Will Investors Reward Drugmakers That Limit Price Increases?
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Someone else will. And it won't be pretty, to be sure.
It won't be long before Congress will tire of simply badgering pharma CEOs and decide to actually do something about pricing scandals. Maybe they'll create an oversight panel with the power to impose fines for “predatory” pricing. Or perhaps they'll allow Medicare to negotiate drug prices directly with manufacturers. But why stop there? Why not require that pricing be part of every NDA? Insert your own nightmare here, please.
Forget the critics. Our worst wounds are self-inflicted. Martin Shkreli's Daraprim fiasco was bad enough. But what was Mylan CEO Heather Bresch thinking when she allowed the price of EpiPens to reach $600? Did she really think that trotting out familiar tactics like patient savings cards and indigent consumer discounts would work? And proposing a half-priced generic is almost cynical, since at $300 for a pair, they'd still be overpriced! We'll talk about her salary boost to $18 million some other time.
Here's the problem. Even if you shift costs away from low-income patients, astronomical drug prices will eventually land on pharmacies, insurance carriers, or the government. That just adds more fuel to the financial crisis that's brewing within our healthcare system. Moreover, what some CEOs don't seem to get is that they're not dealing with discretionary drugs for treating erectile dysfunction or hair loss. Severe allergy is a life-and-death issue and gouging the system just isn't right.
Don't get me wrong. I haven't joined the critics who routinely badmouth pharma. I just fear that this parade of pricing scandals makes us look like a pack of scoundrels. Sure, the EpiPen is a marvel. But that doesn't mean it should be unaffordable! For a small number of patients, Daraprim can be life-saving. But that shouldn't mean you should hike its price overnight by 50-fold!
Isn't it high time that we in pharma acknowledge the giant “kick me” sign that we've taped to the seat of our collective pants? Fortunately, there's still time left for us to clean up our act. Then this will take courage, initiative, and leadership.
Here's an example. A few months ago, Cameron Durrant, the CEO of KaloBios (on whose advisory board I serve), said that his company would confine its revenue expectations to a “reasonable return.” Allergan CEO Brent Saunders went a step further and pledged that Allergan would raise prices no more than once a year. Furthermore, if prices were increased, they would be only slightly above the rate of inflation.
I find Saunders' move especially impressive because Allergan has a huge portfolio containing established brands like Botox and Namenda. It would be easy to go along with the trend and increase revenue simply by inflating prices. Yet, instead of taking a selfish, short-sighted view, Saunders sees the big picture. As he acknowledged, self-policing is our only alternative to governmental price controls, which no one (at least in our industry) wants.
Now here comes the big question. Will the shareholders and directors of KaloBios and Allergan reward or punish their CEOs for what some may see as revenue-capping concessions? Will they be looking at the next quarter or the next decade?
It's hard to say. In the past, self-interest has paid off well. During the 10 years that Mylan was steadily raising the price of the EpiPen, its board of directors was approving one of the most generous executive compensation packages in the industry. On the other hand, it's easy to see that the pressure will only increase on Congress to take some sort of drastic action.
I'm betting that by taking responsibility to keep prices in line, Durrant and Saunders are on the right track. I hope other leaders will march beside them.
Sander Flaum is a principal at Flaum Navigators.