When Biogen announced the price for Aduhelm, its controversial Alzheimer’s drug, the explanation the company gave — it represented the “overall value this treatment brings to patients, caregivers and society” — came right out of Mick Kolassa’s playbook.
For many years, Kolassa was the man drug companies turned to when they wanted advice on how to price a drug.
While Biogen earlier this year had to take the unusual step of cutting the price of a new medication, halving the cost of Aduhelm in the U.S. market, there has been only one direction of travel for drug prices — up.
“It is theoretically possible to set a price that is too high,” Kolassa once wrote in a book on pharmaceutical pricing. “We have yet to identify such a situation in the U.S. market.”
He was a pioneer of the argument that drugs were often underpriced and prices should be based on their value to patients and society, a strategy today known as value-based pricing. If someone thought the price was too high, then they simply needed to be educated about the drug’s true value. It is an argument that drug companies have used to justify ever-higher prices.
That book was published in 2009, when Kolassa was perhaps the most sought-after drug pricing guru in the United States. But in recent years, he has mostly stepped away from consulting about drug pricing, dismayed by how companies were distorting the concept of “value-based pricing” and taking advantage of a broken market to price gouge.
Insights he shared with me shed new light on the debate over the price of medicines and the roots of today’s drug pricing crisis.
Starting in the 1980s, Kolassa was at the heart of a revolution in the way drugs are priced. Back then, the biggest barrier to higher prices was the drug companies themselves.
They were the “most price-sensitive segment of the pharmaceutical market,” Kolassa told me for my new book, “Sick Money: The Truth About the Global Pharmaceutical Industry.”
“You had products that could have easily had very reasonable prices twice as high as they were. But the companies, out of caution, chose not to do that.”
Drugs were once typically priced at or below the cost of the existing treatments, only going higher if a manufacturer believed a new product represented a therapeutic advance and foresaw no competition for at least two years. Even then, the premium applied was a modest one of perhaps 10%.
Companies feared criticism, with the high-profile congressional hearings led by Sen. Estes Kefauver (D-Tenn.) in the late 1950s and early 1960s lingering long in the memory. And marketing departments, who were in charge of pricing decisions, often saw a higher price as an impediment to sales.
Drug executives’ fear of provoking a public outcry if a drug was deemed too expensive was reaffirmed by the experience of Burroughs Wellcome, which faced determined protests after setting an almost unprecedented price for AZT, the first approved AIDS treatment. Sir Alfred Shepperd, the chairman of Burroughs Wellcome at the time, had the windows at his country home reinforced out of concern about being attacked. The company was eventually persuaded to implement price cuts for AZT.
Gradually, things began to change. A key development was the arrival of the first biotech companies, whose carefree West Coast spirit translated into a more gung-ho approach to pricing.
One of the first biological drugs, Ceredase, made by Genzyme, was a treatment for type 1 Gaucher’s disease. The FDA approved it in 1991 for this rare disease. Manufacturing enough Ceredase to treat one patient for a year required processing 22,000 human placentas bought from hospitals, contributing to an unheard-of price tag: $150,000 a year for the average patient.
But Genzyme didn’t experience the blowback the rest of the industry had anticipated. When it developed a way to create a genetically engineered version of Ceredase, drastically reducing manufacturing costs, the price remained the same, despite a promise to activists it would come down.
Biotech companies were, Kolassa said, “the first to realize that they could push past those barriers in the market and not hurt themselves.”
“There were kind of these rules,” he added. “The biotech companies didn’t know the rules [so] they didn’t follow them. And it kind of changed everything.”
Ceredase, and the later Cerezyme, were orphan drugs benefiting a small number of patients. But other pharmaceutical companies began to see the prices of these drugs and realize that Kolassa had been right: They were leaving money on the table with their own modest pricing for larger market drugs.
The language of “value” became not simply part of the decision-making process leading to those higher prices, but also the way to justify them to the public. It eventually replaced the traditional explanation of high R&D costs as the industry’s go-to defense for high drug prices.
As more and more drug companies became aggressive on pricing, there were increases not just in launch prices but also in the emergence of regular price increases for drugs that were already on the market. Multiple sclerosis treatments, which cost between $8,000 and $11,000 in the mid-1990s, averaged $60,000 a year by 2015 and reached $80,000 by 2020.
In many therapeutic areas, drugmakers learned, there was little commercial benefit to trying to sell a drug by touting it as a cheaper alternative. Studies showed doctors rarely knew the price tag put on a drug and so it wouldn’t influence their prescribing habits. The stomach ulcer drug Zantac, for example, was launched with a price 50% more expensive than its already established rival, Tagamet, and was nevertheless a huge commercial success. Tagamet ended up increasing its price.
Even as pharmacy benefit managers and managed care providers have become more adept at driving large list-price discounts in recent years, a higher price, as well as a large market share, would enable manufacturers to offer larger rebates and secure preferred status on formularies.
As Kolassa looks back now, he is dismayed by how the industry changed under the influence of Wall Street. Executives got greedy.
“[Companies] went from trying to find out what their products were worth to finding out how much they could get for them,” he said.
“I saw companies that we worked hard to get them to understand they had a $15,000 drug and once they found out it was fifteen they said, “Well, can I get twenty-five?” When Kolassa said maybe, they’d respond, “Well, if I can get twenty-five, can I get thirty-five?”
Increases in the prices of branded medicines demonstrated that price changes had little effect on demand for medicines. This was also exploited by those looking to do little more than hike the price of old medicines.
“Pharma bro” Martin Shkreli may be the best known actor in this, but dozens of companies have taken this approach. The exploitative price-hiking model has even made it to the United Kingdom where, in spite of a single-payer system, companies have been able to milk £1 billion from the country’s national health service.
It was this price-hiking trend that eventually led Kolassa to walk away from the industry and instead spend his time as a blues musician.
He said he would be called by companies saying, “We just bought this drug, it’s off patent, but there’s no generics. [It’s selling] for $3 a day, can I get $50 a day for it?”
The market would allow them to do that, he says, but he hated it.
“They weren’t bringing anything of value to the market, they were taking advantage of the fundamental problems in the market, and I couldn’t be part of that any more.”
Billy Kenber is a London-based investigative reporter for The Times and author of “Sick Money: The Truth About the Global Pharmaceutical Industry” (Canongate Books, May 2022).
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