• `I wish drugs would fall out of the sky free. Don't we all.'
  • Is it possible to set a price too high? Even the guru says yes

To patrons of the Rum Boogie Cafe in Memphis, he’s Mick, a skilled guitarist with a bushy white beard who favors fedoras and sings soulful tunes about fishing and drinking. To Americans outraged by pharmaceutical prices, he just might be the guy to blame.

Not that they would know him. While Mick Kolassa may be a household name to hard-core blues lovers, he’s hardly one to the patients and politicians who complain about avaricious drug companies. But long before 2014’s “Michissippi Mick,” his first album, Kolassa helped revolutionize the way the industry decides what to charge, and how it justifies commanding premiums for game-changing remedies. He doesn’t figure he has anything to apologize for.

Mick Kolassa
Mick Kolassa
Photographer: Zachary Tracer/Bloomberg

“One of the problems we have in health care is that nobody wants to pay for the actual value,” he says. Without the fedora one afternoon at Medical Marketing Economics, a consulting firm he helped found and that has had a client roster including Valeant Pharmaceuticals International Inc., he puts it another way. “I wish drugs would fall out of the sky free. Don’t we all.”

It was at MME, 80 miles from Memphis in Oxford, Mississippi, where Kolassa fine-tuned the idea that a drug’s price should reflect its usefulness to society. He believes pharmaceuticals are some of the best deals around. When his 89-year-old mother grumbles about the bill for the glaucoma pill that keeps her from going blind, he tells her it’s a bargain. What price can you put on sight?

Far-Reaching Benefits

The burly Kolassa, who at 64 takes generics for blood pressure, cholesterol and arthritis, sold his interest in MME to his partners last year, so he can split time between drug pricing and the blues. Clients still seek the guru out.

“He was the first one to put it down on paper: Here is the way that drugs should be priced -- you should be pricing drugs so you don’t give away the value,” says Jim Yocum, executive vice president at DRX, a Connecture Inc. unit that makes price-comparison software.

The Kolassa theory seems straightforward enough. Basically, it holds that drug companies should charge handsomely for products that will benefit not only the patient but the economy, by keeping people out of hospitals or allowing them to live productive lives. The price should factor in a profit that can finance more crucial discoveries.

A case study displayed on MME’s website sheds light on what the firm calls its “value-based strategies.” A client wondered whether it should cut a price to reverse slowing sales. After discovering some doctors really liked the drug, MME recommended “a set of aggressive price increases immediately.” The client obliged, and “revenue has increased substantially.”

Too High

That might come off as crass to some. Pose the question to Kolassa, though, and he’ll tell you it’s anything but. “If you are asking me if I am ashamed of what I am doing, not at all, I am damn proud of it,” he says. "I would rather have these apparently costly drugs and keep people alive than not have them.”

In his book “The Strategic Pricing of Pharmaceuticals,” Kolassa wrote about drug-price elasticity. “It is theoretically possible to set a price that is too high,” he said. “We have yet to identify such a situation in the U.S. market.”

That was in 2009. He’s seen such situations since, and has been persuaded that there are limits by the behavior of drug flippers -- companies that acquire licenses for treatments and jack up prices. He calls Turing Pharmaceuticals AG’s 5,400-plus-percent increase for a parasitic infection treatment “egregious.” (Turing says it has offered discounts to hospitals and has programs to help patients with out-of-pocket costs.)

Turing helped set off a firestorm in the U.S., where drug costs are largely unregulated. The issue is a spark in the presidential campaign, and there have been congressional probes. Mike Pearson, Valeant’s former chief executive officer, apologized at a Senate hearing for being too aggressive. Valeant is under fire for 525-percent and 212-percent boosts for two popular heart drugs. MME advised the company on pricing those drugs; Kolassa, who wasn’t involved, says he can’t comment.

As absurd as he thinks some maneuvers have been, Kolassa says most companies function as they should be expected to in the pharmaceutical free market, which has its quirks.

When it comes to $10,000-a-month, life-extending cancer drugs, for instance, there’s no upside in setting a lower price than a rival, he says; whatever a doctor figures is best will win, even if it’s marginally more effective and much more expensive.

Free-Market Dance

Then there’s Sovaldi, Gilead Sciences Inc.’s $1,000-a-pill hepatitis C remedy, so shockingly costly for a relatively common virus that it prompted a Senate investigation. To Kolassa, it was a steal. Combined with other drugs, it cures the disease in three months -- no earlier cocktail came close -- making liver transplants unnecessary. “I don’t know if they could have priced it any better,” says Kolassa, who didn’t advise Gilead.

Insurers and pharmacy-benefits managers balked at $84,000 for the 12-week course, with some limiting prescriptions to the very sickest. Gilead, which has said it tried to set a price that would allow broad access with minimal restrictions, started offering steep markdowns. Kolassa calls the pushback from insurers unfortunate but understandable. “They’re starting to do the things they have been threatening to do,” he says. It’s all part of the free-market dance.

Some critics of Kolassa’s ideas say that dance is making his value-based theory obsolete, as insurers wield power and public opinion backs them. “Different customer groups see value very differently,” says Roger Longman, CEO of Real Endpoints, which analyzes drug reimbursements, and that definition has changed “radically” as insurers have exerted control. Drug makers won’t be able to push through hikes just because they persuade doctors their remedies are slightly better than others, he says. “That idea is dead.”

Miracle Drugs

Kolassa isn’t so sure. He opens the door to his office, where the decor includes a poster for a gig on Beale Street in Memphis and a photograph of him at the 2007 launch of Alexion Pharmaceuticals Inc.’s Soliris. It was one of the early ultra-orphan drugs, which treat diseases affecting fewer than 1 in 50,000 people, in this case obscure blood disorders. The initial list price: $389,000 a year. “I’m speechless right now,” one analyst said on a conference call when that number was revealed.

What happened with Soliris? Kolassa notes that insurers paid up. In 2015, the drug generated $2.6 billion in sales.

The modern drug-development era was beginning when he started in the business 35 years ago, at Upjohn Co. in his native Michigan. There were advances in biotechnology and genomic science, creating miracles. HIV is no longer a death sentence, nor are some cancers, but they’re not cheap to fight.

Hot Topic

Kolassa helped launch one of the first first super high-priced drugs a year after he went to work at Sandoz, now part of Novartis AG, in 1988. The antipsychotic Clozaril retailed for nearly $9,000 a year; previous treatments went for hundreds. Patients and their families protested, and there were lawsuits.

Sandoz ultimately cut the cost. But Kolassa says $9,000 was worth it. “There were people that were literally locked away in rubber rooms for 20 years that were put on this drug, and six weeks later they were out living in group homes.”

Kolassa, who earned a Ph.D. in pharmaceutical marketing at the University of Mississippi in Oxford in 1995, was a professor at Ole Miss before founding MME with former students. Two partners join him for an interview at the office near Oxford Square, one in the conference room and the other, Douglas Paul, participating via speakerphone. Paul interrupts several times to ask reporters about their motivations. He’s worried, Kolassa explains later, because the drug-price topic is just too hot. “It’s on the news constantly, Bill Maher talks about it, it’s a massive campaign issue.”

Kolassa’s getaway from it all, of course, is the blues. When he was a kid, he figured he’d grow up to be a musician. In Germany with the Army in the 70s, he led a band called Uncle Bud’s Pet Squid. It didn’t take long for him to realize that was no way to make a living.

Now he’s able to give strumming his Gibson Bluesmaster equal time. His second album, “Ghosts of the Riverside Hotel,” came out last year. Songs include “Whiskey Woman,” “Mama’s Got a Mojo” and “Grapes & Greens,” with proceeds from sales going to the Blues Foundation. And the prices? Pretty reasonable. Just 99 cents per tune on Amazon.

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