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Pharmaceutical Pricing and Innovation: Striking a Balance

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As a responsible investing firm, Parnassus evaluates the pricing structure of any pharmaceutical company under consideration for our portfolios. In this issue of Principles and Performance®, we focus on manufacturers’ drug pricing models, while recognizing that this is only one of many issues affecting the affordability and quality of medicine.

Parnassus has Identified Two Approaches to Drug Pricing

One approach involves firms buying small companies that hold patents, then slashing the acquired companies’ research and development and at the same time sharply raising prices on the acquired drugs. This type of predatory pricing has been practiced by Turing Pharmaceuticals, which hiked the price of Daraprim, a drug used to treat parasitic infections in patients with weakened immune systems by 5000%. Likewise, Valeant has raised the prices on patented medicines of acquired companies by exorbitant amounts.

In contrast, a more sustainable and socially responsible approach emphasizes investing in R&D to innovate and improve drugs for patients. Parnassus believes companies that spend billions of dollars to bring new drugs to market should be reasonably incentivized and rewarded for doing so.

Some Pharmaceutical Companies Have Published Social Contracts with Patients

Across the industry, there are examples of companies that seek to mitigate reputational and regulatory risk by increasing pricing transparency. In 2016, Allergan published the first social contract with patients that promises to:

  • Raise the prices of their drugs no more than once a year, and to cap these hikes at 10%—even when patents are nearing expiration
  • Continue their commitment to risking significant capital to develop new life-enhancing medicines
  • Facilitate improved access to drugs through better patient assistance programs
  • Publicly report on their overall pricing changes at least annually as part of their commitment to improved pricing transparency
  • While “bad actors” continue to egregiously raise prices for old drugs or buy up pharmaceutical firms with the goal of price gouging, we’re encouraged that other companies are beginning to come forward with social contracts like Allergan’s that consider the needs of the patient. Nevertheless, continuing consumer pressure is needed to move the entire industry toward responsible pricing and continual innovation.

    As of 12/31/2016, Allergan (AGN) represented 4.2% of the Parnassus Fund’s TNA, 3.2% of the Parnassus Core Equity Fund’s TNA, and 5.1% of the Parnassus Endeavor Fund’s TNA.

    Mutual fund investing involves risk, and loss of principal is possible.

    The views expressed are subject to change at any time in response to changing circumstances in the markets and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or the Parnassus Funds. Current and future portfolio holdings are subject to risks.