The Balance Between Value Pricing and Price Gouging

At the end of June 2020 Gilead, a pharmaceutical manufacturer, released pricing for remdesivir, and anti-viral drug that doesn’t cure Covid-19 or, it seems, reduce mortality, but does reduce the amount of time spent in intensive care.

Less time in intensive care is generally associated with improved outcomes for the patient. And, as testing continues, evidence might emerge that there is a reduction in mortality.

These are all good things, and as far as Covid-19 goes are clearly a step in the right direction. But what price to charge for a treatment like this?

Independent analysts have estimated that it costs less than $10 to deliver a dose of remdesivir, and a course of treatment over 5 days involves 6 doses. So is the price $60? Of course not.

Gilead are charging the governments of developing countries $600 for a 6-dose treatment; governments in developed countries $2,340; and private insurance patients $3,120.

At least one person I heard interviewed on the radio considered this to be price gouging, and while we are in the middle of a pandemic he thought the drugs should be sold at cost.

I have some sympathy with that. My gut reaction is that this is helping people in their time of need. How can anyone profit from other people’s misery?

So I read up on it, and of course real life is a lot more complicated.

First of all, the price doesn’t only cover the cost of production, it covers the huge cost of development. I think most of us are aware of that, and it means the price of drugs in patent are much higher than when they become generic. And it’s not just the development of this drug; each successful drug has to also pay for the development of unsuccessful drugs. If that wasn’t the case then we’d have no drug companies doing any development at all.

More importantly, there is a value equation. Gilead estimates that the reduced time in intensive care saves around $12,000, so net of the cost of the drugs the hospital saves about $10,000. This is what’s driving their pricing decision, it’s the net value that the drug delivers.

What’s also worth considering, too, is that Wall Street analysts were urging Gilead to charge $5,000 per course treatment. In the USA the President of the Institute for Clinical and Economic Review, Stephen D Pearson, noted that within the context of a USA health system where the launch cost of new drugs often far exceeds Gilead’s price points then these prices demonstrate restraint! And don’t forget they are discounting the price for developing countries.

For myself, I think there are two important takeaways.

First, the value proposition can be difficult to calculate, but when done properly it is a reasonable way to approach pricing. If you’re creating more value than you are charging then you are providing positive value. I’m not saying that Gilead couldn’t have launched at half the price they have decided to charge (which would have had a LOT of positive PR), I’m simply noting that they have considered value.

Of course, I would feel very different if remdesivir saved lives. Then a whole new calculation takes place, which includes a lot of moral issues.

But second, it also illustrates the importance of how you communicate a price. It’s not enough to work out that you are delivering a net positive value, you’ve got to make it abundantly clear to ALL of your audiences that that’s the case. That’s not just your customers, it’s the regulatory bodies, trade bodies, employees, industry pundits, trade press, national press and anyone else who has a stake in what you do.