firm’s affairs.” [5]

Yet, to the extent management works for and heeds investors, perhaps some blame may be appropriately shared by investors.  Should not investors at least comment on or look into corporate actions that appear morally, even if not legally, troubling?  Or, do investors have a pass to tacitly look the other way?  And, how should we think about investors who encourage morally problematic behavior?  If opprobrium is appropriately directed at a company, in some circumstances it might be appropriate to extend it to their backers.

But what can the average investor really do?  An obvious suggestion is that investors should change how they invest.

Depressingly, however, at least with respect to public markets, research suggests virtually nothing can be done through investing itself.  “It is virtually impossible for investors to affect the outputs or behavior of firms whose securities trade in public markets through the financial mechanisms of buying and selling securities in the secondary market.”[6]  This is because “the vast majority of investors in public markets are socially neutral—hence, indifferent to a firm’s social value.”[7]  In a world populated mostly by socially-neutral investors, these investors will drive down any premium created by socially-motivated investing by selling what they consider to be overpriced shares.[8]

In other words, it’s a kind of collective action problem.

Recognizing the apparent limitations on a strategy of changing investments, the National Academy for State Health Policy recommends that state public pension funds wield their influence to hold pharmaceutical companies accountable for their pricing decisions by engaging in shareholder activism.  In contrast to attempting to impart change through the purchase of investments themselves, shareholder activism attempts to make an impact through activities like shareholder voting and the submission of resolutions to a company’s board.

Either way, one possible solution is that more investors—retail, pension, mutual, and hedge funds alike—need to care.  Particularly for price hikes on old lifesaving medications, we need more investors to recognize that reasonable limits ought to be placed on pharmaceutical price increases.  This seems true both for engaging in shareholder activism as well as investment strategy.

With respect to the latter, this is the thought:  What would happen if a sufficient number of investors were sensitive to these issues?  If socially-motivated divesting or purchasing fails to have impact in public markets because there are just too many socially-neutral investors, this suggests we need more socially-motivated investors.  If there were enough socially-motivated investors, could that negate the effects of socially-neutral investors?  Of course, if the answer is yes, then we’d need to figure out (1) what kind of ratio would be enough to tip the scales, and (2) what is the best way to bring about that change?

More investors should care about drug pricing issues, if only out of broader self-interest.  The business model described above can be a disservice to the interests of long-term investors (and pharmaceutical companies).  Furthermore, while some may be spared because of great wealth or luck, most of us, at one point or another get sick or have loved ones who get sick.  If we’re lucky enough to have an illness for which an existing medication can offer relief, we’re not going to want to worry—and shouldn’t have to worry—about how and whether it can be paid for.


Rebecca E. Wolitz is a Fellow in the Center for Law and the Biosciences

[1] U.S. Senate Special Committee on Aging, Sudden Price Spikes in Off-Patent Prescription Drugs: The Monopoly Business Model that Harms Patients, Taxpayers, and the U.S. Health Care System 4 (Dec. 2016), (last visited Feb. 8, 2017)

[2] Id. at 86 (emphasis in original).

[3] Id. at 90.

[4] Id. at 92.

[5] Lynn A. Stout, The Shareholder Value Myth 48 (2012).

[6] Paul Brest, Ronald Gilson & Mark Wolfson, How Investors Can (and Can’t) Create Social Value, Stanford Social Innovation Review, Dec. 8, 2016, (last visited Feb. 8, 2017).

[7] Id.

[8] Id.