The Great Debate on the Ethics of Pricing in the Drug Industry
Alan Patricof and Dr. Roy Vagelos discuss the ethics of pharmaceutical pricing at the 'Restoring Trust: New Realities and New Possibilites in Business Leadership" conference. For more videos from the conference, please view our video library.
By Samantha Marshall
March 7, 2017
“How many people are alive, or have a parent or best friend who is alive, because of some drug?” asked Alan Patricof at the Bernstein Center’s November conference, “Restoring Trust: New Realities and New Possibilities for Business Leadership.”
“Every hand should go up!”
In one of the liveliest segments of the conference, featuring an impassioned discussion on leadership among industries facing a crisis of trust, Mr. Patricof, co-founder and managing director of the venture capital firm Greycroft LLC was speaking in defense of a pharmaceutical industry that, he argued, has been “much maligned.”
Indeed, a recent streak of price gouging has cemented Big Pharma in the public’s mind as a group of greedy corporations willing to exploit desperate patients with no alternatives in the quest for maximum profits. For example, Valeant Pharmaceutical International tripled the price for a vial of Nitropress, used to treat dangerously high blood pressure, to $805, while Turing Pharmaceuticals increased the price of Daraprim, a medicine used to treat toxoplasmosis, a parasite-born infection that can be deadly for babies, by 5,000% to $750 per tablet. Public outrage soared over the spikes, which happened as soon as these companies bought monopoly positions on these once relatively cheap generic drugs. Some industry experts speculate that these particular drugs were targeted because they are used to treat rare conditions with no competing treatments. Consumers would be left with no choice but to pay up, even if it meant re-mortgaging their homes.
The recent public uproar helped force out Valeant CEO, J. Michael Pearson and Valeant CFO, Howard Schiller, as well as Turing Founder and CEO, Martin Shkreli. But debate on price gouging continues amid yet more headlines (most recently concerning EpiPen maker Mylan, which faces a federal anti-trust investigation), underscoring the fact that an entire industry’s image has been tarnished by a few rogue players.
“These people should go to jail,” said Mr. Patricof, adding, “The preponderance [of it] is doing great things for all of us.”
“These people should go to jail...The preponderance [of it] is doing great things for all of us.”
But the pursuit of profits at the expense of patients may well be more widespread than these recent high-profile cases suggest. Beyond pricing, product misrepresentations and promotion of unapproved, off label use, even cases of bribery, also exist. In 2014 GlaxoSmithKline, for example, was found guilty of bribing doctors and investigators and was fined nearly $500 million by a Chinese court. The result is that the industry, once among the most admired and trusted by the public, is one of the most reviled today, alongside oil cartels, according to a Gallup poll published in September 2015[i].
“The industry has a lousy image and it should, until it reforms itself,” observed Dr. Roy Vagelos, Chairman of the Board of Regeneron and former Chairman of the Board and CEO of Merck & Co.
Dr. Vagelos '54PS '83PSis an industry veteran whose entire career has focused on serving the greater good. He attributed the drug business’s failings to “a lack of understanding of what people respect, and a lack of respect for human beings.”
Dr. Vagelos traced the pricing problem back about 15 years, when biotech firms first came out with targeted treatments for diseases that were otherwise deemed untreatable, such as Genentech’s colorectal cancer drug Avastin, which was increasing lifespans three to four months. When he heard the price of the treatment, $50,000, “I almost choked,” he recalled. “But I accepted that that was the price set by the marketplace because there was no alternative. Similarly, the recent treatment, and often cure, for Hepatitis, which costs $95,000 for a course of treatment. Such drugs are priced on the value to the patient, the fact that they can prolong life or cure chronic, painful and often fatal diseases.”
“The industry has a lousy image and it should, until it reforms itself.”
The problem was that these astronomical prices, “set the bar,” and a whole slew of treatments entered the marketplace priced at a multiple that was many times more than most people’s yearly salaries – prices that were not necessarily related to value. Merck is “better than most,” said Dr. Vagelos. But too many biopharma companies double or triple prices within a few years of release, sometimes even jacking up prices several times a year. “It’s gotten out of hand.”
He recalled the stand that Merck, which under his tenure became the world market leader in the pharmaceutical industry, took against these price hikes early on by vowing to only increase prices in line with the Consumer Price Index, plus or minus one percent. About half the industry followed suit. But the price gouging continues.
Of course, the cost of new treatments also reflects the billions that legitimate pharmaceutical and biotech companies spend on research and development. The investment involved in bringing a new drug to market varies, but these firms can spend anywhere from hundreds of millions of dollars to more than $2.6 billion in out of pocket expenses and man hours, according to an estimate by the Tufts Center for the Study of Drug Development.[i]
Another factor contributing to the high costs of drugs in the U.S. compared with other countries is the FDA. The regulatory environment here is a double-edged sword because, although it protects consumers, the cost of additional trials and testing inflates prices even more.
But that doesn’t justify the extreme cases, argued Dr. Vagelos. Nor did it preclude Merck from offering life changing medications to sub-Saharan Africa free of charge. Again, under Dr. Vagelos’s stewardship, Merck broke rank with the rest of the industry in 1988 to donate the ivermectin tablets that could cure onchocerciasis, otherwise known as “river blindness,” for as long as governments and agencies were willing to distribute them, ultimately treating 250 million people for free. As of today, the World Bank reports that 25 million hectares of land are free of river blindness, and in 28 of the 31 African countries where river blindness was endemic, fertile land irrigated by once-infested rivers are no longer unsafe for agriculture.[ii]
“It was an incredible accomplishment based on having the technology, the culture, and an ability to take action when needed,” recalled Dr. Vagelos of the program, adding that Merck’s decision to invest in eradicating this disease for the world’s poorest made it possible to attract the best people to the company. “This is about using your own invention and optimizing it for the world.”
He left out how important it was for him to believe in his own convictions and lead in an ethical manner, which created the right culture at Merck.
“Roy took the decision to give it away for free, then went and told his board and lived to talk about it,” joked Mr. Patricof.
“These people should go to jail...The preponderance [of it] is doing great things for all of us.”
“The industry has a lousy image and it should, until it reforms itself.”