As McKinsey Sells Advice, Its Hedge Fund May Have a Stake in the Outcome

from NYTs

The sins of Valeant Pharmaceuticals are well known. Instead of spending to develop new drugs, Valeant bought out other drugmakers, then increased prices of lifesaving medicines by as much as 5,785 percent. Patients had no choice but to pay.

Valeant’s chief executive, J. Michael Pearson, was hauled into a 2016 Senate hearing and verbally thrashed by lawmakers. “It’s using patients as hostages. It’s immoral,” said Claire McCaskill, then the Democratic senator from Missouri. One executive went to prison for fraud. The company’s share price collapsed.

It hadn’t always been that way. Before Valeant’s fall, its stock was a Wall Street darling, attracting high-profile investors who tirelessly promoted the company on financial news channels. But one investor especially avoided the spotlight — a secretive hedge fund owned by McKinsey & Company, the world’s most prestigious consulting firm. McKinsey, in fact, had deep ties to the drugmaker: Four top Valeant officials, including Mr. Pearson, were McKinsey veterans, and the firm was advising Valeant on drug prices and acquisitions.

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2 Responses to As McKinsey Sells Advice, Its Hedge Fund May Have a Stake in the Outcome

  1. Dylan Flego March 1, 2019 at 6:32 am #

    Market power exists as both a naturally occurring phenomenon and an artificially created method of distorting the market. In this case, the company of Valeant Pharmaceuticals, and more specifically chief executive J. Michael Pearson, brought the company as whole into a grand scheme of its own. Involving price manipulation, immoral communication acts between its consumers, and the forceful development of a monopoly in the making, Valeant Pharmaceuticals landed itself right in the middle of an active market distortion; and the people behind this drastic plan did not attempt to hide it.

    Specialized drugs are one of the most inelastic products on the market for consumers to purchase. In other words, the average person will likely pay large amounts of money just to able to receive a single bottle of necessary pills to prevent an illness, for example. With all of this in mind, it surely is not the case that the consumer would happily pay absurd amounts to buy these drugs. The acts of this particular pharmaceutical company were not done alone, in all technicality. By buying out other companies that produced similar drugs in their own manner, Valeant Pharmaceuticals essentially erased all possible competition from their section of the market. As a result, this ambitious company effectively remained as the sole survivor of manufacturing lifesaving drugs, rising into the infamous status of a monopoly by definition of being the only practical seller. Buyers were stripped of their options, all because J. Michael Pearson elected several decisions to alter the market for drug production and create distortions such that other competitors would have no choice than to exit the market. Pearson utilized several forms of market distortions, and artificially brought his company to power via manipulation. However, this type of manipulation doesn’t just happen in the drug market. It occurs in any and every type of market, and it happens every day, whether in front of our faces or in secret.

  2. Luke Tyler March 8, 2019 at 6:57 pm #

    What first caught my attention to the article was the association of fraud and unethical practices with McKinsey, which in my opinion is a prestigious and well known consulting company. After all the article detailed that McKinsey has worked with “90 of the world’s 100 biggest companies.” With my interest in consulting all I hear about is McKinsey and maybe discussion of Bain & Company every once in a while, but McKinsey has an edge that is unlike it’s competitors according to the article. “MIO” is their investing fund that records considerable gains and is available to employees and partners. While many companies in this day and age offer 401k accounts for their employees, they are usually managed by outside companies. This is where McKinsey differs because their money is handled internally by separate staff. Initially when reading the first couple of paragraphs I knew that this was a recipe for disaster and that McKinsey would end up breaching something ethically. And to no surprise the article detailed how MIO took stakes into clients that McKinsey had knowledge on. As a consulting company, McKinsey had access to a large amount of information including financial records and the state of the companies they were working with.
    So, I thought that this would be a clean-cut case of insider trading and McKinsey would be fined or be forced to close the fund. But, the issue has a lot more complexity and for a firm like McKinsey, they would not be so foolish to not cover their tracks. The company released a statement that their fund has no nonpublic information about the companies McKinsey works with. While it is possible, I do not feel that it is ethical for a consulting firm to run their own in-house fund that manages assets. After all McKinsey’s work has be linked with the pharmaceutical company Valeant who raised the price of a demanded drug to 5,786 percent. In addition, MIO invested in Valeant and profited off the increase price of the drug. In my own opinion I would say that supporting these efforts is not only irresponsible legally, but also morally. MIO also uses off shore accounts where money has been used for other nefarious purposes. One bizarre case would be the money’s involvement in a loan to Guo Wengui which was facilitated through China-focused PAG funds. Wengui is noted for bring one of the highest-profile fugitives after fleeing China. To me these connections McKinsey has with Wengui is very strange and I don’t think it was in the intent of the company for that to happen. However, the use of an offshore account does add to the overall sketchiness of the company. In the past McKinsey has had some issues with employees and insider trading, but now the investigation of the MIO will take it to another level. It will be interesting to see what happens to the fund amidst the allegations.

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