Mind to Market

Wednesday, June 06, 2007

Genentech's Pricing Rationale

In the WSJ's continuing quest to determine how and why drugs are priced as they are, Marilyn Chase interviewed Genentech's CEO Dr. Arthur Levinson. Levinson defended the rapidly escalating price of cancer drugs by comparing total domestic spending on cancer drugs, $15 billion, against the GDP, $13.6 trillion, which by my calculations is a drop in the bucket. But 42% of Americans will get cancer and half will die of it. So where are our priorities? Shouldn't we be spending even more money? Well, in fact we are. In 2007 the National Cancer Institute's budget was $4.8 billion and there are billions more coming in from private foundations. Nevertheless, it's still small compared with the GDP.

What about the other controversial pricing issue at Genentech, doctors using $50 worth of Avastin to treat age-related macular degeneration instead of $2,000 worth of Genentech's Lucentis, the drug approved by the FDA to treat AMD. Despite the fact that both Avastin and Lucentis are VEGF inhibitors the FDA wasn't about to approve Lucentis without Phase III clinical trials costing $40,000 to $45,000 per patient. Hence the added price.

Although Genentech's margins are healthy, pre-tax margin of 34% for 2006, Levinson points out that these are lower than both Microsoft, 37%, and Oracle. Oracle's fiscal 2006 pre-tax margin was actually 33%, but close enough. This does bring up a point however; would Genentech generate more profits if they could? Keeping profits below other industries by capping prices, free drug programs, large research budgets could be a strategy for sustainable and healthy growth without incurring the scrutiny of politicians.

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