A former drug company manager explains industry price-setting: ‘If grandma is on the table, no one will blink at the price’

It was not always this way at Lilly. When she started her career, there was an internal company slogan Leath would hear a lot: “We make drugs as if people’s lives depend on it.”

That was in 1987, when Leath was fresh out of DePauw University and working in Lilly’s finance division.  The company’s portfolio focused on medicines for acute illnesses, including several antibiotics. “One of the things I liked about working there was that the conversation was very much about patients,” Leath said. “You could see that our products like Ceclor were treating infections and saving lives.”

After going back to school to complete her MBA at Cornell’s Johnson Graduate School of Management, Leath moved to Lilly’s business development and strategic planning division. In that role, she worked directly with senior management. So, when things changed, she had a front-row view.

It started in 2000, when Lilly was waging a court battle aimed at protecting their antidepressant medicine Prozac from generic competition. Prozac sales earned as much as $2.6 billion a year, a quarter of Lilly’s entire revenue.  When the company lost the case, its stock price dropped more than 30% in anticipation of Prozac’s patent expiring in August 2001.

The impact was immediate, Leath recalls. “There was a huge amount of external pressure to get earnings back up and the stock price along with them,” she says. “Inside the company, you had staff saying, ‘We just lost $2 billion a year. Am I going to get laid off?’”

Then, the company had a big win. In clinical trials, its Xigris product was proving to be effective at treating severe sepsis, a complication from infection that was killing 225,000 people each year with no approved drug to fight it. Just two months after Prozac lost its U.S. patent, the Food and Drug Administration gave Lilly the green light to sell Xigris. The timing could not have been better. “Xigris may be just what the doctor ordered for Lilly,” the Wall Street Journal reported in September of 2001.

By then, Lilly leadership had spent several months discussing a potential price for Xigris. Leath recalls a preliminary consensus forming around a price of about $500 per dose. That was no bargain: $500 was a hundred times more than the company’s manufacturing cost and at the higher range of the medicine’s class. But, with Prozac sales plummeting and the medical community’s excitement about Xigris rising, that price began to seem inadequate. “All of a sudden, the price everyone talked about was $10,000 per dose,” Leath says. “Someone just pulled that figure out of their derriere, and then it became the number.”

"If Grandma is on the table . . .”

Leath’s observations about the random process of pricing Xigris is consistent with investigations into the opaque world of setting the price for monopoly-protected medicines sold to customers whose lives may depend on them. In 2015, the U.S. Senate Finance Committee conducted an 18-month investigation into how Gilead Sciences arrived at then-record prices of $84,000 and higher for its sofosbuvir-based Hepatitis C medicines. The Senate investigation found that the company considered the remarkable effectiveness of the medicine whose rights it had purchased, looked closely at what the market would bear, and set the highest price it thought it could get away with.

Gilead’s executives bolstered themselves for criticism. Once the drug was released, one company vice president offered a pep talk in an internal email. “Let’s hold our position whatever competitors do, or whatever the headlines,” he wrote in late 2013. “Let’s not fold to advocacy pressure in 2014.” They did remain steadfast, and that strategy combined with the take-it-or-leave-it nature of monopoly protection paid off: In the 21 months after the hepatitis medicines were introduced, the company collected $20.6 billion in revenue for them, fueling a breathtaking corporation-wide profit margin of nearly 50%.

That same year, the Wall Street Journal published an inside account of how Pfizer executives decided to set the price of a new breast cancer drug. As their Gilead counterparts did, Pfizer’s team ignored research and manufacturing costs, instead focusing on discovering the maximum price that insurers would be willing to pay, and at what price level physicians would balk at prescribing the drug. Worried about the intimidating nature of a $10,000 per month cost, Pfizer settled on the same approach that cause microwave ovens and flat-screen TV’s to so often carry price tags ending with 99 dollars or 99 cents. Executives decided that the new breast cancer drug would be sold at $9,850 a month.

But, in 2001, drug price tags like these were still unheard of. So Leath was stunned at the internal discussion of a $10,000 price for Xigris, which would make it the most expensive medicine on the market.  When she realized that the only ones sharing her concern were colleagues in middle management, she raised her objections to her boss. The new price could not be justified by research or manufacturing costs, Leath said, even with a healthy profit added in.

Her boss replied that justification based on company costs was irrelevant. “If Grandma is on the table, no one is going to blink at paying $10,000 to save her life,” he said. It was a phrase that came to be repeated in the Lilly executives’ pricing discussions from then on: “If Grandma is on the table . . .”

Raulo S. Frier, vice president of clinical services at pharmacy benefits manager Express Scripts Inc., told the Wall Street Journal much the same thing.  After the rumored $10,000 cost for Xigris became public--the drug would eventually be priced at $6,500--Frier was among many in the medical community who said there would be no choice but to meet Lilly’s demands. "A lot of hospital pharmacy directors are going to be hyperventilating over the cost," Frier said. "But they will be under a world of hurt if they don't use it."

"Some drugs do not belong in the hands of a for-profit company"

In the end, Xigris did not live up to the hopes of either the company or patients. Although Lilly consistently made $100 million a year from the drug, it was pulled from the market in 2011 after further clinical testing showed it did not have a positive impact on patient survival.

By that time, Frances Leath was long gone. In her decade and a half with Lilly, she had received regular promotions, a six-figure salary, and annual bonuses averaging more than $30,000. She had every indication that those numbers would only continue to rise. Yet, for the granddaughter of a United Methodist minister and chair of Staff Parish of her own Methodist church in Indianapolis, money could no longer keep her in the Lilly fold. “I was struggling, both emotionally and physically,” she says. “I felt like I was participating in things that conflicted with being a Christian.”

Leath is now a realtor, a job she loves. “There is no better feeling than helping someone find the home that is perfect for them,” she says. When she sees the Lilly price-setting on insulin, she shakes her head in recognition of the phenomenon she witnessed first-hand. “They have not generated the next blockbuster drug, and they feel the pressure to make as much money as they did when they had a blockbuster,” she says. “So, they are making up the difference with their chronic care medicines. That strategy was an active part of conversation when I was there.”

To Leath, the lesson learned from her experience in the pharmaceutical industry is that its leaders are now laser-focused on profits, along with the stock prices, salaries, and bonuses that are tied to them. No one should expect those executives to voluntarily restrain themselves from price-gouging on a lifesaving medicine they hold the rights to.

“I’ve concluded that there are some drugs that simply do not belong in the hands of a for-profit company,” she says. “They are driven by motivations that have nothing to do with the health of patients.”