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VIDEO CASE 4–1 Pricing in the Pharmaceutical Industry
Canadians spend billions of dollars annually for prescription drugs to treat acute and chronic ailments. The pharmaceutical industry in Canada has often been criticized for its pricing practices. Many public health officials, government departments or agencies, and consumer advocacy groups argue that, in many cases, the industry is simply charging too much money for its products. Pharmaceutical company executives have responded to such criticism by citing large research and development costs, extensive testing requirements to obtain government approval to market the products, and marketplace uncertainties as valid reasons for the prices they charge for their drugs.
Fair and Reasonable Pricing
A central issue in the debate concerning prescription drug pricing relates to what is a “fair and reasonable price.” Critics of drug pricing spotlight instances where they believe the prices charged are excessive. For instance, drugs to treat ulcers sell in the range of $1300 to $1400 annually per patient. Drugs that control cholesterol cost $1015 to $1265 per year per patient.
Persons suffering from high blood pressure pay almost $850 annually to treat this condition. People over the age of 65, many with fixed incomes, bear these costs. For example, 49 percent of the sales of high-blood-pressure medication are accounted for by the elderly.
Pharmaceutical firms counter critics’ charges of excessive pricing using a variety of arguments. They note that the research and development cost of a new medication can be more than $150 million and span a decade of development and testing. Moreover, the risk is very high since most new drugs are never successfully commercialized. In addition, the pharmaceutical industry spends billions annually for marketing the newest drugs to doctors and consumers.
Debate over what is a “fair and reasonable” price for drugs typically focuses on economic versus societal factors, and the relative importance of a firm’s stakeholders in setting prices. Often the final pricing decision depends on the individual judgment and moral sensitivity of the managers making the decision.
Prolife: Pricing ADL
Issues in the pricing of ADL, a treatment for Alzheimer’s disease, which affects the elderly, were recently faced by Prolife, a small pharmaceutical company. A task force of company executives was considering the pricing strategy for ADL. Two points of view were expressed: (1) pursuing a high-price strategy designed to recoup the costs of the drug quickly and getting a jump on the competition and (2) pursuing a lower-price strategy to increase the drug’s availability to victims of the disease.
Steve Vaughn, an assistant product manager at Prolife, was the principal proponent of a lower-price strategy. He argued that a less aggressive price strategy made sense even though it would take slightly longer to recoup the initial investment in ADL. Having a family member afflicted with Alzheimer’s disease, Vaughn believed that the ability of victims and their families to pay for the drug should be considered when setting the price for ADL. He was overruled, however, by the task force members. Believing that his views deserved attention and action, and that “bottom-line” considerations did not negate his position, he lobbied other task force members and has considered expressing his opinion to senior executives at Prolife. He was cautioned by Bill Compton, a Prolife senior product manager and Vaughn’s mentor, to reconsider his position, noting that Prolife is a business and that “rocking the boat” might not be an advantage to his career at Prolife.
