Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Because of its price hikes and highly acquisitive nature, Allergan has often been grouped with widely criticized specialty pharma peers such as Valeant.  

That may be about to change: Allergan CEO Brent Saunders promised in a blog post on Tuesday that the company would limit future price hikes, in response to widespread criticism of the drug industry's practices. Saunders echoed some of those criticisms, saying companies that take predatory price increases have broken a "social contract" with patients and the public.  

It may not be easy for Allergan to keep its promises and still meet its goal of double-digit annual sales growth. But it seems committed to trying, and its pledge will put more pressure on an industry already in the spotlight. 

Delivery Time
Allergan's shares have languished lately
Source: Bloomberg

Allergan's stock price has struggled this year as it has dealt with the blowup of a planned mega-merger with Pfizer and falling sales of its Alzheimer's drug Namenda. Its pricing promises certainly change the discussion, but leave the company little wiggle room:

  • It will aim for prices to match, or be lower than, the value its products create for patients. 
  • It will take price increases no more than once a year and limit them to single-digit percentages (likely low- to mid-single-digit, or slightly above the rate of inflation). 
  • It will discuss how pricing impacts its business, at least annually.
  • There will be no major price hikes as products near patent expiration, unless there are major increases in costs or regulatory requirements. 

These promises range from the mundane to the bold. Companies often pay lip service to the idea of value-based pricing, for example, even as U.S. prices are usually set by what the market will bear. But very few companies, if any, limit themselves to single-digit price increases per year. And more transparency on pricing would be particularly welcome; companies often blame others for their price hikes but share relatively little data to support their assertions. 

What's more, by promising not to jack up prices ahead of patent expiration, Allergan is bucking a common and lucrative industry practice. Look at AbbVie's Humira -- the best-selling drug in the world last year, at $14 billion in 2015 sales -- which is set to lose its most important patent this year. It's not clear when Humira competition will arrive, but the drug's list price (before any discounts or rebates) has more than doubled since 2012. 

Humira Hike
The price of AbbVie's blockbuster drug Humira has steadily increased as its most important patent is set to expire later this year
Source: Bloomberg/Symphony

Price increases have been a significant revenue driver for the industry lately, not only for Valeant but for better-respected firms such as Amgen, AbbVie, and Pfizer. Allergan will now have to do most of its growing by expanding volume, gaining market share and getting new drugs to market. That's riskier and more difficult than simply turning up the price dial ahead of an expected tough quarter or year.

This will put more pressure on Allergan's acquisition and R&D efforts to balance reward and risk. On Tuesday, it announced the acquisition of a gene-therapy company that tries to alter genes in the eye to improve sight -- the sort of project that could pay off big, but is risky and will take a lot of investment.

If Allergan succeeds with this model, then other drugmakers will face an uncomfortable question: What's wrong with their business (or with their moral compass) that they can't commit to do what Allergan has done? 

And at some point, if more companies don't start policing themselves better, then it gets more likely the government will take on the job

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net