August 3, 2014:
How much can we afford to pay for one drug? How much profit does one company deserve for producing that drug? With last month’s release of record earnings for Gilead Sciences – nearly $6 billion in profits in half a year from the hepatitis C drug, Sovaldi, these questions need to be answered.
The $1,000-a-pill price for Sovaldi makes plain that our system for pricing prescription drugs is broken. At more than $84,000 for a full course of treatment, the total cost of treating the estimated 3.2 million Americans living with chronic Hepatitis C is about $270 billion – almost as much as the United States spends annually on all other prescription drugs combined.
Why does Sovaldi cost so much? Because that’s how Gilead has chosen to price it, and there’s virtually nothing to stop it from charging what it wants. Under federal law, developers of newly approved drugs are granted the right to be the exclusive providers of that drug for a set period of time. Intended to provide an incentive for innovation, this monopoly right is similar to the advantage patent holders in other industries enjoy. However, the prices for other products are constrained by what consumers are willing and able to pay. If the product is priced higher than it is valued by consumers or what they can afford, it won’t sell.
The market dynamic is different with pharmaceuticals, especially ones like Sovaldi that provide significant improvement in treating potentially debilitating conditions. Consumers’ willingness or ability to pay isn’t a constraint on pricing because insurers or government health programs typically pay all but a small portion of the tab. And because these are products that patients need for their health, insurers and government are expected to pay – no matter the cost.
In effect, developers of important new drugs are handed a blank check.
The only tool we have to keep prices in check is trust. We depend on drugmakers to be socially responsible and set prices that reward their innovation, but at a reasonable cost to society. By all appearances, Gilead has shattered that trust.
So what should we pay to incentivize innovation in drug development? The costs of developing Sovaldi haven’t been disclosed, but the average estimated costs of bringing a drug to market have been pegged as high as $1.2 billion by the industry trade group PhRMA and as low as $75 million by a recent independent study. Private pharmaceutical companies also benefit from basic research funded by taxpayers. Yet Sovaldi, which is estimated to cost no more than $30 per month of treatment to manufacture, is on track to generate revenue of $12 billion in its first year.
Gilead says it has priced the drug to reflect the costs of treatments that use of the drug would avoid, such as liver transplants. But only a about a third of hepatitis C carriers eventually develop liver disease, so the total costs of giving Sovaldi to all of those infected would come close to doubling hepatitis C treatment costs over the next 20 years.
It’s frightening to think what will happen if this unrestrained approach to pricing continues. With recent scientific advances, particularly the unlocking of the human genome, an avalanche of drugs is in development. According to a recent report commissioned by PhRMA, 5,408 drugs were in clinical trials as of the end of 2011, with 70 percent of these considered potentially “first in class” medications.
How many in this crop will be like Sovaldi, major improvements in the treatment of a serious condition? Let’s hope many. But if hope is all we have to restrain the pricing of those new drugs, we’re on the road to financial ruin.