‘Anchoring’ was at work in setting the price of Novartis’ new gene therapy

If the Empire State Building happened to be hollow, could you fill it with 1 billion ping pong balls? Would that number fall short, or would you have leftovers? How many ping pong balls do you think it would take exactly?

I know, it’s a hard question. It’s hard to know even where to start.

A half a century ago, Nobel laureate Daniel Kahneman and his lifelong colleague Amos Tversky described what they called anchoring. When offered a number about an intuitively unknowable quantity, like how many ping pong balls could fill the Empire State Building, the guesser is pulled toward that number.

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Kahneman and Tversky asked two groups of students what percentage of countries in the United Nations were located on the African continent. Given an over/under anchor of 10%, their guesses averaged 25%. With an over/under anchor of 65%, the average answer was 45%. The effect of anchoring is largest when the guesser has no other frame of reference.

I raise the issue of anchoring in light of the announcement last week from Novartis that its gene therapy called Zolgensma for spinal muscular atrophy, a rare disease, had an unimaginably high price: $2.125 million per treatment, payable in five annual installments.

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I remember the 1990s. A clot-busting drug came on the market that was deemed a threat to health insurance sustainability. It cost around $1,000. In the aughts, I witnessed a cancer drug be scrutinized heavily by Medicare because it cost around $80,000.

Yet Zolgensma, at more than $2 million, has inspired merely a “meh”?

The usual pricing justifications do not apply. Manufacturing a dose of Zolgensma may cost a lot but it doesn’t cost millions. Its research costs tally to a few hundred million at most, money Novartis will earn back in a handful of months as peak sales should reach $2.6 billion a year.

The drug’s value today is around $900,000, according to the independent nonprofit Institute for Clinical and Economic Review. That is based on being willing to pay $150,000 per high-quality year of life for the treatment when used in already symptomatic type 1 patients, the most common clinical presentation.

Most drugs today are not priced based on any of these parameters but are instead based on the prevailing price in the market for similar drugs — what economists call the price the market will bear.

But Zolgensma is a gene therapy, and when Novartis set out to determine how much of society’s money it could transfer to its shareholders through Zolgensma’s sales, it saw an anchoring type of ping pong ball moment.

After all, Zolgensma is different from other drugs. It is given just once and appears to reverse the loss of motor neurons that leads to severe and rapid decline and death in infants. What it has done for some children would warm the coldest, darkest critic’s heart. It has no logical point of reference.

A few years ago, I started noticing drug corporations and their trade associations begin anchoring by proposing prices for drugs to come. Industry speakers started referring to “million dollar gene therapies” even though there was no such therapy actually on the market.

There were criticism and opinion columns arguing that we need new ways to finance million dollar gene therapies. Blaming the health care system, not the manufacturer that wants to charge the highest possible price, is risible, but it falls nicely into the narrative that the U.S. health care system is broken.

Yet while there is an actual number of ping pong balls that King Kong’s favorite hangout could soak up — about 23 billion — prices of drugs are not immutable. They are a product of what markets will allow. Hence lower prices in Europe than in the U.S. for the same drug.

Over the past few months, Novartis CEO Dr. Vasant Narasimhan tossed out a bunch of price anchors for Zolgensma that ranged from $1.5 million to $5 million. Just before the big reveal, he told reporters the price would be well shy of $5 million, and it was.

We all got anchored, then we got a discount, and now there actually is a gene therapy on the market with a multimillion-dollar price tag.

Peter B. Bach, M.D., is the director of the Drug Pricing Lab at Memorial Sloan Kettering Cancer Center in New York City.