A money-back guarantee is something you usually find associated with late-night infomercials, but it's becoming more common for drug companies to offer the guarantee -- at least in countries that have government-sponsored health plans.
Janssen-Cilag, a subsidiary of Johnson & Johnson (NYSE: JNJ), has recently offered to refund the cost of Velcade to the British National Health Service (NHS) if the patient fails to respond to its multiple myeloma drug. Why would it make such an offer? Six months ago, the National Institute for Health and Clinical Excellence recommended that the drug not be funded by the NHS.
Only 60% to 70% of patients show a full or partial response to Velcade, so it's not surprising that a country might not want to pay tens of thousands of dollars for a drug that will fail on a sizable fraction of patients. On the other hand, that's not really fair to the majority of patients whose lifetimes will be extended by taking the drug. With gross margins on most drugs in the 70%-90% range, it's likely that JNJ will be making plenty of money on the sales even after refunding some of the payments. The risk-sharing deal appears to be a win-win-win proposition.
The idea is catching on. Another British company, GlaxoSmithKline (NYSE: GSK), has announced that it's considering offering a similar deal for some of its compounds.
Companies accepting prices lower than they can fetch in the U.S. aren't much different than what's been happening for years with Canada's drug price fixing. Drug companies tolerate Canada dictating prices for patented drugs because they don't have any other choice; increased sales for less money is better than no sales at all.
Drug-company investors need not worry about these kinds of deals. In fact, they should be happy with the increased sales -- unless the U.S. jumps on the price-setting bandwagon. If that ever occurs, the business model for drugmakers, with their high research and development costs, is likely to fail. Until then, enjoy the increased earnings -- no matter how much smaller they are.
GlaxoSmithKline and Johnson & Johnson are Income Investor selections. You can take a look at all our recommendations, as well as get access to our message boards and exclusive content, with a 30-day free trial.
Fool contributor Brian Orelli, Ph.D., doesn't own shares of any companies mentioned in this article. The Fool's disclosure policy has a money-back guarantee.
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