Rafi Mohammed

Abbott Laboratories: You Definitely Understand the Value Decoder

Posted on January 5th, 2007 (0 Comments)

On Wednesday, John Carreyrou wrote an excellent front page article in the Wall Street Journal describing the pricing tactics that Abbott Laboratories uses for their AIDS drugs. John’s article illustrates that Abbott clearly understands the key principle of the Value Decoder: your product’s price is based on the price & characteristics of its closest substitute.

In 2003 Abbott became concerned about increasing competition for its flagship AIDS drug, Kaletra. Because of its effectiveness and convenience, Kaletra had become the most popular AIDS drug with annual U.S. revenues approaching $400 million. Abbott’s anxiety began in June 2003 when Bristol-Myers Squibb introduced a new AIDS drug Reyataz, which when taken in conjunction with another drug named Norvir, was as effective as Kaletra, had a better effect on cholesterol levels, and was more convenient (fewer pills per day). Using a Value Decoder analysis, the characteristics of the Reyatz/Norvir combination were superior to Abbott’s Kaletra – making it a more valuable drug treatment relative to Kaletra. Abbott’s internal analysis suggested that if the company took no action, Kaletra prescriptions would drop by 10% in 2004. Not a great prognosis for Kaletra’s future commercial prospects, wouldn’t you agree?

Here’s where the story becomes interesting. Abbott happens to be the manufacturer of Norvir, the key component of the superior Reyatz/Norvir AIDS treatment. What’s a private sector company to do in this situation? Abbott considered the following three options:

  1. Take Norvir pills off the U.S. market and only offer the liquid version of Norvir. Not only would this option make the Reyatz/Norvir treatment more expensive, an unpleasant effect of ingesting liquid Norvir is its foul aftertaste. An Abbott representative characterized liquid Norvir as “tasting like someone else’s vomit.” This would definitely make Abbott’s flagship product, Kaletra, more attractive.
  1. Pulling all formulations of Norvir from the global market.
  1. Significantly raise the price of Norvir.

In the end, Abbott decided to raise the price of Norvir by 400% in December 2003. This raised the cost of using the Reyatz/Norvir treatment from $2,504 to $11,187 per year compared to Kaletra’s annual cost of $7,000. As the Value Decoder would predict, the Norvir price change benefited Kaletra and the drug is estimated to do $500 million in sales in 2006.

So, what do you think? Pharmaceutical companies are for profit companies, you and I probably hold some pharmaceutical stocks in our 401 K plans. Are pharmaceutical companies entitled to use the Value Decoder to price for profits and growth?

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