Credit: Photo: Flip Franssen

The outrageous pricing model used by Big Pharma

By Lucien Hordijk, Daan Marselis, | 17 April, 2021

Pharmaceutical firm Novartis charges €2 million for a single intravenous infusion — but the National Health Care Institute in the Netherlands declared in April that it cannot be sold for more than €155,000. The Investigative Desk dug into how medicines can be made so expensive, and how scientists burnish their careers by earning billions for shareholders — while desperate parents are forced to save their sick children with crowdfunding campaigns.

NOTE: This article was first published April 17th, 2021 on Follow The Money. In the months subsequent to publication, the Dutch Government and Novartis reached a deal, making Zolgensma available for SMA-patients in the Netherlands. Final pricing remained undisclosed. This article describes the case of Liam. Liam did not qualify for SMA-treatment under the conditions of the agreement between the Dutch state and Novartis. Fortunately, his parents did raise enough money thanks to a wealthy benefactor. Liam was treated with the gene-therapy in a Polish hospital.

Katarzyna Popkiewicz keeps track of the donations trickling in. Usually, it’s small change: five, ten euros, via the Dutch donation site Geef and the Polish Siepomaga. “My boss sold orchids for us for six euros each,” says Popkiewicz, who works for a plant exporter. Every now and then, a generous €100 arrives — and occasionally even more. Someone in Poland once donated €3,000 after selling a painting.

Popkiewicz, who lives in Zandvoort, speaks in faltering Dutch, but every call with the press brings extra attention for the fundraising campaign for her son Liam. So she takes every interview.

There’s been some attention from the Dutch press for Popkiewicz’s campaign. And not without results: Katarzyna and her husband Piotr Tomazowski have managed to raise €237,000 for their son, who suffers from spinal muscular atrophy (SMA) type 2a, a rare genetic illness that causes muscle weakness and paralysis. At an age where most infants are learning to walk, Liam is unable to crawl. He’s just over a year old and weighs 11 kilos. To receive Zolgensma, a type of gene therapy that promises to turn his fate around, he has to weigh under 13.5 kilos. Although the sum that his parents have amassed seems substantial, it’s only a fraction of the actual cost of the therapy: €2 million for a single infusion.

Pressure on parents

Liam is not the only child for whom donations are being collected to fund this gene therapy. In Europe alone there are more than a hundred crowdfunding campaigns for Zolgensma, a one-time infusion from the Swiss pharmaceutical giant Novartis. It’s authorised for sale, but due to the exorbitant price, only a quarter of patients in Europe are covered for it with their health insurance.

Marcel Timmen, director of the patient association Spierziekten Nederland (Muscle Diseases Netherlands), finds this a bitterly cynical set-up. “The pressure on parents from all the donation campaigns is enormous. They feel like bad parents if they aren’t able to secure the medicine, even though they have to sacrifice so much to get it.” Parents end up competing with each other, because who gets the treatment and who doesn’t, seems to depend on the media savviness of the parents.

Indeed, it was only thanks to massive media attention that Belgian baby Pia Boehnke ended up receiving a donation from one in ten Belgians. Boehnke suffers from the most serious type of the illness, SMA type 1. Then there was the Dutch boy Jayme, who was featured in several evening episodes of the Dutch RTL4 programme Beau. After pop singers Jim Bakkum and Glennis Grace released a single dedicated to him, Jayme’s donations shot over the magical €2 million target. But there are no celebrity saviours who have come to the aid of Liam Tomaszewski, yet.

There’s nothing wrong with well-intended publicity. But these campaigns only serve to highlight that there’s a structural problem with drug prices. Crowdfunding campaigns are the logical consequence of a shift in the pharmaceutical industry’s pricing model. Where companies used to justify high medicine prices by pointing to their enormous investments in research and development, those costs are no longer used as an argument. Now it’s about the assumed savings that the medicine will deliver in the future: value-based pricing, as the industry calls it.

This pricing mechanism stems from health economics, and was initially embraced by governments — because you could calculate “how valuable you find a new drug,” according to Frans Rutten, professor emeritus of health economics at the Erasmus University in Rotterdam, and one of the spiritual fathers of value-based pricing. He invented a model that kickstarted a glittering career: ‘Our model was a welcome addition to how negotiations over expensive medicines usually went — i.e. accepting whatever the highest bidder offered.”

But what was gradually introduced 30 years ago by the government with the intention of making the medical industry fairer, is now creating headaches for the very same government. Because while Novartis can claim that Liam’s single infusion is worth €2 million, sources and a recently released report show that the National Health Care Institute, an independent organisation that advises the Dutch government about health insurance, has come to a very different conclusion — as have the health authorities in Belgium and Ireland, which the institute closely works with.

According to the institute, the price of Zolgensma is three times more than the health value it actually offers. “There is a lot of unknowns around how well, for whom, and for how long the treatment works,” says Lonneke Timmers, secretary to a committee of the National Health Care Institute. The health minister then relies on her committee’s assessment when negotiating the price with the maker. According to the institute’s calculations, one infusion of Zolgensma should cost €155,600.

Will Novartis lower the price by that much? It seems unthinkable, but no one actually seems to know what will happen. The Dutch health minister is set to negotiate the price with Novartis shortly, but that will take place behind closed doors. Even the outcome of that discussion will remain confidential.

Marketing prevention

One day in 1985, the young health economist Frans Rutten got a call from the Dutch director of the American pharmaceutical company Merck Sharp & Dohme (MSD), which had just brought out a new cholesterol-lowering medicine: simvastatin, branded as Zocor. The statin worked better than competitors’ versions, but it would also cost governments more. That produced a dilemma in the Netherlands, where the debate about healthcare costs was high on the political agenda due to a raging financial crisis.

To convince governments and insurers to buy the medicine, MSD had come up with a new tactic: to calculate the savings that Zocor would eventually deliver for the treasury.

“Until then, people mostly focused on what a statin could do to cholesterol levels in the blood,” says Rutten. “But of course you also want to know how many heart attacks and hospitalisations it’ll prevent in the future.” To generate these figures, he created all kinds of complex econometric models.

In essence, these models are based on a simple comparison between two treatments and their costs and benefits over the long term. For example, if medicine A prevents more hospitalisations than medicine B, then it could be justified to charge double for A.

Rutten still proudly reminisces about the research he did for MSD — “I later wrote a huge amount about it in all kinds of top scientific journals.” According to his model, simvastatine helped the government to lower the number of lethal heart attacks and hospitalisations. And therein lay the advantage, he says: compared to a stay in hospital, simvastatine is dirt cheap.

With the data produced by Rutten’s model, MSD convinced governments to invest in the new pills. The number of patients using Zocor continues to grow, because simvastatine also seems to be effective in people with only marginally elevated cholesterol.

As a result, Zocor has become one of the most lucrative drugs ever for the pharmaceutical industry. And Rutten, as an 30-something early in his career, put his stamp on a field that was still in its infancy. “It’s just like bitcoin,” says the British health economist Mike Drummond, another of the spiritual fathers of value-based pricing. “The people who were there first, like Frans and I, have come the furthest since.”

Together with colleagues, Rutten set up the Institute for Medical Technology Assessment (iMTA) at Erasmus University, which does research for both governments and pharmaceutical makers. At the University of York in England, Drummond became director of the world-famous Centre for Health Economics.

Rutten and Drummond also both became presidents of important industry associations, editors of scientific journals, and advisors to pharmaceutical companies — and governments, which also needed to learn to play the new game.

“Shouldn’t we require that medicines are cost-effective before they’re covered by health insurance?” says Rutten. “I   thought that was a legitimate question. Because any money that you give to one patient is money that can’t be given to another.”

That’s how, at the end of the ‘90s, Rutten became the chairman of the Dutch Guidelines Preparatory Commission, which was asked by the health minister how the cost effectiveness of a medicine could be determined. The goal was to allow new medicines to be covered by health insurance, while keeping health costs ‘manageable’.

The health-economical models didn’t go down well with the industry. One of its most strident critics at the time was Rudolf van Olden, then representative of Nefarma, lobbyists for pharmaceutical makers. Minutes of the meetings of the preparatory commission showed that in 1999, Van Olden expressed his scepticism about the work of Rutten and Drummond. Van Olden doubted even if it was to be considered ‘crystal-clear science’.

But in September 2019, the Belgian broadcaster VRT reported Van Olden as saying: “I agree that the single treatment from Zolgensma seems expensive, but I can tell you that it’s a cost-effective treatment.” Later, he appeared on the talkshow Beau, with the same message: the medicine seems expensive, but it’s worth every euro.

Twenty years ago Van Olden, on behalf of Nefarma, protested against the model because it could be used to regulate the price of medicines. Now he’s using the same model to defend the most expensive medicine ever. What could explain this change of heart? Perhaps the fact that Van Olden now works for the pharmaceutical company AveXis, a subsidiary of Novartis, and is now working to market Zolgensma.(Van Olden was not available for comments)

A one-shot cure

Value-based pricing — the determining of medicine prices on the basis of expected future savings — is now common practice. This is partly due to the ever larger ‘curative power’ of drugs. Where Zocor had a subscription model, with patients required to take the medicine daily, Zolgensma is marketed as a ‘one-dose’ cure.

That is of course “a challenge for genome medicine developers looking for sustained cash flow”, wrote analysts at Goldman Sachs in The Genome Revolution, a report published in 2018 about the future of gene therapies. If patients are quickly cured, the market will dry up. The bank said that it therefore expects the price to go from the hundreds of thousands of euros to millions, to keep the development of the medicine attractive for investors.

Another explanation for the popularity of value-based pricing is ‘profit maximisation’, according to Mike Drummond: “Just like all companies, the pharmaceutical companies will ask for a high price if possible. That’s what shareholders expect of them. That’s partly why this model has become so important.”

Pricing of medicines is now so complicated and crucial that there’s a whole industry built around it, with strategy and consultancy firms such as Simon Kucher, Pharmerit and Iqvia — multinational companies that help the pharma CEOs with ‘price advice’.

The Zolgensma case shows how drug makers can use Rutten and Drummond’s model to drive up the price of their medicines. To make their treatments appear as favourable as possible, pharma firms can use the model to play with three different levers: the success of their treatment, the patient’s quality of life, and the price.

Novartis has adjusted the levers in such a way that the efficiency of the medicine versus those of their competitors seems the highest possible, and the costs as low as possible.

The company markets Zolgensma as a ‘one-shot-cure’ with a life-long effect. But Lonneke Timmers from the National Health Care Institute says that claim is yet to be proven. Her report for the Dutch health minister, suggests that four out of ten patients require further treatment from ‘competitor’ Spinraza, an eye-wateringly expensive treatment, that has to be repeated often.

According to Timmers, Novartis’s pricing model factors in an unrealistically high quality of life for patients treated with Zolgensma. “Also, on the cost side, Novartis made the treatment with Spinraza look more expensive than we think it actually is,” she says.

Timmers and her counterparts in Belgium and Ireland have thus come to an entirely different conclusion than Novartis. They have found no evidence of the future savings. Zolgensma is indeed ‘better’ than Spinraza but also much more expensive: it will cost about three times as much as what the treatment delivers in terms of health benefits.

Helma Dollevoet, spokesperson of Novartis Netherlands, says gene therapies are designed to tackle the genetic cause of illnesses — “but it’s only over the long term that we’ll see what that does in practice.”

Dollevoet says Novartis’ assessment is based on the assumption that further treatments with Spinraza aren’t required. “That was also found by an international group of SMA experts,” she says, adding that the study showing that four out of 10 children required Spinraza is outdated. “Back then, Zolgensma was so experimental that some parents wanted to also use Spinraza, just to be certain.”

Rutten and Drummond model aimed to produce a kind of certainty, but the medicine prices are still elusive. There are countless potential interpretations of the same data. Or, as Novartis’ spokesperson Dollevoet says: “It’s about which perspective you use to look at the data. It depends on what your goal is, what you want to prove with it.”

A monster of a model

Have Frans Rutten and Mike Drummond ever thought that they’d created a monster with their model? “The prices can be ridiculously high these days, but a monster? I’d be very sorry if that was the conclusion,” says Rutten.

Rutten thinks calculations based on his model are a useful instrument for countries to determine whether they want to buy a medicine. However, he recognises that, in the hands of pharmaceutical companies, they are also a ‘sophisticated marketing instrument’.

Looking into how Zolgensma was developed shows the enormous gap between the actual R&D costs and the asking price. Because it was developed by a small start-up, the costs of the research and development are easy to calculate. The clinical research — the most expensive phase in a medicine’s development — was conducted by biotech start-up AveXis and later, after its acquisition, by Novartis. In total, both companies paid more than a billion dollars for R&D and the construction of a production plant. A considerable figure, to be sure — but now, less than two years since Zolgensma was approved in the U.S., the investment has been easily recouped.

According to annual reports, by yearend of 2020, Novartis had already earned more than $1.2 billion with Zolgensma — even though the medicine was only available in a couple of countries beyond the U.S.

The importance of the new gene therapy for Novartis is clear from the sum that the company paid in 2018 for AveXis: $8.7 billion, for a company that still hadn’t brought any products to market. The chairman of Novartis’s board defended the takeover sum by pointing at the multi-billion-dollar ‘peak sales’ that Zolgensma would supposedly bring in each year.

Waiting for a saviour

In April 2021, at home on the sofa in Zandvoort, Piotr is feeding Liam mashed carrots. Since his son was diagnosed the previous winter, he and his wife’s lives have been completely turned upside down. Piotr has lost eight kilos from the stress. The day we interview him is an emotional low point: Liam’s wheelchair has just been delivered. ‘You see it and immediately feel: this isn’t good.”

Liam can still eat and breathe by himself, but the letter from the hospital is not optimistic. Patients with SMA type-2a, like Liam, tend to develop digestive and respiratory issues, as well as on their back and on their joints. Eventually, Liam will be ‘completely dependent on the care of others,’ wrote the doctor.

Thanks to the treatment with Spinraza, he is getting a little better. “He has become a bit stronger, but he still can’t turn over and he doesn’t move his legs. When I pick him up from nursery I see all the other children playing and running around. But Liam is just sitting by himself. I find that really hard to watch,” says Piotr.

On April, the Insured Package Advisory Committee from the National Health Care Institute had a meeting about the price of Zolgensma. After that, the committee advised the health minister, Hugo de Jonge, to start price negotiationswith Novartis. But it’s unclear whether Zolgensma will be covered by basic health insurance policies.

Dutch experts say that children with Liam’s condition can benefit from Zolgensma, depending on how progressed their illness is when it’s administered. For Liam, it will probably be too late. While waiting on a response from the government, Novartis has made the medicine available for a few children younger than six months old — but Liam is already more than 13 months.

His parents aren’t giving up. “I’m an optimistic person,” says Katarzyna. “We’re grateful for all the support and I know that we will succeed in raising enough money.”

Until now, they’ve run the crowdfunding campaign through trial and error. They managed to get singer Jim Bakkum to create an Instagram story for Liam. But a saviour still hasn’t arrived. Piotr and Katarzyna show a message from a Dutch TV presenter, whose name they don’t want to reveal. The celebrity would like to sign something for them to sell, but he doesn’t want to “hassle” his followers on Instagram with Liam’s sad story. They understand. “This kind of person has hundreds of thousands of followers. I’m sure we’re not the only ones asking.”

Read the full article on Follow The Money.

The authors of this article are part of The Investigative Desk, a collective of investigative journalists. To produce this article, they received a financial contribution from the Matchingfonds 2020, a fund supporting freelance journalists and photographers.

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