Business Case: Turing Pharmaceutical PDF

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Course Code:

MGMT-703

Course Name:

Ethics and Stakeholder Management

Module 8 – Turing Pharmaceuticals: The Ethics of Drug Pricing Business Case #3

July 20, 2020

TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

Executive Summary This case showed one of the dark sides of a pharmaceutical firm, Turing Pharmaceuticals AG (Turing). It was evident in the media when the company Turing increased the price of Daraprim medicine all sudden from US$ 13.5 to US$750 per tablet. Daraprim has been in the market for decades and it was proven to be an effective cure for toxoplasmosis, a parasitic disease that damages the immune system. An increase in prices of medical drugs is common in every pharmaceutical industry because this is where they highly generated the majority of their profit. In this industry, no one dictates at what price should drugs to be offered. Under the leadership of Martin Shkreli, founder and former CEO of Turing, he publicly announced the increase in the price of Daraprim drug for more than 5000% because of the modernization of their research and development (R&D) on this drug. The firm also acquired Impax Laboratories worth $55 million for the manufacture and commercialization right of Daraprim. However, there was an internal disagreement of this press release of Shkreli about the R&D of the drug. It is not accordingly to what is happening inside Turing and its employees. After Shkreli’s resignation, the appointed CEO, Ron Tilles and his management team are at stake to prioritize the company’s profitability or public drug availability and affordability. Given the arising problems, the team provided several alternative strategies such as the new pricing of Daraprim drug. As recommended, the firm should also provide more into CSR activities, reassess employee commitment and loyalty, and recalibrate the strategy of the R&D process. In line with this, the company can attract more investors and strengthen its relationship with the stakeholders. Moreover, the company can take an appropriate action plan as the company needs to be transparent in terms of its R&D activities so that it can establish the trust of the investors while making the products. Action plans are divided into three plans – immediate, within 6 months and 1 year.

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TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

Overall, these stakeholders should make plans with proper implementation of corporate social responsibility so that company will able to get their investor’s trust and get more funds its R&D activities and work on new products. In addition, the company can figure out the new channels of price and product distributions.

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TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

TABLE OF CONTENTS Executive Summary…………………………………………………. 1

I. Introduction………………………………………………………..4 II. Define the Problem……………………………………………….6

III. Problem Analysis a. SWOT Analysis…………………………………...8 b. Fish Bone Analysis……………………………….10 IV. Identification and Evaluation of Alternatives………………….13

V. Recommended Course of Action……………………………....17 VI. Action Plan and Implementation……………………………….19 Conclusion…………………………………………………………….21

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TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

I.

Introduction

Turing pharmaceuticals AG (Turing) is a privately-held biopharmaceutical company in New York. It was founded by Martin Shkreli in February 2015, and he was appointed as the chief executive officer (CEO) of the biotech firm. Under Shkreli’s leadership, Turing publicly announced an increase of price from US$13.502 to $750.00 a pill on one of its medical drugs, Daraprim (pyrimethamine). This drug has been in the market for decades and had its off-patent in 1970. It was known to treat toxoplasmosis, a parasitic disease that weakens immune systems due to HIV/AIDS, 9 cancer, pregnancy, or organ transplant. Acquisition of Impax Laboratories on the manufacturing and commercialization rights of Daraprim was the main reason of Turing for increasing the price of the drug. As publicly announced by Shkreli, he stated that it would support research and development on modernizing the 1953 drug to develop a refined version of the “next-generation drugs”. Also the price increase was evident because of the drug is highly specialized. With this announcement, several stakeholders were unhappy about it, most especially the newly appointed interim CEO, Ron Tilles, who is responsible to address the issues and challenges of Daraprim’s price increase. Below is the list of stakeholders in this case report: Ron Tilles and his management team - As Shkreli resigned and left this price hike issue, Ron Tilles is obliged to address the arising issues about this matter. Tilles and his team are at stake on whether to maximize their company profit or economic availability of the drug, Daraprim. Employees – Inside Turing firm, most of its employee’s particularly senior officials, are unhappy about the price increase because they believe it will result in a negative impact on Turing’s brand image. Also, the company is increasing their salaries because of the Daraprim program, but it is experiencing a financial loss. 4

TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

Patients – Due to the increased price of Daraprim, they are seeking for alternatives as a substitution for the drug. For instance, Isla and the family who is diagnosed with congenital toxoplasmosis, are experiencing expensive medication for their daughter Isla to survive. Hospitals – Same experience with the patients, hospitals are looking for drug substitution for their patients because Daraprim drug price is not economical for them. For example, Massachusetts General is switching on prescribing from Daraprim to Bactrim to their patients, despite the guaranteed efficacy of the drug. Congress – Several U.S. senators that demand the explanation behind the price increase of Daraprim drug, regardless of the purpose of having a closed distribution system and modernized R&D. They have an implicit power to control the firm’s operation if they found out that the drug price increase is unethical. Media – Since Shkreli announced the price increase publicly, the media went outraged about it and can impact on the image of Turing. No matter what content the media will release about the company, it may affect the decision-making of stakeholders like customers, investors, and employees. Investors – As the price of Daraprim increased, Turing’s company stock price will decrease because that move was unethical to the public. A possibility of losing sales is one of the main reasons that this will be unattractive to investors. Insurance Companies – The increase in drug price can highly affect the insurance companies because they would need to charge their members with higher insurance premiums as well

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TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

II.

Define the Problem

Main Problem:

Turing Pharmaceuticals AG (Turing) drastically increased its price by more than 5000% on one of its drugs, Daraprim (pyrimethamine) that was done under the leadership of founder and former CEO, Martin Shkreli. Only in the United States, the drug price was from US$13.502 to $750.00 a pill. Meanwhile, in other countries, they are offered at a lower cost.

Problem 2:

Martin Shkreli stated publicly that the price increase of Daraprim was to maximize profit for investors, but the truth is to cover up the “dirty secret” of pharma. During the leadership of Shkreli, he mentioned to Dr. Rima McLeod, the medical director of the toxoplasmosis center at the University of Chicago, which the purpose of price increase is for the “dirty secret” of the pharma and not for research and development. This conversation between Shkreli and Dr. McLeod was cascaded to Eliseo Salinas, Turing’s current president of R&D. Also, Nancy Retzlaff, Turing’s chief commercial officer, testified that it was only 60% was used in R&D.

Problem 3: Turing will harm their brand image because of the more than 5000% price increase such as a decline in sales performance due to customers seek for substitution. Since the announcement of the price increase, the media started releasing outrageinducing article headlines. Turing is getting numerous inquiries from several U.S. 6

TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

senators, who use the drug and demanding for an explanation about the pricing decisions. There are also hospitals like Massachusetts General that are switching on prescribing from Daraprim to Bactrim.

Problem 4: Martin Shkreli, founder and former CEO of Turing has numerous unethical work histories in the pharmaceutical industry like securities fraud. Before establishing Turing firm, Shkreli has several issues with other companies like improper handling of legal settlements and siphoning Retrophin’s money. Thus, this unethical work history can happen also with Turing’s unethical price increase of drug. Problem 5:

Ron Tilles, the new chairman of the board, was appointed interim CEO, is at stake whether to prioritize a company’s profits or consider drug availability in the industry. Since the public scrutiny happened after the resignation of Shkreli, Tilles is the new chairman and interim CEO of Turing, who needs to handle the drastic price increase of Daraprim done by Shkreli, that he calls “dirty secret” of pharma.

Problem 6: Turing’s Daraprim program is at a financial loss and at the same time, employee salary was increasing. Nancy Retzlaff, Turing’s chief commercial officer, stated that the program is experiencing financial losses with an approximately $98 million gross sales and $20 million net sales. At the same time, the firm is increasing the salaries of its employees, which was 7

TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

mentioned on a board agenda held on October 14, 2015. III.

Problem Analysis. Corresponding to the SWOT and Fish Bone Analysis (Ishikawa).

a) SWOT ANALYSIS

STRENGTHS

WEAKNESSES

OPPORTUNITIES

Acquisition of Impax Turing was founded Since

THREATS

1970, Due

to

the

price

Laboratories for the and operated under Daraprim is in the increase of the drug, manufacturing and the commercialization

leadership

of market which shows there will be sought of

Martin Shkreli who drug

rights of Daraprim has

an

effectiveness alternatives

on

the

unethical and credibility to the consumer's end.

will be easier for work history in the consumer. Turing to produce pharmaceutical the drug.

industry.

Daraprim is a highly Daraprim has a price No one dictates the Turing's specialized

drug

price

drug increase for more drug price in the increase can result in a

that has been in the than 5000%, which pharmaceutical

decline in stock prices

market for decades is not economically industry.

that

to provide efficient practical for patients,

investors.

treatment

unattracted

to partnered hospitals

toxoplasmosis,

a and insurers (who

parasitic disease.

represent

the

minority of patients). Shkreli

passionate Daraprim is having Since Daraprim is in There will be numerous

about his career and financial loss while the market for a long biotech firms within the has

numerous increasing the salary time, Turing can set pharmaceutical

experiences in the of their employees.

the

bar

for

the industry that can offer a

pharmaceutical

pricing of that type more

industry for several

of during and can efficient

affordable drug

and than 8

TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

years.

monopolize

the Daraprim.

industry.

Turing

has

an The

price

of Turing's stock price The media can inform

advanced capability Daraprim

is can go higher if they the

of modernizing the significantly lower in can drug

provide

public

about

the whether a good or bad

Daraprim other countries than modernized drug for image of Turing and its

because they were in the US, this could the new generation products. able

to

acquire mislead consumers at

Impax Laboratories. Turing

on pricing strategy.

an

price.

has Daraprim program is With

competent

who

the

new The

senior- at a financial loss management

level employees like while the company is CEO, Howard

affordable

Dorfman, increasing saw

Turing

and hinder

congress

can

Turing

from

can operating its business if

the change and improve they found out that the

the employee's salaries.

the Daraprim drug price

actions

with

done

Shkreli

Impax Laboratories. "dirty secret" of the firm.

under

help

is

unethical by

the

increase

of unethical and due to a

his

leadership.

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TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

b) Fish Bone Analysis (Ishikawa). Problem 1.

Problem 2.

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TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

Problem 3.

Problem 4.

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TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

Problem 5.

Problem 6.

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TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

IV.

Identification and Evaluation of Alternatives

1. The company needs to come up with a new pricing strategy for Daraprim tablets and the management must announce to the public that this happened during the time of Martin Shkreli and he has been removed from the company because of his unethical practices. Pros: o This will raise the image of the company. o Helps the company to satisfy the needs of its stakeholders. o Reduced pricing will increase the sales of the company. o The company can save many lives when Daraprim became more affordable to the public

Cons: o Reduced pricing will reduce the profit of the company. o Problems with shareholders will happen. o Reduced profit will lose the investors and shareholders of the company.

2. The company needs to clean up the statements done by Shkreli with an appropriate action plan for the company’s R&D process. The action plan should be more visible and clearer to the public. Pros: o The stakeholder’s trust in the company will increase. o The public will get a clear idea about the company’s intention towards the betterment of society. o This will increase the public image of the company. o It will help the company to state that Shkreli’s statement was wrong and 13

TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

misleading to the public. Cons: o The company will lose its secrecy in the areas of research and development. o This might cause the chance of competition.

3. The company should evaluate and properly monitor the employee’s commitment and loyalty towards the company. Pros: o This will help the company to avoid both the internal and external problems of the company. o The management can understand each employee’s intention and the level of his commitment towards the company. o This will improve the commitment and loyalty of its employees. o The company will get an idea about the future risks and threats of the company. This will help the company to find a solution in a faster way.

Cons: o Not practical in all the time. o The employees will act loyal to the company to escape from this. o Time-consuming process.

4. The company must participate and concentrate more on its CSR activities, which will help the company to show its commitment towards its stakeholders. Pros: o It will help the company to improve its image in public. o The company will get more positive media coverage and helps the company to get more publicity. 14

TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

o The company will get more supports from the government. o Helps to increase the sales of the company. Cons: o A financial burden to the company. o Impact the interests of the company’s shareholders. o Reduce the profit of the company.

5. The company can increase the profits by increasing the market scope and availability of enough drugs in the market, instead of worrying about the employee’s salary. Pros: o This will increase the profit of the company. o Daraprim will be easily available for the people in need. o The company can ensure enough supply of Daraprim tablets in the market. o This will enlarge the company’s target market. Cons: o Inaccurate information and studies about the market will adversely affect the objectives of the company. o The company’s production and transportation costs will increase.

6. The company can conduct a survey or study to ensure that all the patients using Daraprim have insurance coverage. Pros: o This will show the company’s commitment to its customers. o This study will help the company to take accurate decisions like pricing. o This will protect the interest of the customers. o Increase the brand image of the company. o Helps the company to identify the problems facing by the customers. 15

TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

Cons: o Time-consuming process. o Lack of accurate information and responses from the customers will affect the objective of the plan.

7. The U.S. government can initiate some legal actions to protect the patients from the overpricing of the drugs. Pros: o This will protect the customers from overpricing of the drugs. o Remove unethical pricing practices from the pharma industry. o

Protect the rights of citizens.

Cons: o Regulations in pricing affect the supply of enough drugs to the market. o Reduce the chances of new entrants to the industry.

8. The company can implement a new distribution system rather than the company’s current closed and restricted distribution system. Pros: o The company can ensure the proper supply of Daraprim to the market based on its demand. o The patients will get easy access to the drug when they in need. o Will generate more sales and revenue Cons: o A financial burden to the company. o Proper evaluation and inspection needed to avoid the risks

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TURING PHARMACEUTICALS: THE ETHICS OF DRUG PRICING

V.

Recommended Course of Action

Recommendations:

Explanation and Rationale

Recommendation 1: The company can take a new strategy in The company can accept the concepts of the pricing of Daraprim. The mix of cost- cost-based

and

value-based

pricing

based and value-based pricing strategies strategies instead of its present skimming will work effectively.

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