Pharma at the Crossroads?

When pharmaceutical companies take out full page ads in national newspapers touting newly responsible approaches to drug pricing, even the most skeptical of activists sit up and take notice. After 15 years at the forefront of shareholder activism, I can’t help but ask myself if the pharmaceutical industry has finally come to a crossroads on sustainable pricing practices.

Since the early nineties, a wide range of stakeholders; patients, practitioners, health systems and investors have been pushing for drug pricing reform. It is possible the time has come. Does the reputational risk and public scrutiny of recent headlines at long last outweigh the corporate benefits of arbitrary and opaque pricing models?

Several recent signs make me wonder if a few companies are choosing a different path on pricing. I see real potential ahead as some leaders step forward with innovative ideas and models.

With much fanfare, Allergan, the specialty pharmaceutical company and maker of Botox, a revised “Social Contract with Patients.” The most refreshing revision – and the part that created recent headlines – was a pledge to limit price increases on medicines that Allergan sells, or will sell (presumably). In brief, Allergan said it would “not engage in price gouging or predatory price increases”; limit price increases to “single-digit percentage increases” once a year; and refrain from price increases on drugs about to go generic, unless cost increases dictate otherwise.

Five months earlier, KaloBios, a small biotech, announced its “Responsible Pricing Model.” This appears to be the first of its kind, and Allergan’s pledge mirrors many of the responsible pricing model’s main tenets.  Emerging from its own brush with reputational risk, KaloBios said it plans to price its products “at overall cost, plus a reasonable and transparent profit margin” – arrived at after seeking input from stakeholders on what “constitutes a reasonable return”. It will post the elements that make up its price publicly. And KaloBios said it will limit price increases to the rate of inflation or Consumer Price Index, once a year; and refrain from “aggressive or predatory pricing policies or ‘price gouging.’”

I’m betting that truly new thinking could unlock the industry’s vast potential, perhaps attracting new kinds of investors. Healthcare, like never before, is building an audience alongside education and climate change at the Mission Investors Exchange, a leading voice in impact investing. The reform-minded impact investing pool represents serious money, upwards of $60 billion according to the Global Impact Investing Network’s 2015 survey. The opportunity to build better links between social impact investing and the biopharmaceutical industry has never been greater. So what path should the drug industry choose at this crossroads to build sustainable pricing and deliver on the promises its social contract implies?

First, the industry must start at the original launch price for drugs. Attention to downstream price increases is necessary but not sufficient. Models which hover near the status quo ignore fundamental arithmetic. The sustainability of healthcare spending and its social impact depend on the base price, as much or more, than subsequent price hikes. It must seek models that clearly define a “responsible price.” In the KaloBios example, responsible price is defined as: “affordable for patients, transparent for stakeholders and delivers a reasonable return.” Furthermore, the model should quantify a reasonable profit margin, and be willing to disclose it.

Second, the industry must break free from the opacity of current drug pricing. This is increasingly a priority for many stakeholders, including recent calls for pricing transparency by US states, the United Nations, physician leaders and others. Transparency will be the foundation of any serious effort to truly lead to a better way. Responsible pricing models that pledge to make profit margins transparent by “publicly sharing the key elements” of the price of a drug could lead to a virtuous cycle of transparency; mitigating the public perception of this essential-yet-blemished industry.

Shareholder activists, including my former shop the Interfaith Center on Corporate Responsibility, have been focused on these issues for decades.  Recent events have proven that all stakeholders are engaged in these issues, issues with profound moral and economic implications.

At present the few companies leading the way are outliers thus full-page ads draw a lot of justifiable attention. I see momentum building from a coordinated coalition of bold companies willing to lead with maverick ideas on responsible pricing and transparency. Thus companies should not only seek to follow their own true North, but to align with each other to build concrete and sustainable improvements to drug pricing. This coalition would highlight the premier operational innovators in pharmaceuticals – which we sorely need to champion.

From my perspective, access to healthcare, medicines included, is a Human Right and never a privilege for the lucky few. Progress in responsible drug pricing will bring us closer to delivering on that promise. Together, all stakeholders need to look at the right model now to deliver on the social contract of this powerful industry. There is progress in pharmaceutical pricing, but there is more to do together.