ANAHEIM, Calif. — The doctor was dumbfounded: A drug that used to cost $50 was now selling for $28,000 for a 5-milliliter vial.
The physician, Dr. Ladislas Lazaro IV, remembered occasionally prescribing this anti-inflammatory, named H.P. Acthar Gel, for gout back in the early 1990s. Then the drug seemed to fade from view. Lazaro had all but forgotten about it, until a sales representative from a company called Questcor Pharmaceuticals appeared at his office and suggested that he try it for various rheumatologic conditions.
“I’ve never seen anything like this,” Lazaro, a rheumatologist in Lafayette, La., says of the price increase.
How the price of this drug rose so far, so fast is a story for these troubled times in U.S. health care — a tale of aggressive marketing, questionable medicine and, not least, out-of-control costs. At the center of it is Questcor, which turned the once-obscure Acthar into a hugely profitable wonder drug and itself into one of Wall Street’s highest fliers.
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At least until recently, that is. Now some doctors, insurers and investors are beginning to have doubts about whether the drug is really any better than much cheaper alternatives. Short-sellers have written scathing criticisms of the company, questioning its marketing tactics and predicting that its shareholders are highly vulnerable.
That Acthar is even a potential blockbuster is remarkable, considering that the drug was developed in the 1950s by a division of Armour, the meatpacking company that once ruled the Union Stock Yards of Chicago. As in the 1950s, Acthar is still extracted from the pituitary glands of slaughtered pigs — essentially a byproduct of the meatpacking industry.
The most important use of Acthar has been to treat infantile spasms, also known as West syndrome, a rare, sometimes fatal epileptic disorder that generally strikes before the age of 1.
For several years, Anaheim, Calif.-based Questco lost money on Acthar because the market was so small. In 2007, it raised the price overnight, to more than $23,000 a vial, from $1,650, bringing the cost of a course of treatment for infantile spasms to above $100,000. It said it needed the high price to keep the drug on the market.
“We have this drug at a very high price right now because, really, our principal market is infantile spasms,” Questcor CEO Don M. Bailey told analysts in 2009. “And we only have about 800 patients a year. It’s a very, very small — tiny — market.”
Companies often charge stratospheric prices for drugs for rare diseases — known as orphan drugs — and Acthar’s price is not as high as some. Society generally tolerates those costs to encourage drug companies to develop crucial, possibly lifesaving drugs for these often neglected diseases.
But Questcor did almost no research or development to bring Acthar to market, merely buying the rights to the drug from its previous owner for $100,000 in 2001. And while Acthar production is complex, it accounts for only about 1 cent of every dollar that Questcor charges for the drug.
Moreover, the tiny “orphan” market soon became much bigger. Before long, Questcor began marketing the drug for multiple sclerosis, nephrotic syndrome and rheumatologic conditions, even though there is little evidence that Acthar is more effective for those other conditions than alternatives that are far cheaper.
And the company did so without being required to prove that the drug works. That is because Acthar was approved for use in 1952, before the Food and Drug Administration required clinical trials to show a drug is effective for a particular disease. Acthar is essentially grandfathered in.
Today, only about 10 percent of the drug’s sales are for infantile spasms. The new uses, Bailey has told analysts, represent multibillion-dollar opportunities for Acthar and Questcor, its sole maker.
The results have been beyond even the company’s wildest dreams. Sales of Acthar, which accounts for essentially all of Questcor’s sales, totaled nearly $350 million in the first nine months this year, up 145 percent from the period a year earlier. In the same period, Questcor’s earnings per share nearly tripled, to $2.12.
In the five years after the big Acthar price jump in August 2007, Questcor shares rose from around 60 cents to about $50, one of the best stock performances in any industry.
But in September, the shares plummeted after Aetna, the big insurer, said it would no longer pay for Acthar, except to treat infantile spasms, because of lack of evidence the drug worked for other diseases. The stock now trades at $26.93.
Peter Wickersham, senior vice president for cost of care at Prime Therapeutics, a pharmacy-benefits manager that has found the drug is possibly being overused, says the huge increase in Acthar’s price “just invites the type of scrutiny that it’s received.”
Questcor, meanwhile, has said the U.S. Attorneys Office in Philadelphia is investigating its marketing practices. The company hasn’t been accused of wrongdoing.
Bailey defends his company’s practices. He said that when Questcor raised Acthar’s price, it did not initially intend to market the drug for other uses. It simply responded to demand. “Nobody predicted this,” he said. “Nobody.”
He also said Questcor isn’t competing with low-price alternatives but that it is marketing the drug as a treatment when those alternatives fail. Used that way — for instance, as a last chance to avert kidney failure — insurers are still paying for the drug at least 85 percent of the time, he says.
Still, given that Questcor is now pursuing billion-dollar opportunities far beyond the treatment of infantile spasms, is the high, orphan-drug price still justified?
“We could lower the price and make less money,” Bailey says, “and then we would be sued by our shareholders.”
Whatever the case, some shareholders have done pretty well. Over the past two years, as the share price soared, Questcor insiders have sold more than $100 million of stock.