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CNBC: Bill George On Drug Pricing: I Want A Market-Based Solution

Bill George, CNBC Contributor and former Medtronic CEO, discusses Mylan CEO Heather Bresch's testimony to Congress over EpiPen pricing.


 

This video was originally published on CNBC on 9/27/16.

CNBC: Bill George: Don't Know A Company That Will Bring Back Jobs Like Trump Wants

Bill George, CNBC Contributor and former Medtronic CEO, discusses the trade and workforce arguments presented at the first presidential debate.   This video was originally published by CNBC on 9/27/16

Mylan CEO's Testimony was a Huge Blow to the Entire Pharma Industry

Tune in to CNBC's "Squawk on the Street" at 10am Tuesday. Bill George will be a guest.

The disregard for children's health that Mylan CEO Heather Bresch demonstrated in her testimony to the House Oversight and Government Reform Committee directly harms consumers.

Less directly, Mylan's exceptionally high price increases erode public confidence in all medical companies, including those investing billions in research to help people suffering from life-threatening diseases. 

When companies like Mylan, Valeant and Turing Pharmaceuticals — which have grown profits through financial engineering, not drug discovery — take advantage of loopholes in our health-care system, they create public outrage against all medical companies. I have a growing concern this outrage will have dire consequences for research-based pharmaceutical companies, and could even lead to price controls.

Rather than acknowledging her mistakes in raising EpiPen prices 500 percent from $100 to more than $600, Bresch has tried to obfuscate her actions by shifting the blame to health plans and pharmacy benefits managers that have instituted co-payment and high deductible plans to keep premiums low for strapped consumers. Mylan's largest price increases came shortly after the FDA pulled its competitors off the market, leaving the firm with a monopoly.

Meanwhile, Bresch claimed Mylan was not making much money on EpiPens while admitting it earned $100 on a net selling price of $274 (after normal discounts). In her testimony she said Mylan earned $100 on a net selling price of $274 (after normal discounts). It turns out that Bresch misstated Mylan's profit on Epipens – it's actually $160, not $100, as the Wall Street Journal reported. That is a profit margin of 60 percent – exceptionally high by any standard. Yet she could not answer basic questions from Congress about revenues from EpiPens and their contribution to Mylan's profits.

Bresch used EpiPen's success to fuel her rapid rise to the CEO's office, yet she proved in that testimony that she is not stepping up to the responsibilities her role demands. Publicly, she led with her chin by saying, "I am running a business to make money" as if she were running a financial fund.

Bresch may feel protected from the wrath of Congress and the public by Mylan's highly unusual governance procedures, established when the company executed a tax inversion to The Netherlands in 2015 after it turned down a purchase offer from rival Teva valued at more than twice today's stock price. Under its procedures shareholders don't get to nominate board members; only the board can do that. 

Authentic health-care companies from Mayo to Merck understand they are in business to restore people's health, and if they did that well, profits would follow. Mylan seems to be ignoring Merck founder George Merck's admonition, "Medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear."

At Medtronic, our founder Earl Bakken charged us with "using biomedical engineering … to restore health." As Medtronic revenues grew from $400 million in 1985 to $30 billion today, every CEO has faithfully followed Bakken's mission through good times and difficult ones. Medtronic's proudest achievement over these 31 years is not its growth in shareholder value from $400 million to $120 billion, but fulfilling its original mission by expanding the number of new patients restored each year from 150,000 to 30 million today. 

In 1990 in response to public concerns over rising health-care costs, Medtronic instituted a "no price increase" policy. This put pressure on us to reduce our costs while spurring investment in more advanced products. It paid off with rapid growth and high profits, which were invested in research and development, expansion into emerging markets, and acquisitions to broaden the company's base.

One of Bresch's only defenders in this experience is disgraced former hedge-fund manager Martin Shkreli, who resigned as CEO of Turing after his outrageous 5,500 percent price increases on an AIDS drug fueled public anger. To Bresch's credit, she tried to answer questions, while just Shkreli smirked in his Congressional appearance while taking the Fifth Amendment. He later arrogantly called the congressmen, "imbeciles." The public furor these bad actors have stirred up will not subside soon, especially in this election year, and are stimulating legislative actions rather than market-based solutions.

Pharmaceutical companies have long argued that they need patent protection and pricing freedom in order to justify returns on large investments in research. Yet that argument falls flat in the cases of Mylan, Valeant and Turing, which historically have not invested in research. As long as these types of companies stay in news, public pressure will mount for government price controls or at least the ability to negotiate prices. The unintended consequence of such actions could be cutbacks in high-risk research aimed at curing and healing the most threatening diseases that require high returns to justify high costs.

In contrast, the major pharmaceutical companies base their success on high-cost, high-risk science with long lead times and no assurance of returns. In recent years some short-term investors have argued for cutting back research and simply buying drugs from others. Yet those who have committed to research without hesitation — Merck, Amgen, Genentech and Novartis, just to name a few – have created breakthrough drugs that saved millions of lives and generated high returns on their investments for their long-term shareholders.

With pharmaceutical prices now under public scrutiny, responsible leaders of medical companies should call for and demonstrate restraint in setting prices for their products, especially when they enjoy protected positions. Thus far, the only CEOs to speak out publicly against these abuses are GSK's Andrew Witty, Merck's Ken Frazier and Allergan's Brent Saunders. They should be voluntarily joined by other CEOs and industry associations like PhRMA and AdvaMed.

The time for health care's leaders to act is now, before Congress acts for them.

Commentary by Bill George, a senior fellow at Harvard Business School and the former Chairman and CEO of Medtronic. He previously served on the board of Novartis. He is also author of the book "Discover Your True North." Follow him on Twitter @Bill_George.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.


 

This article was originally posted on CNBC on 09/27/16.

Bill George on Mylan CEO: Showed Very Little Empathy for Consumer

Bill George, Harvard Business School Senior Fellow and Former Medtronic Chairman, weighs in on Mylan CEO Heather Bresch's upcoming testimony on Capitol Hill over the EpiPen pricing...


  This content was originally posted on CNBC.com on 9/21/16.

Why CEOs Need to Make a Better Case for Free Trade

Business leaders have been far too quiet on this key issue.

With the presidential election looming, this much is clear: Populism is the big winner in 2016, and America’s global businesses may be the biggest loser.

Donald Trump claimed the Republican nomination on the strength of a candidacy opposed to free trade. Faced with the insurgent candidacy of Bernie Sanders, former Secretary of State Hillary Clinton, shifted her positions, most notably now opposing the Trans-Pacific Partnership (TPP).

Business leaders face a dilemma: what should they do when both candidates are spouting positions that are directly contrary to their interests? Thus far, they are remaining silent, assuming they can recover after the election through an inside game. This may be a historic misjudgment on their part.

For the past quarter-century, global trade has been the engine of American business growth and its dominance of numerous global markets. Rather than remain silent, business leaders should offer rebuttals, speaking out now to provide policy solutions for the new administration. Let’s look at some of the most vital areas:

Free Trade

Trade has created millions of jobs in the U.S., far more than jobs lost. The U.S. Chamber of Commerce points out that NAFTA alone created 5 million jobs. Other experts warn that the massive 45% tariff on Chinese imports that Trump proposes would cause a trade war with China striking back with excessive tariffs of its own or banning imports from the U.S. altogether. High tariffs on Chinese and Mexican goods would raise prices for U.S. consumers, hurting lower-incomes families who shop at Walmart (WMT) or Target (TGT).

As trade has opened up, American companies dominate the list of the world’s most valuable companies. At the end of 2015, 579 of the 2,000 largest companies are U.S.-based. Abandoning free trade risks both jobs and economic value creation.

Job Creation

Technology and productivity gains, not trade, have held down job creation during the last decade. For example, it takes only 10% as many workers to build a Ford as it did 20 years ago, thanks to automation. Meanwhile, the U.S. auto industry is booming, producing record numbers of vehicles as the Big Three have regained competitiveness with foreign makers. Communications advances have made global outsourcing easier for large U.S. firms who can offshore lower-value jobs, such as customer care or software QA, to cost-effective locations. At Medtronic, we found every factory worker added in our overseas plants created three new jobs in the U.S. in R&D, manufacturing processes, marketing and sales. Silicon Valley companies have an even greater ratio.

Watch Donald Trump’s speech on trade:

Corporate Taxes

U.S.-based companies hold more than $2 trillion of cash overseas, because they refuse to pay both overseas taxes and the higher U.S. corporate tax rate of 35% to repatriate the funds. Meanwhile, this money is not being reinvested in the United States. This dysfunctional system makes U.S. companies more valuable to foreign acquirers than their U.S. shareholders, and has caused several companies to relocate their legal headquarters outside of the U.S.

The U.S. could fix this problem by reducing corporate tax rates while eliminating loopholes in tax policy. Short-term, the government should create a foreign income tax repatriation holiday of taxes at 10-12% for companies with specific plans to reinvest the savings in the U.S. My Harvard Business School colleagues, Michael Porter and Jan Rivkin, would go a step further with territorial taxes that tax profits where they are earned. This would eliminate double-taxation of profits, thereby enabling American companies to redeploy capital in smart investments at home. At the same time, doubling investment tax credits for new tangible assets and increased research and development would strengthen the technology advantage for America’s global companies.

Education

While unemployment has dropped 50% since President Obama took office, millions of Americans that lost their jobs in the 2008-09 recession lack the skills for today’s positions. The failure of the U.S. Congress to authorize funds for job retraining after the 2008-09 recession has contributed to these problems. Our K-12 and higher education systems also do not produce the talent that innovative companies need to grow.

In addition to job retraining, the U.S. needs to strengthen its vocational and technical education system, encouraging more high school students to consider these alternatives. Some companies, such as AT&T, are partnering with schools like Georgia Tech to offer specialized online training. The U.S. could do much more to ensure that educational institutions provide the mentoring, faculty and facilities that produce the types of workers companies clamor to hire.

Isolationism Won’t Make America Great

Concerns about wage stagnation among U.S. workers are legitimate, but they are only part of the broader economic story. Suppressing free trade will harm these workers much more than the companies who can access overseas labor.

Corporate leaders need to take on the importance of making American companies fully competitive in global markets. A pro-growth agenda—one that educates workers for the future, incentivizes investment and allocates resources effectively through trade—is a far better way to navigate the next decade than practicing the politics of isolationism.

Business leaders have an important case to make. There are only two months left to speak out.

Bill George is Senior Fellow at Harvard Business School, former Chair & CEO of Medtronic and author of Discover Your True North.


 

This article was originally posted on 9/7/16 on Fortune.com.

CNBC: The VC View on Drug Pricing

James Thornton, venture capital investor, discusses Mylan CEO Heather Bresch's explanation for the pricing of the EpiPen. CNBC Contributor Bill George, former CEO of Medtronic, and Darnisha Harrison, Ennaid Therapeutics CEO, weigh in.

CNBC: Bill George: Bresch Should Commit to No Further Price Increases

CNBC Contributor Bill George, former CEO of Medtronic, and Darnisha Harrison, Ennaid Therapeutics CEO, discuss the controversy surrounding Mylan's pricing of the EpiPen.


CNBC: Pro: Heather Bresch Made a Big Mistake

Bill George, Harvard Business School professor & fmr. Medtronic chairman and CEO, shares his take on Mylan and the EpiPen pricing outrage.

Why I Am Endorsing Hillary Clinton for President of the United States

Many of my most thoughtful colleagues still seem torn about the upcoming presidential election. They are disgusted and frightened by Donald Trump, but uncomfortable with Hillary Clinton. However, I find myself in a very different place.

Politically, I am an independent who has voted in like measure for Republicans and Democrats. After graduating from business school, I worked in the administrations of Presidents Johnson and Nixon. Like many of my colleagues, I am a fiscal conservative and social progressive who has often struggled to find candidates to support that are aligned with this philosophy.

In this election the choice between Clinton and Trump is clear: one is fully qualified to be our next President, and the other has neither the experience nor the temperament to be President. For this reason I am enthusiastically endorsing Hillary Clinton for President of the United States. Let me explain my rationale.

Clinton will be a terrific leader for our country, and will rebuild confidence in our nation for all its people. As several major political leaders, including President Obama, have said, she is the most qualified and most experienced person ever to run for president. She has the intellect, temperament, wisdom, and leadership ability to bring us together as a nation and lead us forward. I trust her fully to use her experience to make the right decisions and always put the interests of the American public ahead of her own needs. She will also unleash fresh energy from new faces or those who have been sitting on the sidelines, dismayed by the dysfunctional of government.

Having been in public service for twenty-five years, her actions have been scrutinized in every possible way. This has caused her to be guarded in public. As she noted in her acceptance speech, “I have been in public service for twenty-five years. I realize I am more comfortable with service than being public.” That is not unusual for politicians seeking our nation’s highest office. Former Presidents Dwight Eisenhower, John F. Kennedy, and Ronald Reagan were often reticent publicly, as is President Obama.

No doubt Clinton has made mistakes, as she did with her private email server, but which of us has not made significant mistakes in our careers that we have come to regret? The issue for politicians like Clinton is that everything you do is examined with a microscope in the public eye. In contrast, Clinton’s opponent has never held a public or elected position, so he has no record of service to examine.

A majority of Americans are looking for change in electing our next president, but there is no agreement on what that change might look like. In my experience there are two ways to create change: blow the system up and start over, or work diligently for change from within. There is ample evidence that the former cannot work in the U.S., especially under the U.S. Constitution with its proven system of balance of power. The French tried it in 1789, leading to a long period of chaos. The Germans tried it in 1933 when the Nazis seized power and Adolf Hitler was elected Chancellor, leading to the most violent war in history.

Real change is genuinely hard work and must come from within. This is where Clinton excels. Everyone who has worked with her – Republicans as well as Democrats – has come to admire her work ethic and her ability to create positive action. She realizes changes by working with all sides and across the aisle to reach compromise agreements that serve the greater good. This kind of change is never glamorous or exciting, but it is the only way to make meaningful progress. Clinton’s record of creating improvements domestically in education, health care, human rights and equality for all is exceptional.

In international affairs presidents have even greater latitude to make monumental decisions with lasting consequences. Not infrequently, presidents who lack deep knowledge of foreign affairs can make major mistakes, as John Kennedy did with the Bay of Pigs, Lyndon Johnson did in escalating U.S. troops in Vietnam, and George W. Bush made in invading Iraq. Government leaders around the world – friend and foe alike – rely on the stability of the U.S. to deliver on its long-term commitments. In large measure this is why Republicans and Democrats have been unified in their international positions since the 1940s. It is this unity that has made America the greatest nation in the world.

In this realm Clinton stands out even more. She will use her leadership, diplomacy and negotiating skills to advance U.S. interests around the world. She knows every world leader personally and can gauge and influence their actions. In turn, they know her to be both tough and trustworthy – two essential qualities for dealing with both friends and foes. She will not flinch from confronting our foes, nor fail to honor our long-standing commitments to our allies.

Being president is not a one-person job. While the president may be the person constantly in the spotlight, it takes thousands of exceptional leaders to lead this nation. With Clinton’s long history of working with the most dedicated U.S. public servants, I expect she will appoint a talented team of experienced veterans combined with dedicated new faces across the political and geographic spectrum that represents America’s great diversity. This is what capable leaders like Clinton do so well.

Of particular importance in this election are the Millennials and their involvement with national affairs. Clinton’s biggest challenge between now and November will be to get the Millennials engaged to focus their enormous passions on making America a better place to live and work for their generation and those that come behind.

For all these reasons I endorse Hillary Clinton for President. I urge each of you to support her and get behind her campaign. She is the right leader for turbulent times. As President, Hillary Clinton will make America even greater.

FORTUNE: 5 Lessons Business Leaders Can Learn From Brexit

Britain’s leaders were out of sync with its voters. Could the same be happening at your company?

The U.K.’s Brexit vote to leave the European Union shocked the world. The day before the vote,

London odds makers gave 80% chance that Remain would be victorious, as polls revealed a 10-point edge over the Leave campaign.

What caused the politicians and “smart money” to misjudge the electorate so badly? Elites underestimated the anger and despair of Britain’s working class. They also discounted the apathy of the millennial generation, which favored Remain but only 36% voted.

The U.S. faces similar issues: working class anger, hostility toward the federal government, and a desire to blame problems on “the other”—Hispanic people, Muslims, African-Americans, and China. These emotions translate into fears of immigration, globalization, free trade, and technology—all themes that fan flames of distrust in government and the establishment.

American business leaders who ignore their workers’ feelings do so at their own peril. Unhappy employees lead to disengaged workplaces and mediocre results. Here are five lessons they can learn from Brexit to apply immediately in their businesses:

Focus on your workforce first and stock market second

As the near-term pressures from short-term investors have accelerated, business leaders have engaged in financial engineering such as stock buybacks, cost cutting, and spinoffs. As a consequence, companies aren’t investing in their employees. Health care, perquisites, and other benefits are being cut back, employee training programs shelved, and support for creativity and innovation diminished, while the gap in compensation between rank-and-file workers and executives has widened dramatically. With employee cutbacks, fewer people are being asked to carry a larger share of the workload.

According to Gallup polls, employee engagement scores have dropped to 30% or lower. More people are simply showing up to pick up a paycheck, while their passion for the business and commitment to pleasing customers has waned.

To turn around these attitudes, business leaders need to stop trying to please the stock market – which will never be satisfied, no matter how strong the results – and engage and inspire their front-line people. Instead of cutting employee costs, they should be investing in them through training, added compensation incentives, attractive healthcare, and by creating an empowering culture.

Support front-line employees who grow the business, instead of adding corporate bureaucracy that makes work more difficult

All too often, managers see their job as controlling employees throughout the enterprise. Finance groups focus on cost-cutting, risk-averse lawyers make the company impossible to do business with, and human resources casts judgment on employees. As a result, corporate departments at many businesses have grown while the rest of the organization has shrunk, causing resentment.

Meanwhile, top executives spend most of their time in internal meetings poring over numbers rather than listening to employees in research labs, offices, and factories.

Corporate staffs in multi-business companies should be shrunk dramatically in size and refocused on helping employees do their jobs and making it easier for customers to do business. Accenture, with its 275,000 employees, is a good example of this approach. It has no true corporate headquarters, and its minimal corporate staff is dispersed around the world and focused on supporting customers.

Spend one-third of your time with customers

Whether you’re in retail, health care, IT, or financial services, there is no greater place for learning what is going on than being in the marketplace with customers. When I was at Medtronic, I observed more than 700 procedures in 12 years; it was the greatest learning opportunity I ever had. Leaders who apply all five senses to customer interactions learn more first-hand than they do from reading reports or looking at PowerPoint presentations.

When he became CEO of Unilever  UL 0.32% , Paul Polman asked his leaders 10 questions to see how much time they were spending with customers. Their responses were so embarrassing that Polman challenged them to refocus their organizations on customers. Similarly, Anne Mulcahy kept Xerox  XRX 1.81%  out of bankruptcy by skipping the endless meetings at headquarters in favor of riding with field salespeople to stem the tide of customer defections. This type of customer engagement signals to the entire organization that the company puts customers first.

Promote transparency internally and externally

In today’s world of social media and smartphones, transparency is not only the right choice – it is the only choice. Employees expect their leaders to keep them informed about what is going on, no matter how negative the news. When they are not treated with transparency, they turn to external sources and internal rumors for information, which they perceive is more timely and accurate than internal communication.

Following a 2015 layoff, Zappos founder Tony Hsieh wrote to employees: “Remember this is not my company, and this is not our investors’ company. This company is all of ours, and it’s up to all of us where we go from here.” Hsieh’s communications are authentic, transparent, and informal.

Former Ford  F 2.94%  CEO Alan Mulally used weekly business performance reviews (BPR) to create transparency across the organization to turn around the troubled automaker. In these meetings, Mulally dove into details deeper than any Ford executive had ever done. Honest conversations helped to heal Ford’s politically charged, blame-focused culture. Rather than frowning on problems, Mulally used them to come up with solutions.

Work with the government, not against it, to make sensible reforms.


Many business leaders see government as an enemy, and send out legions of lobbyists to influence laws in their favor. Properly constructed, regulations can help protect against defective or rogue products in the marketplace and ensure customer and employee safety.

Brexit should be a wakeup call for all business leaders. The vote showed Britain’s leaders were out of sync with its voters. Could the same thing be happening with employees in your company? Are you involved on the front lines with your employees and customers every day, or are you holed up at headquarters?


The answer may well determine your company’s success.


Bill George is Senior Fellow at Harvard Business School, former Chairman & CEO of Medtronic, and author of Discover Your True North.