By: Owen Jarem
With many advancements in technology, and with research and development, there has been an increase in the availability of treatment for terminal illnesses, such as cancer and AIDS. These treatments rely heavily on the availability and cost of the pharmaceutical drugs that bolster recovery from various illnesses. With such a high demand for pharmaceutical drugs needed for proper treatment of illnesses, companies have the capability to take advantage of an inelastic supply/demand model.
Martin Shkreli is an ex-hedge fund manager turned CEO of Turing Pharmaceuticals, a prescription drug manufacturer, and he has caused major uproar in the last month after recently raising the price of the AIDS drug Daraprim from $13.50 to $750 per pill. Shkreli justifies this 5,000% markup of Daraprim by saying “We paid a very, very large amount to buy an unprofitable medicine. We can’t continue to make, to lose money on the drug at that price so we took it to a price where we can make a comfortable profit but not any kind of ridiculous profit.” (Golgowski). Also, Shkreli feels that this markup is needed for R&D in order to improve upon the drug, which was developed in 1953, by creating a drug that will be safer and more efficient. Due to the controversy Shkrel caused, he “…agreed to lower the price on Daraprim to a point that is more affordable and is able to allow the company to make a profit, but a very small profit.” (Golgowski). The price reduction has not been made official yet. The cost to produce one pill of Daraprim is $1.
Since the patent on the original drug is now expired, competitors have the capability to produce similar alternatives to Daraprim using the same technologies and procedures to produce a reliable source of AIDS treatment. San Diego based Imprimis Pharmaceuticals has announced that they plan on creating a similar drug to Daraprim and offer it at a cost of less than $1 per pill (Bomely). The pharmaceutical industry and investors praised the announcement by driving Imprimis’ shares up 17.4% to $7.01( Bomely). Imprimis CEO Mark Baum commented on this announcement, saying “…we respect Turing’s right to charge patients and insurance companies whatever it believes is appropriate, there may be more cost-effective compounded options for medications, such as Daraprim…”(Bomely). Spokespeople for Turing have declined to directly address this announcement, but have mentioned that their focus has always been on making Daraprim available and affordable to all of those in need, and that they are investing in research for many other diseases that need better drugs.
Imprimis Pharmaceuticals has potentially created a pricing war with their introduction of AIDS treatment prescription drugs. Marketing managers are giving the task of setting a price that is related to consumers’ perceived value of a product. Value is defined as the benefits a customer receives compared to the costs he or she incurs. The price that a marketing manager decides to set on a product is a key determinant of the perceived value of the product. In the case of Turing Pharmaceuticals, they are running a risk of lowering the value of their product by having such a high markup in cost for Daraprim. Consumers and investors are having a difficult time justifying the price set for Daraprim, doubled with consumers knowing how cheap it is to produce the drug and skepticism that Turing is trying to generate excess profits for themselves. By Imprimis setting a much more reasonable price for their alternative to Daraprim, they are adding value to their generic drug offering. Everyday low pricing is the pricing tactic being used by Imprimis, as they are attempting to make a drug widely available to more consumers compared to Turing, thus increasing their product’s value. Turing will continue to argue this saying funds are needed for R&D towards treatment for other diseases. If the value of an alternative drug offered by Imprimis is increasing through low costs, Turing will need to lower costs and begin a pricing battle.
Bomey, N. (2015, October 24). Drug company attempts $1 alternative to Daraprim. Retrieved October 25, 2015: http://www.usatoday.com/story/money/2015/10/23/imprimis-pharmaceuticals-turing-pharmaceuticals-daraprim/74452030/
Golgowski, N. (2015, September 22). Company accused of ‘price gouging’ to drop $750 drug cost. Retrieved October 26, 2015: http://www.nydailynews.com/news/national/company-accused-price-gouging-drop-750-drug-cost-article-1.2370607