Yesterday’s fiscal Q1 release from Cal-Maine Foods Inc reported a 5-fold increase in operating profit and earnings per share, driven by the near doubling in the price of eggs, of which Cal-Maine Foods is the US’s largest supplier. An outbreak of bird flu has led to a shrinkage of the national laying flock of chickens and the laws of supply and demand have kicked in, almost doubling egg prices. Despite this price increase and Cal-Maine’s gross margin growing from 22% to 43% I hear no political outcry calling for a cap on the price of an omelette, a Congressional Hearing on pancakes, or the importation of waffles.
This rather trivial observation masks a more serious point; pricing of consumer products and medicines is different. A basic foodstuff like an egg will be priced to reflect a combination of factors, including costs of production vs competitors and the purchasing power of the retailers. In contrast, a medicine’s price typically has no bearing on production cost (even including allocated R&D) but should reflect the value to society that the clinical benefits of the medicine deliver. If it doesn’t create value (from society’s viewpoint) it shouldn’t be developed. This is where the US biopharma industry has got itself into a bind.
Unfortunately the US seems to have evolved no vocabulary with which to discuss the value of individual medicines to society. The US association PhRMA argues cogently for medicine pricing to be a matter between payers and manufacturers, quoting the net benefits that medicines, in aggregate, have on reducing downstream costs (hospitalisation etc) and its stable percentage of total healthcare expense. However, in arguing for maintenance of the status quo it is unwittingly sheltering those companies that are blatantly exploiting their monopoly position with no thought to the value that their products offer. Price and value are not the same thing and while Hillary Clinton’s proposals of an arbitrary price cap on medicines is absurd it is at least well-meaning. Until the US biopharma industry has developed and explained a compelling narrative about the value, not the price, of its medicines the industry will continue to suffer sporadic pressure from politicians and shareholders.
Pharmaco-economic data is used routinely by European Health Technology Assessment groups (eg NICE in the UK) to control market access and pricing and doesn’t always come up with the right answer. However, you can’t make an omelette without breaking a few eggs!
The author was a Pharmaceutical Analyst at Lehman Brothers for 23 years as well as being involved with the PharmaFutures projects www.pharmafutures.org but is now writing independently. Stewart Adkins is a Director of Pharmaforensic Limited www.pharmaforensic.co.uk
Stewart Adkins was a Pharmaceutical Analyst at Lehman Brothers for 23 years and was involved with the Pharmafutures projects.