Mis-management 101: How to price a $10 deal for $1,500—and look inept for free!

In a perverse way it’s fascinating to observe how execs can sometimes make the worst possible decisions—to arrive at what are knowable-in-advance, obvious outcomes that it simply would simply be impossible to predict as being good for customers, employees, or shareholders.  Right now, K-V Pharmaceuticals gets the award for the firm which recently made a strategy and pricing decision that is so flawed, I frankly would expect sophomore business students do much better at.  It’s an interesting lesson on what not to do when you’re the decision-maker.

What!  Brand a drug that's over 50 years old?

A little background first: K-V recently received approval from the FDA to offer a drug named Makena, which is based on the pre-existing, active element, hydroxyprogesterone--thathas been available since 1956, and which serves to prevent premature births from occurring by pregnant women who get the weekly dosage.  The target of the drug is women with a history of at least one spontaneous preterm abortion.  Over the past 55 years, so-called "compounding pharmacies" have made available a relatively inexpensive version of hydroxyprogesterone, also known as 17-P, which sold for about $10 to $15 per shot. 

Mistakenly, K-V anticipated that its approval by the FDA signaled as well that independent sources which were producing compounded versions of the drug would be banned by the agency, in effect stamping out a competitive supply that has occurred for over half-a-century.  Thus, the pharma firm decided to price the new, Makena shot at $1,500 apiece--up roughly $1,490 over the previous prevailing price!  This price brought the total patient price tag for a full dosage to over $25,000 over a four month regime!

People were not very happy about the new brand.

Well, you can only imagine the backlash the firm experienced.  A huge public outcry ensued, forcing the firm to slash its short-lived new price by over 55%, with the latest price now being a mere $690.  Currently, Congress is threatening to get involved; the Federal Trade Commission is being urged to take action by two Democratic senators to determine the extent of anti-competitive behavior; the company’s share price declined by 40% for the week, and the FTC has said that it will not take enforcement action against pharmacies that continue to provide compound hydroxyprogesterone for a market price of about $10. 

Actually, K-V sought to do something very dicey to begin with.

I don't really think that K-V's run by entirely incompetent people, but let's face it, the overall strategy was flawed to begin with. Deciding to brand a generic product deep in it's life-cycle is a very--let me repeat, very--dubious plan.  Then to think that that "new" brand could be readily sold at an exorbitant price in an industry--i.e., health care--which is increasingly price and savings conscious is, well, a very weird strategy indeed.  

It is hard for me to imagine how the process unfolded in the corporate offices of K-V Pharmaceuticals to arrive a such a awesomely flawed set of decisions; I wonder how the conversation went down when somebody in the corporate suite seriously proposed the idea of replacing a generic version of the drug with what at that point amounted to an unknown brand—then to be sold for a premium of 1,500 times the prevailing market price.  That would have been some unusual, wild-eyed marketing strategy discussion to listen in on, to be sure.

Business doesn't really hold the power people think it does.

It is common belief among people who know little about business that the marketing and promotion practices of the modern corporation can make any product a successful undertaking—despite the fact that 80% of all new products fail!  This story is, similarly, a perfect example of how more often than not most firms are price-takers, not price makers.  And, too, it shows that the public will generally be content to pay commensurate to a product's perceived value--but not much for anything else. 

Also, this story should serve an inspiration to all the students of business and management—how could one not help but think that there really is opportunity in the corporate suite to show how smart you are—when others are making such dopey decisions, the likes of which just happened at K-V Pharmaceuticals.  
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