Yesterday, on every social media site, I saw one dominant story. Specifically this one:
— Occupy Wall Street (@OccupyWallStNYC) September 21, 2015
Always interested in the reasons behind business decisions, I watched a video of the CEO. Generally, I had a bit different reaction. To get started, here's the video:
Rather than just react from the hip regarding the terms "Hedge Fund Manager" and 5,500% price increase and AIDS (or a name that starts with four consecutive consonants) I thought I would look a little more into the CEO's argument. Here's what it breaks down to:
- The drug is a low-demand, rare disease drug, historically under-priced. It was price far below its peers (other rare-disease drugs) and was effectively not profitable, largely due licensing and other back-end non-production costs. Key comment: It was only $1,000 to save your life, which is a lot more valuable than that.
- We are changing the service model. Here he's making some claims that they will provide a higher level service, and better serve the needs of the customer. Uses term "dedicated patient services." Also more R&D to help patients have access to a better drug. (read: blah blah blah, I have a business plan, but we want to make this profitable now to access that)
- We also offer pro-bono services of the drug. This is key. Here he argues that the drug will be offered for free to patients who can't afford to pay. Also mentions co-pay assistance programs for people who can't afford to pay insurance co-pays, and "even if we're having a disagreement with the insurer, we'll send them drug for free until that ..."
I'll just address the CEO's points one by one.
- It's completely fathomable that the drug was under-priced to the point of being unprofitable. Especially if it was owned by large pharmaceutical companies where it was an ignored net-neutral accounting line. It's also completely reasonable to want to test price increases (or decreases) to a profit maximizing standard. I actually do this quite regularly, the simplified assumption being that you're balancing price sensitivity and profit and finding a profit maximizing equilibrium. But in normal circumstances slow, incremental pricing changes are more telling for a model, and also safer from a revenue perspective. This is a giant pricing change, why?
- This sounds like CEO BS. So there's this scene in Halt and Catch Fire where John Bosworth just got out of prison and Cameron re-hires him, and basically says "I don't know just do CEO stuff." CEO stuff is what this sounds like. He's trying to talk about his plan for the business, and he may have every intention of R&D and future "dedicated patient services" but at this point, this company is probably just selling the same old product: daraprim.
- The pro-bono services are telling. What's most telling is "working with patients" through insurance problems, copay assistance. Effectively, they are communicating that this price increase is designed AROUND an insurance system (and rich people, but mostly the insurance system). Once something becomes part of an easy finance-able system (like insurance, financing, think mattresses over past 20 years, easy mortgages 2002-2007) you increase the customers ability to pay and thus you change the functional demand curve/price sensitivity of customers. Under this view, my final point here: The CEO's rhetoric tells us that he is leveraging higher pricing against the financial-insurance system, and effectively betting on the ability to extract large mid-term profits from it. The insurance system, as it exists, enables this type of cost increase by giving *ordinary* people *extraordinary* ability to pay for effectively one-time services. A fairly classic perverse incentives/moral hazard problem.
Side note. At what point did the term "Hedge Fund Manger" become derogatory? Like this person was trusted with millions (potentially billions) in assets from high net-worth individuals and that somehow is an indictment of character? Are we getting "Hedge Funds" confused with "Trust Funds?" Certainly it would be negative if it were a Ponzi scheme or other financial scam, but at this point we're only dealing with a pricing change.