Who Benefits from our Current Health Care Dysfunction? - Mallinckrodt's Leadership Maintains Impunity After Well Publicized Opioid Settlement

The Latest Mallinckrodt Settlement

Jeff Sessions, the current US Attorney General, is ginning up a lot of press coverage of his recent crackdown on makers of narcotics.  For example, per the Washington Post on July 11, 2017...

The Justice Department and Mallinckrodt Pharmaceuticals reached a $35 million settlement Tuesday to resolve allegations that the company failed to report signs that large quantities of its highly addictive oxycodone pills were diverted to the black market in Florida, where they helped stoke the opioid epidemic.

The agreement is the first with a major manufacturer of the opioids that have sparked a crisis of overdoses and addictions across the country. The Justice Department said the deal establishes 'groundbreaking' new standards that require the company to track its drugs as they flow through the supply chain to consumers in an effort to control the epidemic.

The company had argued that once it passed the drugs to wholesale distributors, it was not responsible for illegal diversion of the painkillers as they were sent to retailers and then pain patients.

'The Department of Justice has the responsibility to ensure that our drug laws are being enforced and to protect the American people,' Attorney General Jeff Sessions said in a statement. 'Part of that mission is holding drug manufacturers accountable for their actions. Mallinckrodt’s actions and omissions formed a link in the chain of supply that resulted in millions of oxycodone pills being sold on the street.'

A Slap on the Wrist with a Wet Noodle

Hold them accountable? With a $35 million dollar settlement? That should really strike fear into the hearts of evil-doers.  After all, this settlement is tiny compared to the magnitude of the behavior.

At one point, the government calculated that it could have assessed the company $2.3 billion in fines for nearly 44,000 violations of the federal Controlled Substances Act, according to confidential government documents obtained by The Post.

And,

Between 2008 and 2012, about 500 million of Mallinckrodt’s pills ended up in Florida, 66 percent of all oxycodone sold in the state, The Post reported.

Nearly 180,000 people died of overdoses of prescription painkillers between 2000 and 2015, and the abuse of pharmaceutical opioids is widely blamed for a crisis that now involves many thousands of overdoses on heroin and fentanyl.

Then, the settlement is tiny compared with the company's revenues.  For example, according to a recent company press release, Mallinckrodt had

Fiscal 2016 net sales of $3.381 billion, up 15.7%, principally driven by volume in Specialty Brands;...

Furthermore, the settlement let the company deny wrongdoing, stating

'While Mallinckrodt disagreed with the U.S. government’s allegations, we chose to resolve the legacy matter in order to eliminate the uncertainty, distraction and expense of litigation and to allow the company to focus on meeting the important needs of its patients and customers,' Michael-Bryant Hicks, the company’s general counsel, said in the release.

In addition, as we have seen in many other legal settlements arranged by US authorities, no individual at the company who oversaw, authorized, directed, or implemented the questionable actions paid any penalty. In fact, top executives at Mallinckrodt continue to make out like proverbial bandits.  Earlier this year the St Louis Post-Dispatch reported:

Mallinckrodt Chief Executive Mark Trudeau's pay jumped 29 percent to $12.6 million as the company rewarded him for a year when profits more than doubled.

Mallinckrodt, a drug company that is legally Irish but has its headquarters in Hazelwood, disclosed details of its executive pay in a proxy statement last week.

Trudeau's pay included a salary of $1.04 million and a bonus of $1.6 million, which was 127 percent of the target amount. He also received $5.9 million in stock and $3.9 million in options, with some of the stock depending on Mallinckrodt's revenue growth and total shareholder return between 2016 and 2018.

An earlier stock award, from 2014, paid out at 200 percent of its targeted amount. That brought Trudeau shares worth $2.5 million at current prices.

Trudeau also received $101,003 in contributions to a supplemental savings plan and $16,535 in tax reimbursement. The tax reimbursement was for executives whose spouses or partners attended a national sales conference.
So Mr Sessions  thought he was holding them accountable?

At least the Washington Post coverage added some dissent,

Joseph T. Rannazzisi, who supervised DEA efforts to control diversion of opioids for a decade before he retired in 2015, said Tuesday that multimillion-dollar fines have not deterred large pharmaceutical corporations accused of failing to report suspicious orders of pain pills to the DEA.

'These fines mean nothing to Fortune 500 companies,' he said. 'Large corporations see these fines as the cost of doing business. Unless there are meaningful sanctions brought against these companies, they will continue to violate the law.'

So the extremetly lenient treatment of Mallinckrodt and its top executives in this case will likely not deter health care corporate leaders from pursuing future bad behavior that is in the their self-interest.  Plus this case provides another example of the impunity of big health care organizations and their top executives. 

Just the Latest Mallinckrodt Settlement

And wait, there is more.  The latest settlement did not seem to be informed by any knowledge of the company's previous transgressions.  Like many other big health care organizations, Mallinckrodt and its predecessors have a long history of bad behavior which at worst has resulted in previous lenient settlements, wrist slaps, and executive impunity.  Consider some examples from this decade alone. 

The 2013 Settlement of Kickbacks to Doctors

As we noted in this post, for a few million dollars, Mallinckrodt settled allegations that it gave kickbacks to physicians to prescribe its antidepressants and sleeping tablets.

The 2015 Questcor Shareholder Suit Alleging Deception

As reported by the St Louis Business Journal,
Mallinckrodt PLC (NYSE:MKN) has announced a preliminary $38 million settlement in a shareholder lawsuit related to Questcor Pharmaceuticals Inc.

The settlement is pending approval by the U.S. District Court for the Central District of California. Mallinckrodt, a Dublin, Ireland, company with its U.S. headquarters in St. Louis, acquired Questcor in 2014 for $5.6 billion.

The settlement would resolve a class action lawsuit brought against Questcor alleging misstatements from former company officers and directors related to H.P Acthar Gel. Acthar, a drug used to treat autoimmune and inflammatory conditions, generated net sales for Questcor of $761.3 million in 2013.

Again, no individual who presided over, authorized, directed or implemented the misstatements suffered any negative consequences.

Note that H. P. Acthar gel, when marketed by Questcor, was one of the earliest examples of a company gaming the system to increase the prices of an old drug to outrageous levels (see our posts here).

The Questcor Anti-Competitive Practices Settlement

Then in early 2017 Mallinckrodt settled a case involving unfair competition, as reported by Reuters,

Mallinckrodt Plc (MNK.N) has agreed to pay $100 million to settle allegations that a subsidiary broke U.S. antitrust law by sharply increasing the price of a multiple sclerosis drug while ensuring that no rival medicine appeared on the market, the Federal Trade Commission said on Wednesday.

Mallinckrodt's share price dropped sharply to just under $43 from above $49 on a report Wednesday, which proved incorrect, that the FTC would sue Mallinckrodt. It spiked above $50 after news of a settlement and closed at $46.53, down 5.8 percent.

In 2001, Questcor bought the rights to Acthar, a type of hormone-based drug used to treat infantile spasms as well as multiple sclerosis. Over time, the company raised the price from $40 per vial to more than $34,000, the FTC said. Questcor was acquired by Mallinckrodt in 2014.

Acthar, which is off patent, represented 34 percent of Mallinckrodt's $3.4 billion in net sales for fiscal 2016, the company said in a government filing.

Per patient, Medicare spent more on Acthar than for any other drug in 2015, putting out $504 million for just 3,104 patients, according to the Medicare Drug Spending Dashboard.

Several U.S. drug makers have been criticized for sharp increases in drugs, notably Turing Pharmaceuticals' Daraprim and Mylan's (MYL.O) EpiPen. The U.S. Centers for Medicare and Medicaid Services reported 11 drugs saw price increases of more than 100 percent in 2015.

'This is an egregious case of a monopolist doing a deal to eliminate potential competition and keep its power over pricing. It is abhorrent that lifesaving drugs cost New Yorkers tens of thousands of dollars,' said Attorney General Eric Schneiderman in a statement.

Again, Mallinckrodt denied all wrongdoing,

'We continue to strongly disagree with allegations outlined in the FTC's complaint, believing that key claims are unsupported and even contradicted by scientific data and market facts,' a company representative said in a statement.

And of course, to repeat, no one at the company who presided over, authorized, directed or implemented the anti-competitive practices suffered any negative consequences.

After that settlement, Sy Mukherjee wrote in Fortune that the

$100 million fine [was] 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.

Of course, that would be hard to do as long as our top political leaders are the best buddies of the multi-millionaires and billionaires who run the big pharmaceutical companies and other huge health care organizations that generate our health care dysfunction.


Summary and Discussion

Mallinkcrodt made settlements of four legal cases since 2010, involving kickbacks to physicians, various deceptions, and anti-competitive behavior.  The settlements never involved severe enough penalties to the company to really affect its bottom line, never required admission of responsibility, or any accountability by top executives whose huge remuneration were doubtlessly based on the revenues brought in by bad behavior.  Yet US Attorney General continued the Kabuki performance by proclaiming he would "hold them accountable."  Sessions just slapped the company on the wrist again, with a wet noodle.

That will show them.

This shows that despite all the hoopla lately about health care reform, our political debate completely misses most of the causes of our health care dysfunction.


There is suddenly a brief lull in the ongoing battle about whether to "repeal and replace Obamacare."  This was cast as a health care reform debate, but really at best "Obamacare" (the Affordable Care Act, or ACA) was a somewhat jury-rigged attempt to increase health insurance coverage without any substantial decrease in the US dependence on large often locally dominant for-profit insurance companies to provide health care insurance.  There was no serious discussion of alternatives, including "single-payer" government health insurance, much less a return to smaller non-profit insurance which might have some local accountability (see this post about Wendell Potter's Deadly Spin for an account of how non-profit insurance executives sold their organizations out to for-profits, greatly personally profiting from the process).

Even more to the point, there was no serious discussion of why US health care is the most expensive in the world, yet provides thoroughly mediocre service and outcomes, and still leaves many patients uninsured (see this LA Times article summarizing the latest Commonwealth Fund  report).

But while so many people are making fortunes from the current system, and are able to use their money to influence the ongoing debate, do not expect much change.  The case above is just one example showing how executives of big health care corporations can make millions while avoiding accountability for their actions.


As I have said until blue in the face,...

We will not make any progress reducing current health care dysfunction if we cannot have an honest conversation about what causes it and who profits from it.  True health care reform requires ending the anechoic effect, exposing the web of conflicts of interest that entangle health care, publicizing who benefits most from the current dysfunction, and how and why.  But it is painfully obvious that the people who have gotten so rich from the current status quo will use every tool at their disposal, paying for them with the money they have extracted from patients and taxpayers, to defend their position.  It will take grit, persistence, and courage to persevere in the cause of better health for patients and the public.