Drug Prices and how to keep them down

How Drug's Rebirth as Treatment For Cancer Fueled Price Rises:
Once-Demonized Thalidomide Boosts Celgene's Sales; Patients See
Costs Soar

Wall Street Journal - November 15, 2004
Geeta Anand, geeta.anand@wsj.com

http://www.aegis.org/news/wsj/2004/WJ041105.html
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-- Avoiding AIDS Activists

WARREN, N.J. - When Celgene Corp. got its first drug approved, it
priced a 50-milligram capsule at $6. Today, it sells the same
white capsule for nearly five times the original price, or $29.

Little has changed to affect the cost of making the drug since it
was first sold in 1998 as a treatment for leprosy and severe
weight loss, or wasting, caused by AIDS. But today, it is
primarily prescribed for cancer, a disease whose patients and
advocacy groups have shown little interest in fighting for lower
U.S. prices.

"When we launched it, it was going to be an AIDS-wasting drug,"
says Celgene's chief executive, John Jackson. "We couldn't charge
more or there would have been demonstrations outside the
company."

Celgene's drug is thalidomide, which earned world-wide notoriety
in the 1960s for causing birth defects. The story of its
reincarnation as an AIDS and cancer treatment shows how the
political environment and drug companies' perception of what the
market will bear drive decisions on drug prices in the U.S. For
some serious diseases such as cancer, the sky is virtually the
limit -- although it may not stay that way.

The ability to price medicines ever higher has helped fund the
pharmaceutical industry's research and development programs,
which bring new medicines to patients. It also fills the coffers
of some companies and their executives. Meanwhile employers,
insurers and sometimes patients must pay the tab.

"For patients, the side effect of taking this drug is penury,"
says Raymond Comenzo, a hematologist at Memorial Sloan-Kettering
Cancer Center in New York City.

Thalidomide is inexpensive to make. Fundacao Ezequiel Dias, a
government laboratory in Brazil, sells 100-milligram capsules to
the Brazilian government health system for seven cents. The pills
are given to leprosy and cancer patients free of charge. A
Netherlands pharmacy sells the same dose for about $2.60.

Celgene began as the biotechnology department inside a big
chemical firm, Celanese Corp., in the late 1970s. In 1987, after
Celanese merged with another company, it decided to spin off the
biotechnology division. The new company, named Celgene, at first
focused on using biological processes to make industrial
chemicals. But in the early 1990s it decided to move into
pharmaceuticals because the old focus was "a lousy business,"
says Sol J. Barer, a founder of Celgene who is now chief
operating officer. "Chemicals are priced on the cost of
ingredients," he says, while pharmaceuticals are "priced on
value."

In the 1990s, Dr. Barer, a chemist, was wandering the halls of
Rockefeller University in Manhattan in search of products when he
bumped into a scientist who was studying why thalidomide helped
treat leprosy. She theorized that the drug acted to inhibit a
protein associated with inflammatory diseases from asthma to
rheumatoid arthritis.

Dr. Barer grew excited about thalidomide's potential but was wary
of its history. In the early 1960s, the drug was found to cause
horrific birth defects in the babies of mothers who had taken the
drug for morning sickness. Most of the babies were born in Europe
because the drug was never approved by the U.S. Food and Drug
Administration. Some babies had no arms or legs, while others had
deformed limbs.

Thalidomide was still being used in poorer countries because it
was cheap and effective in treating leprosy and wasting in
tuberculosis patients. U.S. AIDS patients were importing
thalidomide illegally to treat wasting. Dr. Barer concluded that
Celgene could get the FDA to approve thalidomide, despite its
notoriety, if the company sought to sell the drug for AIDS.

Celgene began clinical trials to show thalidomide could reduce
wasting in AIDS patients but unexpectedly found the amount of
AIDS virus in patients' blood seemed to rise temporarily on
thalidomide. That meant more testing would be needed. Dr. Barer
says he decided on a quicker route: getting the drug approved for
treating leprosy, for which substantial data existed in public
health databases around the world. Once the drug was on the
market for leprosy, doctors could prescribe it for AIDS or any
other disease, a practice known as "off label" prescribing.

The company devised a system for dispensing the drug that
requires, among other things, regular pregnancy tests for
patients of childbearing age. Since thalidomide had been around
for decades and the composition couldn't be patented, Celgene
would eventually patent this system of controlling distribution.

The FDA faced pressure from AIDS activists who wanted access to
thalidomide. In July 1998, the FDA granted Celgene approval to
market thalidomide for leprosy under the brand name Thalomid,
giving the green light to those who wanted to prescribe the drug
off-label for AIDS wasting.

The next challenge was setting the price. Mr. Jackson, a lanky
former Marine who had held executive positions at Merck & Co. and
American Cyanamid, took over as Celgene's chief executive in
1996. Mr. Jackson and Dr. Barer wanted to avoid antagonizing AIDS
activists. "Our pricing people said if you charge more than
$3,000 [per year], they'll show up at the door," Mr. Jackson
says.

Only after the price had been set at $6 for each 50-milligram
capsule did the two men fully realize thalidomide's potential to
treat cancer. In 1997, Bart Barlogie, a cancer specialist in
Little Rock, Ark., tried thalidomide on an elderly man with
multiple myeloma, a cancer of the plasma cells in bone marrow
that afflicts 50,000 Americans. Dr. Barlogie was acting on the
suggestion of Judah Folkman, a researcher at Children's Hospital
Boston who studied substances that can deprive cancer cells of
new blood vessels for growth. Dr. Barlogie's patient had a nearly
complete remission.

On Dec. 6, 1999, Dr. Barlogie reported the results of a clinical
trial: About 30% of 169 patients who had relapsed after other
treatments saw levels of a protein associated with myeloma
decrease by 50% or more after taking thalidomide.

Thalidomide was reborn as a cancer medicine just as the drug was
eclipsed by new AIDS medicines that made wasting virtually a
thing of the past in the U.S. Again it was being prescribed
off-label since Celgene hadn't received FDA approval to sell the
drug for cancer.

Celgene, like many small biotech companies, had lost money every
year since its founding. In 1998, it reported a loss of $32
million on revenue of $3.8 million. Now it could begin to tackle
those losses. Mr. Jackson says he knew he could charge a lot more
for thalidomide as a cancer drug. The question, he says, was
whether to double or triple the price immediately or make more
gradual increases. He decided on the latter. In 1999, he raised
the price by 21% to $7.23 from $6 for the 50-milligram
thalidomide capsule. The cost for consumers at pharmacies is
typically between 20% and 25% higher than what Celgene charges to
drug distributors.

Celgene's revenue soared to $38 million in 1999 and $85 million
in 2000. It became a star on the stock market, even though it
continued to post losses. In February 2000, Mr. Jackson did a
secondary offering, raising $298 million at $101 a share. Mr.
Jackson and Dr. Barer, who had dreamed of turning Celgene into a
major pharmaceutical company, acquired a San Diego cancer
research firm in June 2000 for $200 million in stock.

As the use of thalidomide spread, some cancer doctors noticed
that they could get the same results with a lower dose. That was
significant because thalidomide can cause a nerve disorder and
sleepiness, especially at higher doses. At the end of 2000, the
company says it found the average daily dose per patient had
fallen by about 25% to 225 milligrams, from 300 milligrams a day
per patient at the start of the year. That meant the average
patient was spending less per day on thalidomide -- $35.70
compared with $43.38 at the start of 1999. Mr. Jackson believed
Celgene could raise the price.

Over 2001 and 2002, he did so several times. The medicine
remained cheaper than many cancer drugs and Mr. Jackson says he
received few, if any, complaints. By the end of 2002, Celgene was
selling the 50-milligram capsule for $11.03. "By bringing it up
every year, it was heading toward where it should be as a cancer
drug," says Mr. Jackson.

It was a time in which "companies just raised the price and
somebody paid the bill and nobody objected," says Margaret
Tempero, a cancer specialist who is the immediate past president
of the American Society of Clinical Oncology.

In December 2002, Mr. Jackson made another acquisition, a New
Jersey company that harvested stem cells from human placentas
after pregnancy, for $45 million in stock. At the end of 2002,
Celgene reported a loss of $100 million on revenue of $136
million, as it continued to significantly boost its research and
development spending.

The next year brought another reason for raising the price. A
biotechnology firm in Cambridge, Mass., Millennium
Pharmaceuticals Inc., brought the drug Velcade to market in May
2003 for multiple myeloma, priced about twice as high as
thalidomide. Velcade, delivered in an infusion in the hospital,
cost about $4,400 per month for the average patient, compared
with around $1,800 per month for a typical thalidomide user.

In June, one month after Velcade came to market, Mr. Jackson
raised thalidomide's price by 10% to $15.76 from $14.33. "We felt
certainly from a competitive perspective that would be
justifiable," he says. By the end of 2003, the 50-milligram
capsule of thalidomide cost $22.32. In 2003, thalidomide sales
nearly doubled to $244 million. Celgene declared its first
profit, of $13.5 million.

Mr. Jackson says the price increase wasn't as rapid as it seems
because in 2003 Celgene also introduced 100-milligram and
200-milligram doses of thalidomide and didn't raise the prices of
those higher doses as frequently. More than 60% of patients take
200 milligrams per day or more of the drug, according to Celgene.
Previously they had to take four 50-milligram pills; now they
could take a single 200-milligram pill and save some money.

Each year, as thalidomide revenue grew, Mr. Jackson plowed more
money into research and development of new medicines. By 2003,
the R&D budget at Celgene had reached $123 million, which
amounted to nearly half of the company's revenue of $271 million.
Part of the research budget funded three clinical trials of
Revlimid, a drug the company believes could be more effective
than thalidomide in certain cancers without the potential to
cause birth defects.

As revenue grew, the company raised pay for top officers. In
2003, Mr. Jackson earned $1.8 million in salary and bonus,
compared with $365,000 in 1998. He says he took a pay cut to take
the job in 1996 because of the potential upside, particularly the
stock options. By the end of 2003, he held 1.5 million stock
options valued at $31 million, according to the company's proxy
statement. Other senior executives also received big increases in
their salaries, bonuses and options.

Also last year, Celgene raised $400 million in a convertible debt
offering. The money helped it buy a Welsh manufacturer of
thalidomide for $110 million this year. The company still sits on
about $800 million in cash and marketable securities. Celgene's
shares, which have split twice since 2000, stood at $30.41 in 4
p.m. Nasdaq Stock Market trading Friday, giving the company a
market capitalization of about $5 billion.

In theory a generic-drug company could sell thalidomide in the
U.S., since the patent on the drug's composition expired long
ago. However, it would need to get the FDA's approval for a
distribution system to keep the drug out of the hands of pregnant
women. Such a system would be difficult to devise without
violating Celgene's five patents on its own system. And the FDA
might hesitate to approve an alternative system because Celgene's
system has worked well to prevent birth defects from thalidomide.
Celgene says no other company has attempted to bring thalidomide
to market in the U.S.

Celgene is seeking FDA approval to market thalidomide for
multiple myeloma; currently, since the drug is only approved for
leprosy, Celgene sales representatives aren't allowed to directly
promote it for other uses.

This year, Mr. Jackson has raised the price of the 50-milligram
capsule twice, by a total of 32%, to take it to $29.44 from
$22.32. The current price of the 200-milligram capsule is $75.60,
or about 36% cheaper than the 50-milligram capsule on a
per-milligram basis. Patients who take 200 milligrams a day are
now paying about three times as much as they did in 1998, while
those with a 50-milligram daily dose are paying nearly five times
as much.

Still, Mr. Jackson says a month of thalidomide for a typical
patient costs only about 60% as much as a month of Velcade,
meaning there's room for more price increases. He says if he
brought his drug to market today he'd sell it for the same price
as Velcade. In fact, he told investors during a recent
presentation at an industry conference to expect Celgene's next
product, Revlimid, to be priced at twice the cost of thalidomide
"unless the political environment changes."

Some on Wall Street believe such a change is looming. Oncologists
have begun to complain that prices are out of hand. And the
Centers for Medicare and Medicaid Services, the federal agency
that covers health-care costs for seniors and the indigent, has
proposed cutting federal reimbursements for the infused
biotechnology medicines covered at present. Analyst Eric Schmidt
at SG Cowen & Co. says he expects the federal agency to exert
more pressure on drug prices when it begins covering most
prescription medicines for seniors in January 2006.

Mr. Jackson argues the high prices don't hurt patients. "Either
people are wealthy enough to pay or health insurance pays or our
company gives the medicine away for free," he says. Don Baylor,
the New York Mets' hitting coach last season, takes thalidomide
to treat his multiple myeloma and says in an interview the cost
of the drug is covered under Major League Baseball's
health-insurance plan.

But other patients bear much of the cost themselves. Mary Lou
Wright, a retired insurance agent in Harrisonburg, Va., says she
has paid a portion of the cost of thalidomide under her insurance
plan, although she has enough income to make the expense
manageable. Until Ms. Wright went off the drug recently, she paid
$289 a month for her prescription of 50 milligrams a day. "The
price of the drug is outrageous," says Dr. Comenzo, the
Sloan-Kettering oncologist who treats Ms. Wright and Mr. Baylor.

Celgene's free drug program, generous by industry standards,
helps patients who earn less than $38,000 a year and also have
assets of less than $10,000. It doesn't apply to people whose
insurance is paying part of the bill. Dr. Comenzo's nurse, Alice
Ford, says she sees many patients who struggle to pay for
thalidomide and don't qualify for Celgene's free drug program.
For that reason, she says, "I discourage the doctor from putting
people on it." Velcade, though more expensive, has been covered
by Medicare.

The two biggest advocacy groups for multiple myeloma haven't made
lower drug prices a priority. "I try to focus on the positive
rather than coming after them on price," says Kathy Giusti,
president of the Multiple Myeloma Research Foundation.

Susie Novis, president of the International Myeloma Foundation,
says taking on drug companies over pricing is a losing battle.
"They won't even discuss it. They say, 'It is what it is,' " she
says.

Dr. Comenzo, while praising the advocacy groups' work, accuses
them of shying away from the pricing issue because they receive
substantial donations from Celgene and Millennium, among other
drug companies. Ms. Giusti says drug-company donations don't
influence her views on pricing. Ms. Novis says she surveyed her
group and found only a minority of U.S. members worried about
price. But she may take up the price issue in Europe, where
patient groups and doctors have raised an outcry.

Celgene licensed the right to market thalidomide in Europe to
Pharmion Corp. of Boulder, Colo. Pharmion sells the drug under a
program for making lifesaving medicines available before they've
been officially approved by regulators. A patient in Europe on a
daily dose of 100 milligrams would pay about $30 a day to get
thalidomide from Pharmion.

Pieter Sonneveld, a hematologist at the University of Rotterdam
in the Netherlands, says his patients complained so much about
Pharmion's price that he helped set up a pharmacy to make
thalidomide and sell it at cost in the Netherlands through
hospital pharmacies. It costs about $2.60 for 100 milligrams, he
says. However, if Pharmion gets marketing approval from European
regulators it would have exclusive rights to sell the drug for
multiple myeloma, making it more difficult for low-cost
alternatives such as Dr. Sonneveld's to survive.

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