I know a few people who have Type 1 Diabetes. Diabetes is a metabolic disorder that results from the pancreas’ inability to produce enough insulin. One way to treat diabetes is with insulin analog, which was developed in the 1940s. Left untreated, diabetes can be deadly. Today, a few pharmaceutical companies make insulin analog, one of them being Eli Lilly. Lilly produces a family of products under the name Humalog. Lilly has also been accused of increasing the cost of its insulin products, making it untenable for some of those with diabetes to manage their disease.
What I’m getting at it, is that diabetics are effectively a captive consumer base. They need insulin to live. Humalog specifically was approved in 1996. That year, a vial was $21. In 2017, a one month supply was $275. That’s a 1300% increase over a 21-year period. (For reference, inflation over that same time period was just 56.2%). My opinion: that’s a gross thing to do when it’s seriously impacting people’s health.
Having reviewed Lilly’s 2017 annual report, there are three things I want to discuss. (1) executive compensation and Lilly’s profits (big surprise); (2) their marketing budget; and (3) Cialis.
Executive Compensation.
First, some quick hits:
1. CEO, David A. Ricks, made $15.8M in 2017.
2. Total executive compensation for 2017 for 5 executives = $46.7M.
3. Lilly posted $2,737M ($2.7B) in income in 2016.
4. Humalog’s revenues in 2016 were $2.7B.
5. Lilly’s margin on pharmaceuticals in 2016 was 73.4% (meaning the cost of actually making the product is only 26.6% of the price).
5. In 2017, Lilly issued a dividend to its shareholders of $2.25/share (or $590M).
Conclusion/Editor’s Note: Lilly’s executives could have: (a) dropped the cost of Humalog by 20% instead of issuing their dividend or (b) halved the cost of their insulin products and still posted an $1.3B in income in 2016, but instead chose otherwise.
Marketing Budget. Lilly spent $6.5B on their marketing budget in 2016, more than double their revenues from Humalog. Going back to their insulin product – what if they just sold Humalog at-cost, or at 26.6% of the actual price (assuming the average margin)? If they took all lost revenue out of their marketing budget, they’d still be doing $4.5B in marketing. But instead, charged $275 for medically necessary insulin. With a captive consumer base for their biggest drug, what is it that they need to market?
Cialis. Lilly doesn’t just produce insulin. They also produce Cialis, which, if you don’t know, is for the treatment of erectile dysfunction. Lilly’s 2016 revenues from Cialis? $2.4B. How much would Lilly have to increase the cost of Cialis to be able to offer Humalog at cost? 82.5%. Is saving people’s lives worth the cost of paying twice the amount for an erection?
Editor’s Note: YES!
This had nothing to do with employee pay, but I think highlights the business practices of Corporate America, and I think something worth paying attention to. Is this what we want? Are you an owner of Lilly stock, and thus an owner of this company? Is this what you support?
I don’t want this.
Pay your people and try not to kill them,
The Anxious, Amateur Economist
The Anxious, Amateur Economist 