Should Politicians Fix the Price of Sovaldi?

A version of this Health Alert appeared at Forbes.

Gilead (NASDAQ: GILD) has become the whipping boy du jour for the forthcoming Obamacare-driven cost explosion in government and private health spending. Apparently, everything was going swimmingly until Gilead — right out the blue! — dropped a cure for Hepatitis C on the market and threw everyone’s spending projections into a tizzy.

Politicians and the health insurance industry have embarked on a high-profile campaign to shame Gilead for the price of its new wonder-drug, Sovaldi, which can add up to $84,000 for a course of treatment. If successful, this campaign will have terrible long-term consequences for medical innovation.

Thursday’s earnings report by Gilead confirms that Sovaldi is blowing the doors off. About 70,000 patients have already received treatment in the U.S., and a further 10,000 in Europe. Worldwide, sales for the first half have amounted to $5.75 billion, almost half the company’s revenue. That revenue comes from health insurers and governments, so it is not surprising that they are scrutinizing the issue.

Senators Wyden and Grassley have requested documents from Gilead respecting its acquisition of Pharmasset, the company which originally developed the medicine that was to become Sovaldi. This is a fishing expedition that purports to have the objective of determining exactly how much Pharmasset and Gilead spent on researching and developing Sovaldi. However, this question cannot be answered. Further, it is irrelevant to the value Sovaldi delivers.

In its latest 10-Q, reporting the first quarter’s results, Gilead confirmed that:

We do not track total R&D expenses by product candidate, therapeutic area or development phase. However, we manage our R&D expenses by identifying the R&D activities we anticipate will be performed during a given period and then prioritizing efforts based on scientific data, probability of successful development, market potential, available human and capital resources and other considerations. We continually review our R&D pipeline and the status of development and, as necessary, reallocate resources among the R&D portfolio that we believe will best support the future growth of our business.

In plain English: Gilead’s management sees how things are going in the research portfolio and moves money around based a lot of business factors. To be sure, Gilead does not want to expose the details of its R&D budget to politicians and the public. However, it probably could not even if it wanted to.

Lessons learned from a failed drug candidate are useful for another compound. A molecule is forgotten about for a couple of years until a new scientist decides to have another look at it. Some research may be applicable to more than one candidate in the portfolio. If a drug-maker’s board tasked two different executives to calculate the historical R&D spending on a successful medicine, those executives would probably arrive at very different measurements.

The brand-name pharmaceutical industry’s trade association points out that only one in ten thousand new compounds will be approved by the Food and Drug Administration, and only two or three of them will make enough profit to justify the investment. Forbes‘ Matthew Herper has estimated that it now costs $5 billion to invent a new medicine, which includes the cost of the tens of thousands of molecules that fail. The government cannot simply dictate that a pharmaceutical company shall earn a politically acceptable rate of return only on a specific medicine’s R&D costs, without taking failed R&D spending into account.

The Wall Street Journal has exposed the role of the health insurance industry. Its trade association, apparently, has funded an effort by John Rother of the National Coalition on Health Care to criticize Gilead for the price of Sovaldi. Health insurers are now quasi-public utilities whose income statements are regulated by the federal government. This is done via the medical-loss ratio (MLR) which dictates health insurers’ profit margins. Further changes in premiums are regulated (but not fixed) and must be accepted by state regulators months before taking effect. On the other hand, they have to pay for prescription drugs, for which there is no price regulation in the U.S. private market.

So, an asymmetry exists. Still, are we meant to believe that health insurers have no clue which drugs are coming down the pipeline, and how much they will cost? On the contrary, pharmaceutical companies have highly skilled people calling on payers, proposing the value proposition of their products.

Gilead’s critics are not very clear about what they want. Karen Ignagni, CEO of America’s Health Insurance Plans, calls for “balance“. That sounds reasonable, but that should not require an expensive public-affairs campaign. Drug makers and health insurers have done business for decades without politicizing and exposing their differences.

Perhaps Obamacare has consolidated the government-healthcare complex to the point where it is no longer possible for these two industries to negotiate in a businesslike manner. Mr. Rother simply asserts that Sovaldi’s price is “unsustainable“. However, he does not suggest a more “sustainable” price. At a recent panel discussionin Washington, DC, Mr. Rother insisted that Gilead be more transparent about its costs to research and develop Sovaldi.

It looks suspiciously like Gilead’s critics are trying to develop a pathway for the government to regulate drug-makers’ margins based on R&D spending. Innovative drug-makers would have to expose their most sensitive business practices to government scrutiny, worry about the government’s response to a change in R&D priorities, and perhaps even get the government’s permission to change the R&D budget.

The research and development process, especially in the clinical-trial phase, is already highly regulated. This has added significantly to the cost of new drugs. Government oversight and regulation of pharmaceutical budgets and margins would be a catastrophe for innovation.

Comments (34)

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  1. Matthew says:

    While Sovaldi is extremely expensive, any government regulation should not be allowed, because as described above, it will hinder innovation. The cost of Sovaldi is high, but the cost to create it was also high. This is definitely is a slippery slope and tough question to answer.

    • DoctorSH says:

      “There is no bad regulation that future regulators can not fix” —- Present administration.

  2. Patrick skinner says:

    Since the US is one of a handful of countries that don’t put price controls on drugs, we are subsidizing the R &D for the rest of the world? What would be wrong with the US allowing the average of the highest 5 counties ‘controlled’ prices? Force the RX companies to spread the R& D cost around the world. The oncoming a Federal Bankruptcy could be pushed back a few years?

    • John R. Graham says:

      The outcome would be that the drug makers would increase prices in those other countries.

      • Patrick Skinner says:

        Exactly John!!! Let’s ask some other socialized medicine countries to help defray the cost of R&D! If they paid a ‘fair’ price, they might not be able to claim their healthcare system is so much more efficient than the free enterprise system the U S used to be?

        • John R. Graham says:

          They can also credibly threaten to break the patents, via compulsory licensing.

  3. James M. says:

    “Worldwide, sales for the first half have amounted to $5.75 billion, almost half the company’s revenue.”

    If Gilead has made this much revenue on Sovaldi already, and the costs to produce a drug is reaching $5 billion like what was cited above, couldn’t Gilead lower the cost and continue to reap high profits worldwide off of their drug?

  4. Roger Waters says:

    Hear, hear.

    Just a few facts and ideas to ponder:
    – Cost of liver transplant: $600,000 (many Hep C patients need more than one since the virus does not leave with the old liver and can infect the new one)

    – Value to the patients who are cured: priceless (read the many interviews in the press), don’t forget, this is a complete cure, let me repeat CURE – almost unheard of in modern medicine

    – Insurance companies who didn’t see this coming: incompetent, and in fact utilization management helps make sure those who need the medication get it, and it is not over-used, so there are controls on costs

    – Government attempts to limit availability of life-saving cures – unethical, and may be illegal

    So, what is the value of a life?

    • John R. Graham says:

      One problem is that private insurers are being asked to pay the cost, but they do not benefit. A majority of U.S. hep C patients (I was told at a conference) are in prison or ex-cons. The liver transplants are paid for by Medicare because it takes 20 to 30 years until it gets to that point.

  5. DoctorSH says:

    Simple answer.

    Do not allow the govt or insurers to directly pay for any medication. Get rid of third party RX administrators.

    Let Gilead set a price that a normal Joe Schmoe can afford, instead of one that the govt or insurers can.

    The cost would fall immediately and continue falling.

    Then the insurers or govt can “reimburse” patients for their treatment, or not, dependent upon their insurance contract.

    On the $$$ side of this, this is just Gilead not leaving any money on the table, as they are trying to get as much as possible from payers with deep pockets.

    take the deep pockets out of the equation.

    • Walter Q. says:

      “Let Gilead set a price that a normal Joe Schmoe can afford, instead of one that the govt or insurers can.”

      Wow, finally some reason in this debate. Prices fall once consumers are acting with their wallets and insurers and government aren’t the ones bearing the costs.

      Gliead is charging what they are because they can, and insurers are obviously willing to buy at that price point.

      • John R. Graham says:

        One problem in this case, e.g. Sovaldi, is that the patients are not people who have money or – to be blunt – are very popular. Most have been in prison.

      • Jerome Bigge says:

        You have to remember that there is no “free market” in medicine. There is no legal access to medical drugs except with a doctor’s prescription. This prevents “price competition” or consumers making their own decision as to what medicines to take.

        A good example of this is insulins for diabetics. Go to “GoodRx” (Google it) and see how the actual prices of insulins vary all over the place. The diabetic who is able to make his or her own decisions would doubtlessly select the lowest cost first, then move up the scale if needed. However doctors usually don’t give you a choice based on cost. Why? Prescribe an expensive “brand name” medicine and the company will “compensate” you for doing so. Note that this also applies to a number of other things where the producer “rewards” the sales person for selling one product instead of another. If you sold the “preferred” product, the company would send you a “gift” (often cash). Saw this for myself back in 1960 when I was working in a camera store. The concept is the same as those “percentage off” deals you see in supermarkets. The manufacturer is “compensating” the store for selling their product instead of another.

        The drug companies have a lot of sales persons relative to the number of doctors in practice. Then the companies also run expensive ads on TV about their drugs. There are two COX-2 inhibitor drugs drugs used for osteoarthritis. One is a “brand name”, the other a generic. One costs $400 a month, the other costs $4. Guess which one gets prescribed the most…

        • John R. Graham says:

          I regret I do not know enough about insulin to know why a diabetic would need one brand over another.

          With respect to the COX-2 inhibitor, I can’t respond because you have not written the brand-name drug. I’m not going to guess!

          Generally speaking, the brand-name drug will lose huge market share once a generic enters the market. That is why about 87 percent of prescriptions written in the U.S. are generic.

          Even if the doctor is habituated to writing the brand name instead of the generic name on the scrip, most state dispensing laws will cause the pharmacist to dispense the generic, unless the doctor has specified DNS (“do not substitute”) on the scrip. With electronic prescribing, genericization is even more likely to occur.

  6. Steve says:

    Unfortunately, I think many people miss the main idea of posts such as these, and that is that: What RIGHT does the government have to regulate the final market prices of ANY product produced by the private sector?

    Yes, the government and health insurance companies are usually the buyers of this product. But so what? If the government doesn’t like the price, they ought to stop paying for it. It’s that simple.

    But, as usual among liberal know-it-all elites, some lawmakers believe that THEY know the “fair” price of certain products, rather than the markets. What they usually fail to mention is that their interference in the regulatory process itself has already made the price rise!

    • Flyover Country American says:

      Exactly! So the government involvement actually causes the high prices of Sovaldi to some extent. Then, administration officials blame the drug companies for charging “too” much, and then government price controls make the problem even worse by stifling life-saving innovation.

      Great job bureaucrats.

  7. Patrick Skinner says:

    Exactly – take the gov’t out of the equation – either give every American a voucher to purchase private insurance, or reduce taxes to where they can afford to buy it. They can choose appropriate coverage.

  8. Devon Herrick says:

    The actual price charged for a given drug has little to do with the R&D cost. On a drug that fails to get approved due to inefficacy, the R&D cost is a sunk cost. On a really effective drug with a huge market, the drug may be priced as a function of other drugs on the market. In the case of Sovaldi, it’s likely priced based on the fact that there is a relatively limited market (compared to drugs for cholesterol or hypertension). Also, it is highly effective. It also cures a condition that is far more costly to treat with the competing drugs.

    It isn’t drugs like Sovaldi that worry me, it’s the ones that are only marginally effective that have to be taken for years. In the long run, they likely cost more than Sovaldi.

    • John R. Graham says:

      That is the major reason why I am uncomfortable with proposals whereby the government would guarantee a profit margin based on R&D. The amount spend on R&D is not suggestive of value. A competitor may develop a better drug and launch it at about the same time.

    • Jim Dillon says:

      When the price of drugs that “cure” is capped, it becomes more profitable to develop drugs that must be taken indefinitely, with no prospect of cure.

      Apparently the process was similar in our conversion to energy-efficient lightbulbs. The older product provided abundant light indefinitely, thus falling victim to its own success.

  9. John Fembup says:

    “Should Politicians Fix the Price of Sovaldi?”

    Now that they have fixed the health care system?

  10. H D Carroll says:

    So, how about US payers get the same price they charge in India and African countries? The “cost plus” of this product shouldn’t vary on the basis of who (or where) the payer is, but whatever a properly determined global market value.

    Normally I would go into how such “products” are not “ideal” economic goods, but for now let’s just stick to the geographic cost shifting instead of payer affiliation differential cost shifting.

    • Devon Herrick says:

      When it pertains to goods that have a variable cost per unit that is close to the selling price, global prices are often similar. But when a good has a low marginal cost, but very high start up costs, price discrimination is used to maximize revenue in diverse markets with much different income. If we all paid the “African price” there would be far fewer drugs available. If we charged Africans the “U.S. price” few Africans could afford them. What is most irritating is that the rest of the developed world refuses to help cover the overhead that went into developing drugs.

  11. Joe Barnett says:

    Yet, like other expensive wonder drugs, Sovaldi is not the only option. For instance, there is a promising new Hep C regime using a combination of other drugs
    Such alternatives, which may be cheaper, would not, in the future, be developed, if Solvaldi was offered at a subsidized (or forced) price. Indeed, other potential innovations are often the cost of government intrusion into the market. E.g., does anyone think that the federal entitlement to dialysis treatment in the 1970s slowed the development of cheaper, more effective alternatives?

  12. Jimbino says:

    The problem here derives directly from our system of socialized medicine.

    If each person paid for his own medical care and drugs without depending on cross-subsidies inherent in gummint socialized medicine, there would be no controversy, just as there’s no controversy when a person can’t afford a Lear Jet or a Ferrari.

    The problem arises when we promise folks a Ferrari and pay for it with “everybody else’s money,” as Thatcher remarked.

    It’s a good thing we don’t have gummint insurance for providing us our food, cars, houses and sex.

    • Jerome Bigge says:

      Trouble is that government is involved all the way through medicine. Much the driving force for government involvement came from the health care industry itself seeking the establishment of legal monopolies that would allow greater profits. The AMA was organized back in 1846 for the same purposes as any labor union, that is, improved income for its members. The first thing was to eliminate “scabs”, that is, those weren’t members of the AMA. The legal profession did much the same. These organizations as an idea first arose during the Middle Ages as “Guilds” which were in fact organized with the idea of a creation of a legal monopoly which would give the members higher incomes. Same basic principle as any labor union.

      You will note that all of these organizations also require the power of the State to provide them with “protection” against any possible competitor. Organized labor didn’t make its gains until the Roosevelt administration gave organized labor the necessary legal backing. The same thing is true of the licensed professions and occupations. Government is the source of their power.

  13. Patrick Skinner says:

    EXACTLY Devon!!! I’m not asking for the African discount, but how about the average that England, France, Germany, Russia, India, and China pay? Why should the U S Taxpayer or Personal Insurance payor subsidize the gov’ts of Russia or China?

  14. HD Carroll says:

    Patrick, you replied exactly as I would have, but you got there first, thanks. If those countries need support paying a ‘fair’market rate, then give it to them separately, don’t distort the market by embedding a hidden subsidy.

  15. Barry Carol says:

    The pharmaceutical industry for decades was and still is among the most profitable industries in America despite the cost of R&D failures and high marketing and advertising costs. In its most recent quarter, GILD’s net after tax profit margin was in the 50% of sales range. I’ve never seen any other company earn that much as a percentage of revenue.

    Suppose GILD decided to price Sovaldi at $500,000 for a course of treatment. Should we just be expected to pay for it out of fear that it would hurt future innovation if we didn’t? I would like to see a few payers, especially some of the state Medicaid systems and the VA, tell GILD that they won’t pay $84,000 for a course of treatment but they will pay $36,000 which is what Pharmasett expected to charge for the drug before it was acquired by Gilead Sciences. Then let GILD tell the Medicaid systems and the VA we won’t sell it to you for $36,000; we demand $84,000 even though we sell it for less in other developed countries.

    There are numerous legitimate reasons to practice price discrimination in a multitude of industries. Pricing based on differences in per capita GDP is not one of them. No other industry does it that I’m aware of.

    • John R. Graham says:

      Medicaid programs already get a discount by law. Indeed, I (and many others) contend that the mandatory Medicaid discounts increase the pre-discount price, which is the political hot potato.

  16. Bob Hertz says:

    Barry is right. At some point the price of a drug becomes a pure power struggle.
    Nothing to do with efficacy or market size or the abstract future of innovation.

    There is just a corporation that wants to make an extra $50,000 per patient.

    No American insurer and very few American regulators wants to be stuck in a position where their stubbornness could be blamed in the death of a patient.
    So they will usually knuckle under to price gouging.

    Health bureaucracies in other countries are in that sense more heartless. Of course their actions and the deaths that can result are not as visible to the public or grabbed off by trial lawyers.

    • John R. Graham says:

      Then, I suppose we have to ask: Why doesn’t Gilead charge $1 million? $10 million? The firm knows what value the drug provides.

  17. Bob Hertz says:

    I think that the ‘value’ of life saving drugs is overstated.

    Some transplants are themselves wildly overpriced. Hospitals do a week or even less of work and send out bills for $500,000.

    If the transplant is overpriced, then the value of saving a transplant is overpriced.

    Sad to say, most people feel that the value of a prisoner’s life is zero, or even less than zero if the prisoner in the can because of a violent and cruel act.

    Spending $3 dollars on a such a prisoner is bad enough, but spending $300,000 is appalling.

    • John R. Graham says:

      Thank you. We have been having a conversation based on the unstated and unverified assumption that the costs of transplantation are fixed.

      There are surely ways to reduce the costs of transplantation, too. Some have suggested increasing the supply of organs by legalizing a market for them.