Article originally published in the Philadelphia Business Journal on February 17, 2016
On rare occasions, corporate leaders lose sight of a major principle in business and in life. When they take an action that in the eyes of the public, customers, government regulators or elected officials is unreasonable or egregious, or act in a way that is disrespectful or with disdain, their behavior will come back to haunt them and their company.
Such is the case of Martin Shkreli, the former CEO of Turing Pharmaceuticals. This company acquired the rights to Daraprim, a drug used to treat toxoplasmosis, a disease that weakens the immune system of people who have cancer or are HIV positive. Turing increased the price of Daraprim from $13.50 to $750 per pill, pushing this drug out of the financial reach of many patients.
Shkreli resigned from his position as CEO of Turing Pharmaceuticals after being indicted on Dec. 17 for securities fraud committed prior to him joining Turing. Quoting Brooklyn U.S. Attorney Robert Capers, who said in a press conference on Bloomberg Business, “Shkreli essentially ran his company like a Ponzi scheme where he used each subsequent company to pay off defrauded investors from the prior company.”
During his appearance at the U.S. House Committee hearing on Feb. 4, Shkreli continually invoked his Fifth Amendment right, refusing to answer any questions which might incriminate him. Unfortunately, Shkreli had a dismissive attitude during much of his appearance. After the hearing, his lawyer, Benjamin Brafman, chalked up Shkreli’s behavior to his young age of 32 and being nervous. However, after his appearance before the House Committee, Shkreli tweeted, “Hard to accept that these imbeciles represent the people in our government.” An immature action, and not the proper behavior for any current or former CEO.
The media had a field day. USA Today quoted U.S. Rep. Trey Gowdy, R-South Carolina, as commenting, “Drug company executives are lining their pockets at the expense of some of the most vulnerable families in our nation. … It’s not funny, Mr. Shkreli. People are dying and they are getting sicker and sicker.” Quoting the Wall Street Journal, “… Shkreli appeared to smirk, look away and otherwise goad lawmakers…” Bloomberg Business ran a story headlined, “Congress tweet ‘unfortunate,’ lawyer [Brafman] says as Shkreli goes online.”
This guy was the CEO, the leader and the public face of a company? Why would a board appoint an individual with these behavioral traits as CEO? Turing is a privately held company, and only two individuals are listed as board members on the Turing website, chairman of the board Ron Tilles and Walter C. Blum. Tilles assumed the additional position of CEO on an interim basis when Shkreli stepped down from that position. I am sure that Tilles and Blum are not happy with Shkreli’s performance in front of the House Committee. Shkreli tarnishes the public image of all business leaders. He is an embarrassment to the position of chief executive.
It is understood that the price of pharmaceuticals must not only cover a new drug’s research and development, animal and human trials as well as safety testing costs, but also the costs for drugs that never make it to market. Without the ability to recover the cost of drug development, many lifesaving drugs would never be introduced.
Daraprim, however, is not a new drug. It is an existing drug that Turing Pharmaceuticals acquired from another company, so its research and development costs many decades ago have long since passed. Increasing the cost of Daraprim 5,500 percent shows a lack of sensitivity to patients who rely on the drug, and damages the reputation of the company and pharmaceutical industry in the eyes of the public. Where was Shkreli’s good critical judgement, an attribute all CEOs must have?
During an interview at the Forbes Healthcare Summit in December, Shkreli stated that the additional profits from the Daraprim price increase would be plowed into research and development of new toxoplasmosis drugs. What Shkreli didn’t mention was that Turing needed to earn a return on the acquisition cost of Daraprim, and that return would be paid for by Daraprim’s patients through the huge price increase.
At the Forbes Healthcare Summit, Shkreli stated, “I probably would have raised the price [of Daraprim] higher … I think healthcare prices are inelastic. I could have raised… [the price] higher and made more profits … this is a capitalist society, capitalist rules, and my investors expect me to maximize profits, not to minimize them or go half, or go 70 percent, but to go to 100 percent … [like we] are all taught in MBA class.”
Wow! Is that what was taught in Shkreli’s MBA class? He should have been taught that personal and company reputations matter, that markets react. He should have been given media training. Industries and the companies within those industries are given a license to operate by the public. The public controls this license through the lawmakers they elect, who in turn, appoint regulators whose goal is to ensure that companies obey the law and operate in way that is not detrimental to the public interest.
There are now calls to pass laws and regulations that protect the public against excessive pricing of pharmaceuticals. In cases where the customer is a company and it feels that it is being taken advantage of by its supplier, that company will go to the ends of the earth to find an alternate source of supply. That Mr. Shkreli, is how the capitalist system works. There is always a reaction to egregious behavior.
Leaders need to understand that their decisions and actions have consequences, including damage to their personal reputations and that of their company. Reputation is the most important thing we have. Once lost, we never really gain our reputation back. We must carefully protect it.
Stanley W. Silverman is the founder and CEO of Silverman Leadership. He is a writer and speaker, advising C-suite executives about issues and on cultivating a leadership culture within their organizations. Stan is Vice Chairman of the Board of Drexel University and a director of Friends Select School and Faith in the Future. He is the former President and CEO of PQ Corporation. Follow: @StanSilverman. Connect: Stan@SilvermanLeadership.com. Website: www.SilvermanLeadership.com
