Allergan, the pharmaceutical company best known for making Botox, pledged Tuesday morning to limit annual price increases on its drugs and to stop hiking prices on medicines right before their patents expire.
In the announcement published on the company's website, Allergan chief executive Brent Saunders said the company will limit price hikes to once a year and each increase will be no more than a single-digit percentage.
Saunders said Allergan will price its products based at or below their value to patients, based on how much the drugs improve their quality of life and how well they work compared to other drugs. He added that the company will also disclose how prices are affecting the growth of its business at least once a year.
"I think the entire biopharmaceutical sector needs to take a step back, look in the mirror and figure out how do we discipline ourselves and self-police ourselves to be able to balance investing in research and development and innovation -- and pricing our medicines responsibly," Saunders said. "Allergan is going to be a different kind of company, that’s going to put the social contract with patients and physicians in front of all of our business decisions. And in doing so, we can run one of the most successful growth pharma companies in our industry."
The pharmaceutical industry is under intense scrutiny by patients and politicians for price increases, concerns which have most recently flared into outrage about the ever-increasing list price of the lifesaving allergy injection, EpiPen. The industry has said the companies that jack up prices of old drugs are generally outliers, and that some high prices are necessary to fund the risky and expensive science the industry does to launch new drugs.
In his statement, Saunders said the overall net prices of drugs after rebates will increase "slightly above the current annual rate of inflation."
Vamil Divan, an analyst at Credit Suisse, said the move was unlikely to have a significant impact on the company's sales and earnings growth, but pushes the industry in the right direction.
"I think that's sort of the calculation here: We can put these proposals forward and it will have a little bit of a modest impact on financials, but it's a lot better impact than doing nothing and letting politicians resolve the issue the way they want to," Divan said. "If you don’t do more to regulate yourself, then regulation will be put in place that will be a lot more onerous."
Saunders said Allergan will distribute its pledge to intermediaries, such as insurers and the companies that negotiate drug prices on its behalf, as one way of holding itself accountable.
He added that Allergan had pledged to limit its price increases at the beginning of the year, and even before Tuesday's announcement, the company's price increases for 2016 had dropped by almost a half.
"Yes, in the past we have taken greater price increases than we will in the future," Saunders said.
Kenneth Kaitin, director of the Tufts Center for the Study of Drug Development, said the announcement is significant.
"This is not only an interesting proposal; I think it’s critically important that the industry get in front of this, instead of falling back on old arguments," Kaitin said.
The industry has defended the high prices of treatments in part by highlighting the billions of dollars that must be spent to develop new drugs. The Biotechnology Innovation Organization, the trade group for the biopharmaceutical industry, announced on Tuesday a new television ad and web campaign that emphasizes the role of innovation in helping patients and saving money to the health care system.
Saunders said that Allergan would be held accountable by its customers and partners. Some of the information would likely be made public through the company's regular financial updates. He noted that Allergan already does studies that will help set drugs' initial prices, and that he was open to considering the idea of some kind of public insight into that process -- but that would be weighed against the need to remain a competitive business.
What remains to be seen is whether other companies will follow suit, joining Allergan's pledge or issuing similar vows.
Ron Cohen, chief executive of the biotech company, Acorda Therapeutics, said that while he did not see the pledge as a one-size-fits-all solution for every company, Allergan was playing a leadership role for the industry.
"Every company has to come up with a framework that makes sense. What I’m very pleased about is that Brent and Allergan have clearly had that internal conversation, and have decided to publicly make a statement about where, at least, they have landed on the issue," Cohen said. "To me, that’s very constructive."
Kaitin said that his sense was that smaller companies might follow Allergan's examples, because they don't face as much shareholder pressure. Although the industry may be wary about inviting greater public scrutiny of its pricing practices, Kaitin said that it was clear that when drug pricing explodes into a national furor, the public does not draw the same lines that industry does between price-gouging companies and innovative ones that raise prices, but to a smaller degree.
“The economic principles are the same," Kaitin said. The companies thought the public “wouldn’t cast them under one blanket — it was silly, it was misguided,” he added. “They really have to address this and right now, and it is such a festering wound that I really do think that this is a good first step.”