The breathtaking pace of scientific breakthroughs in the pharmaceutical industry has been stunning. Few, for example, thought developing a COVID-19 vaccine in less than a year would be possible. That innovation doesn’t come for free, of course. Achievements in medicine are often the result of significant capital investments, sometimes spanning decades.
Naturally, as more life-enhancing and life-saving drugs are developed—and as our public health becomes increasingly interdependent—questions of costs and equitable access will become more frequent and pronounced. The industry should see this moment as an opportunity to get ahead of those questions.
Growing Threats
With the passage of the Inflation Reduction Act, Congress enacted price controls on an array of drugs for seniors. The scrutiny of drug prices hasn’t let up. And the chorus of critics seems to be growing, putting pharmaceutical companies at risk of reputational damage and more regulation.
Some of the threats have come from predictable sources. U.S. Senator Bernie Sanders, who took over as chair of the U.S. Senate Committee on Health, Education, Labor & Pension in January, surprised few when he used a hearing in March to grill Moderna’s CEO over the company’s decision to increase the price of its COVID-19 vaccine. But perhaps less expected was the common ground Sanders appeared to find with some Republican senators on drug prices.
Of course, the threats aren’t emanating only from Washington. In the last seven years, 14 states have passed price transparency laws requiring reporting from drug manufacturers when they increase wholesale costs above a certain threshold. Other states are considering adding similar laws.
In addition to legislators, drug pricing has also caught the attention of activist investors. Notably, in December, a coalition of shareholders at the Interfaith Center on Corporate Responsibility caught the pharmaceutical industry’s attention when it asked nine companies to disclose information about how they consider patient access when developing patent strategies protecting the high prices of their products.
“This transparency is critical to ensuring that everyone understands companies’ pricing decisions and how they factor in the impact of drug prices on the patients relying on these medicines,” said one shareholder in a statement.
New Approaches Required
Pharmaceutical companies must acknowledge that these threats aren’t going away anytime soon. Their critics are more emboldened than ever. And the approaches to price scrutiny that worked in the past are not likely to fly in this new age of accountability.
Traditionally, executives have justified high drug prices with arguments based on extensive outlays their companies make in research and development. But they’ve often been reluctant to share many details about those costs.
Companies may want to consider proactively sharing carefully selected data around their drug prices to strengthen their brand and mitigate risk.
First, we acknowledge that doing so may be uncomfortable, especially for those who choose to be among the first. Major corporations—especially those in regulated industries—rarely relish moving out of step with their peers. We also understand that deciding which data to share isn’t easy. Critics demanding more data on the costs to produce specific drugs, for example, will seize on any data to score political points. Nothing will completely satisfy them.
But external forces are making more price transparency a necessity. The movement to include drug pricing transparency in Environmental, Social & Governance (ESG) assessments could be one of the most important trends to monitor over the long term. Yes, ESG investing has encountered political headwinds in recent months. But the fundamental logic supporting the movement—that sustainable business models and practices help drive shareholder returns—has lasting power.
The fact is that the pharmaceutical industry has a good ESG story to tell on that front. If not for the many billion-dollar bets it makes on R&D, we would not benefit from life-saving treatments.
First-Mover Advantage
Some companies have already made this kind of effort. In 2017, for example, Sanofi joined a handful of other companies to publicly explain how it approaches pricing and pledged to keep price increases to a minimum. It has published its Pricing and Principles report annually ever since. The report details the rationale for pricing drugs launched during the previous year and provides data on price increases.
Of course, that report—or any report like it—will not quiet some critics. But it’s an important tool to combat misconceptions about their business models. It also allows companies to be on the offensive with a fact-based story.
Partners in Public Health
Pharmaceutical companies owe a fiduciary duty to shareholders to maximize their investments. But effectively carrying out that duty means answering to a diverse array of stakeholders and taking responsibility for promoting the public’s health. Whether combatting polio or COVID-19, pharma has a long history of partnering with communities and governments to address public health concerns.
Pharmaceutical companies should view price transparency as part of that tradition. It’s not only the right thing to do; it’s the best way to address growing threats to their business.
A former U.S. Senate health policy advisor and Policy Director for the Democratic Senatorial Campaign Committee, Ben Nathanson is leader of the Healthcare Practice at Ichor Strategies. He is based in the Brooklyn office.
Sedric Warren, Associate Director of Client Management at Ichor, has spent nearly a decade in public health. He is based in Indianapolis.
