By Ben Locwin
Are prescription drugs too expensive? When given the opportunity, people will most often choose something that is cheaper over something more expensive—so long as all other factors are held equal.
On a recent talking circuit, I fielded a lot of questions about prescription pharmaceutical drug pricing and reimbursement. Now to be fair, there has been a lot more press coverage on this topic over the past couple years than in a long time—largely fueled by the vilified Martin Shkreli and his former company’s Daraprim drug price hike of 5,600%. So this narrative of drug pricing carried through the American public at the speed of social media, where it became almost immediately apparent to everyone that drugs are just too expensive. But are they really?
What is something worth? What is a new iPhone worth? What is a Starbucks premium beverage worth? Things are worth whatever the market will pay for them. That’s it. When companies try to increase sales of lagging products, one strategy they employ is to lower the prices. This changes the elasticity of demand in many cases, and the lowered (or incentivized) pricing moves more units. So really, the answer to the question “Are drugs too expensive?” is: ”Compared to what?”
Biotechnology and pharmaceutical manufacturers are publicly-traded, for-profit companies, subject to the same investor pressure as any other company on Wall Street. If we trust in the economic principles of the free market, then those companies that strategically provide value to the market while appropriately managing their internal liabilities will succeed in the long run. Like any other successfully-run company (Apple, Netflix, Amazon, Starbucks, Google, etc.), those that “do it right” do well in the market and reap the monetary benefits.
Now the reason why some of these highly-ranked companies are in our public vernacular is because they were specifically not fly-by-night companies looking for a short-term financial surge. The public and the market are sensitive to this to a certain degree. It has been observed that stock prices increase more considerably when companies announced a clear approach to segment, target, and product differentiation—presumably because of the inherent value in a company that has clear long-term goals. The public, operating through commerce, rewards those companies that deliver value year-over-year, and they find ways to continue to do it in increasingly innovative ways. The same principles apply to pharmaceutical and biotech companies: The companies that have built successful legacies have continued to demonstrate value to the marketplace—and their market is the very health of the public. How do they do this? By continuously re-investing their earnings in ongoing R&D.
When your health, i.e., your life and/or wellbeing, determines how much you will pay for medicine and treatment, you better bet that drugs are worth a whole lot. But how do pharmaceutical companies put a price on life or wellness? Read tomorrow’s blog post to learn more on drug pricing.