In a bold move, Allergan (AGN) chief executive Brent Saunders on Tuesday issued a manifesto promising to avoid “price gouging” as part of a “social contract” with the public. His company will limit price increases on branded drugs to single digit percentages per year in most cases, he wrote. The move comes amid growing national anger over prescription drug prices — most recently fueled by the EpiPen controversy — and ensuing outcries from Washington lawmakers. We spoke with Saunders about his plan and the extent to which it can make a difference. This is an edited version of our conversation…
Pharmalot: So your plan is a voluntary effort. Why should we believe it will stick? In the 1990s, pharma CEOs agreed to keep price increases at or below inflation, and we see what happened.
Saunders: I’m only the CEO of Allergan and what I can tell you is that it’s real for Allergan. In the current environment, and for the foreseeable future, our customers will hold us accountable to this commitment. They’re all aware and we’ll talk to them about it and build it into our agreements with price protection clauses.
What I hope is that [with] a combination of public pressure, [and pressure from] media, policy makers, and the customer base… the good people in the biopharma industry will follow suit in their own way. We don’t have monopoly on best thinking and maybe someone else will come up with something even better… But somebody had to take the first step.
Pharmalot: So have you talked to other CEOs? What do they say? And what happens if only a few agree to follow you?
Saunders: I haven’t. I did get messages from CEOs of smaller companies [who] asked if I’d spend time talking to them. And I will do it. I do think it’s good for the entire sector to look in the mirror and reflect on how to become better citizens.
But I’d welcome competition on who has the strongest social contract because I think it’s good for the overall biopharma industry. I can solve the problems of my own company, and I think we made a tremendous first step, but there will continue to be an evolution… I really do hope other big pharma companies, in their own way, will at least take the time to step back and reflect. We can all learn from each other and challenge each other. We risk capital to pursue innovation and produce needed products. But there’s also social responsibility in terms of affordability and price…
I think a lot of noise from Washington is political rhetoric and a campaign statement. But I also think the industry is far away and better off self-policing and self-regulating itself rather than leaving it to Washington to do it for us. But we’ll do this regardless of whether anybody else does it.
Pharmalot: You say that you won’t take “major” price hikes when a patent is due to expire on a drug. Every company seems to do this before generic competition arrives. But how do you define major?
Saunders: This goes back to how we think about price increases. They’ll need to be justifiable and need to be near single-digit or somewhere around a multi-year review of the inflation rate. What we’re not going to do any longer is this common practice in the industry, and it’s something we’ve done in the past — take a big price increase near the end of the life of the product. It’s not a practice we’re going to deploy.
Yes, we will take some price increase. Yes, they’ll be modest to moderate, more than likely. Will they be in line with the social contract? Absolutely. Is there something out of line that we don’t foresee? It’s possible.
Pharmalot: You also promised to provide an “aggregate” view of the impact of the pricing on your business each year. Can you explain?
Saunders: It will evolve like all things you do in reporting and transparency. You get a lot of solicited and unsolicited feedback. The real goal is to show net price increases are consistent with our commitment made today and that no single product increased more than what we committed to doing today…
I hear from investors. They don’t want to put capital into companies that have risk and one of the largest risks today is finding yourself on the front lines of a major pricing controversy. The shareholders that I’ve heard from say they appreciate knowing Allergan has a social contract… And hopefully that pressure will also push industry into thinking about these dynamics.
“I hear from investors. They don’t want to put capital into companies that have risk, and one of the largest risks today is finding yourself on the front lines of a major pricing controversy. ”
Brent Saunders, CEO of Allergan
Pharmalot: You don’t name any companies in your blog post, but you do refer twice to outliers. Valeant and Turing were blamed for buying drugs and raising prices by sky-high amounts. But is Mylan an outlier when it’s one of the biggest generic players? And there’s also anger about new drugs for hepatitis C and cancer that cost a lot. There are a lot of companies that raise prices. So who are you talking about?
Saunders: The way I think about the distinction is that I believe the main body of the biopharma industry is grounded in innovation. And it’s those companies that are willing, in any form, to invest — to risk capital —to bring new medicines for unmet medical needs. And that distinguishes them from companies that buy existing drugs and build a business model almost exclusivity or predominantly on raising prices.
There is a line that distinguishes the vast majority of companies from those companies… Mylan is not an innovation-based pharma company. But this has got nothing to do with being generic or brand or big or small. It has to do with whether you invest in looking for solutions to unmet medical needs and if that’s core to your business strategy.