Fines are one-offs. Price hikes persist.
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Slaps on the wrist don't tend to change behavior.

By Sy Mukherjee
January 21, 2017

You’d think that a $100 million fine would be enough to chastise a company for bad behavior. When it comes to certain pharma giants, you’d probably be wrong.

Mallinckrodt mnk , an Ireland-based drug maker with about a $4.8 billion market cap, struck a settlement with the Federal Trade Commission (FTC) on Wednesday for monopolizing a drug and then extravagantly hiking its price. The backstory: a drug company called Questcor (now a unit of Mallinckrodt) had a major seller in Acthar, a treatment for infantile spasms and multiple sclerosis. Questcor snapped up the U.S. rights to a rival therapy from pharma giant Novartis nvs in 2013, effectively ensuring the company would have no viable competitors in the space.

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Having cornered the market, Questcor continued to extravagantly hike Acthar’s price, bringing it to the $1 billion annual sales range. The success story drew Mallinckrodt’s interest and led to a $5.6 billion acquisition.

Mallinckrodt then continued to hike Acthar’s price from $28,000 per vial at the time of the 2014 Questcor deal to $34,000 per vial now. All told, Acthar’s price has swelled a staggering 85,000% over 15 years, according to the FTC. (In no small bit of irony, the person who reportedly brought attention to Questcor’s price gouging was none other than the infamous, price-hiking Martin Shkreli himself.)

Which brings us to the FTC settlement: a $100 million fine for purposefully maintaining a monopoly on a drug that brought in one third of Mallinckrodt’s $3.4 billion net 2016 sales. Although Mallinckrodt will have to sell off its U.S. license for the competing Novartis therapy, it has no obligation to lower Acthar’s list price or hit pause on the price hikes since drug makers have carte blanche over their pricing in the U.S.

This highlights a critical moral hazard in the biopharma industry and the system of using fines to punish bad actors. Back when I was the editor of the trade publication BioPharma Dive, I had a fascinating conversation with Patrick Burns, Acting Executive Director and President of Taxpayers Against Fraud, a group that brings forward whistleblower cases under the anti-fraud False Claims Act. Burns argued that fines are ultimately ineffective because in the U.S., we “privatize the profits and we communitize or communize, if you will, the costs.”

What Burns means is that, ultimately, news of a big fine can cause a short-term (and relatively insignificant) dent in a company’s revenue stream and some PR backlash that can drive its stock price down (Mallinckrodt’s shed about 7% of its market cap since the settlement). But ultimately, most of the people who suffer from that stock dip are the public and investors, not the executives who chose to engage in the bad behavior in the first place. That helps explain why some drug companies have been repeat offenders on practices like bribery and kickbacks.

Burns presented a much more provocative alternative to the fines system: ban the executives responsible for the fraud or other bad behavior from working in the industry for a number of years, or actually send them to jail.

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