Consumers who are outraged by huge increases in the price of the lifesaving EpiPen allergy drug could also direct a little of their anger toward what’s happened with another old-fashioned drug, called H.P. Acthar Gel.
Hardly cutting-edge science, it’s derived from the pituitary glands of pigs and was actually developed by the Armour & Co. meatpacking company, and has long been used to treat infantile spasms. And like the EpiPen, whose maker has come under harsh criticism lately, it’s a shockingly expensive drug that once used to be very cheap.
Not that long ago the drug sold for maybe $50 per vial, giving it so little commercial value that a drug company called Questcor in 2001 acquired rights to it for $100,000.
Questcor jacked up the price and turned itself into a hot enough specialty pharmaceutical company to be bought by Mallinckrodt PLC. H.P. Acthar Gel now costs about $35,000 per vial (with a coupon!) and Mallinckrodt’s pricing practices have been pounded by health care systems, insurers and a bearish investment pro.
And much like the EpiPen, which, as Bloomberg reported, delivers maybe a buck’s worth of a hormone in a product that costs more than 200 times that, the actual cost of the drug in a vial of H.P. Acthar Gel is minuscule.
Not that the cost to make these products much matters.
What pharmaceutical companies do is called value pricing, setting the price based upon the product’s perceived value to the customers who will buy it. Cost is irrelevant.
What’s important to grasp as well is that it’s the same pricing process pretty much every savvy business manager has adopted. Anti-inflammatory medication, tacos from a food truck, a replacement battery for the car or estate planning advice from a lawyer, it doesn’t matter, the prices for all were arrived at pretty much the same way. It’s hard to think of a product with a price set only on what it costs to make it.
Not every market, though, is as closely regulated as pharmaceuticals or has the purchasing decisions shared by health care system, insurance company and government bureaucracies. If comparable products to the EpiPen and H.P. Acthar Gel were readily available, introduced by companies with some marketing muscle, that would quickly sober up the management teams of Mylan, EpiPen’s producer, and Mallinckrodt. Plans to further jack up prices would be shelved permanently.
Getting caught in the harsh glare of public criticism for ratcheting up prices hasn’t had much effect on the thinking at the top of some of the companies in the industry, either. Another PR crisis blew up last year for Mallinckrodt when news broke that in Canada the company had raised the price roughly 2,000 percent on a drug that treated a potentially dangerous case of epilepsy in infants.
As the Wall Street Journal dryly noted, “Considering current skepticism around high prescription-drug prices and the apparent economic insignificance of [the drug], it isn’t clear why Mallinckrodt would court controversy with its move.”
These companies may not have been fully considering the reaction of people who once bought the product or prescribed them when they cost a fraction of what they do now, said Mark Bergen, a marketing professor at the Carlson School of Management at the University of Minnesota who has long studied value-based pricing.
Their economic analysis of the value of their products may have been sound, he said, “but can your buyers make sense of the way you’re pricing? It’s really hard for a buyer to make sense” of big price increase after big price increase for the EpiPen, for example, when its basic function hasn’t changed. The buyer could only conclude that there was something else going on here besides sound business strategy, like unchecked greed.
That’s what makes stories of under-the-radar high-priced drugs so interesting. Congressional hearings don’t usually get called to look into the pricing of a drug if the price inches up over a long period, even though by 2016 the price may be eye-popping. A great example is a drug developed by Novartis called Gleevec.
This drug was a genuine breakthrough medication for patients with a chronic form of leukemia when it came out in 2001. Novartis developed it for what the company thought of as a relatively small market.
Initially Novartis priced it to cost about $26,000 for a year of treatment. Novartis admitted at the time that getting acceptance for a drug so expensive could be an uphill battle.
Well, the customers did buy it, enough for the company to steadily increase its price. It’s now more than $145,000 for a year’s treatment, making this one-time niche drug the biggest seller for a multibillion-dollar global company. Gleevec sales last year were nearly $4.7 billion.
There are something like 18 generic versions of the drug now available around the world including a few in Canada. North of the border the generic medication is sold for about $8,800 a year, according to an analysis published in May in the cancer treatment journal the ASCO Post. A year’s supply costs only about $400 in India.
A generic version of the same medication finally came to the market here, too, after a delay when Novartis essentially paid a generic maker to hold off bringing it out. It was priced about $140,000 per year.
So what’s the value-based pricing argument here? Can drugmakers really claim that this miracle drug has a genuine value here, with our richly funded health care system, that’s 350 times the perceived value to buyers in India?
It’s doubtful too many Americans relying on this drug will buy that argument. They may yet take to Facebook in droves to share their disgust.