The Price is Right?
Pricing’s tough to get right. Underprice and risk driving your company to exhaustion for no profit. Overprice and fail due to a lack of customers.
How do we find the right balance? There’s no easy answer, but let’s take a look at some case studies to help us decide when the price is too high.
The pharmaceutical industry is a fascinating case because prices charged don’t always reflect the cost of drugs, which can range from loss-making generics to stratospheric monopoly pricing. Regarding the latter, a US company called Gilead has entered the market with a new drug called Solvadi that is a 95% near perfect cure for Hepatitis C that affects 150 million people globally.
Not that amazing you say… then let’s look at the numbers.
Gilead are currently charging $1000 per pill. Which works out to about US $84,000 for a 12 week course, that will cure Hepatitis C, without any injections, interferon or major side-effects.
Staggering, when you consider that the estimated cost to produce each course is about $300. And whilst we have governments in the US and soon-to-be Australia shelling out taxpayer funds to Gilead, at these prices per treatment. There are countries like India who only have to pay $300, because they would not grant Gilead a patent for the drug.
In 2014, during the first year of sales, Gilead posted revenue of $10.3 billion US dollars for Solvaldi[1], making it one of the most profitable drugs of all time in its first year.
Looking closer to home, earlier this year, Colgate Palmolive were fined $18 million dollars in Australia from competition regulator the ACCC, because they had formed a cartel with Cussons and Unilever to artificially inflate the price of laundry detergent. Unilever allegedly received immunity from prosecution in return for informing on the deal.
It’s not surprising in Australia, that Colgate Palmolive were lionized for their actions by our regulator. Indeed the ‘free marketers’ might say all of this regulatory intervention is unnecessary, and that if left to itself, the market would eventually deliver the right price.
For lawbreakers like Colgate, the monetarists would cite game theory and the notion that most cartels will eventually fold because of the simple incentive to defect is too attractive. Just like Unilever allegedly folded on Colgate.
But in the meantime, firms that break the rules can make super profits.
It stands to reason, that if the scale of profit is gargantuan, while the maximum fine payable under regulation is comparably weak and not a significant disincentive,
“then we can have situations, preposterous though it may sound, where there is a valid, legally sanctioned return to cheating, as long as you don’t complain when, or if, you get caught.”
Returning to Gilead, they have certainly been innovative with their pricing for Solvadi, but forgive me for asking:
What part of the $1000 per tablet is entrepreneurial and what part is in the public interest?
Last time I checked — it wasn’t actually legal to buy a liver. So I’m not sure where they are heading with this message?
In defending the price, Gilead could point to the acquisition costs of the drug which they bought from a scientist for several million dollars after his government funded research study led to the discovery. Undoubtedly the debate will continue.
In the meantime, legislators are likely to be moving new laws aimed at whittling away this type of profit largesse and taxpayer funded fiscal health hemorrhage. And Gilead will lobby to protect its legal interest under their patent, while it lasts until 2028! As to the likely outcome of it all, I wouldn’t be surprised if Gilead, is struck by the same fate as any other multinational making super normal profit — a takeover bid.
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