Drug pricing: Bitter pill

A hepatitis treatment’s soaring price is prompting the debate that most alarms the industry

When delegates turned up for a big healthcare conference at New York’s plush Waldorf Astoria hotel in February, they were met by placard-wielding activists.

That in itself was not unusual. Big pharma has long been the subject of angry campaigns over issues such as animal testing and access to Aids drugs in Africa.

Yet the focus of these protesters was something different: the high cost of a new hepatitis medicine in the US.

This small-scale insurrection on a Manhattan sidewalk has since turned in­to something approaching a national rebellion against Gilead Sciences and its drug known as Sovaldi, which costs $84,000 for a 12-week course of treatment. Scrutiny increased further last week when the California-based biotech company announced that sales of the medicine had reached $5.7bn after six months on the market, making it the most successful drug launch on record.

But while investors were celebrating – Gilead’s share price is up 50 per cent in the past year – many in the industry were nervously monitoring the growing political debate over drug pricing that Sovaldi has triggered.

Last month two senior members of the US Senate finance committee wrote to John Martin, Gilead’s chief executive, asking him to justify Sovaldi’s price and expressing “serious concerns about the extent to which the market for this drug is operating efficiently and rationally”.

Such an intervention is unusual in the US, which, alone among big developed economies, has no government powers to regulate pharmaceutical pricing. The letter from Ron Wyden, Democratic chairman of the Senate finance committee, and Charles Grassley, a Republican, has raised questions over whether this laisser-faire approach could be destined to change.

After a slowdown since the financial crisis, US healthcare costs have started to rise again. At about 17 per cent of gross domestic product, they are the highest in the developed world. Pharmaceuticals account for only one in every $10 spent on health but they are among the most visible to patients because of the steep co-payments demanded by insurers.

President Barack Obama’s healthcare reforms have increased incentives for healthcare providers to control costs as insurance coverage is widened. But Sovaldi has shown that, when a new medicine arrives with high demand and no competition, there is little to stop drugmakers charging what they wish.

“Other countries have come up with frameworks to make drugs affordable for people whereas in the US it has always been a case of what the market will bear,” says Steve Miller, chief medical officer of Express Scripts, one of America’s biggest prescription management companies. “We think the market is no longer bearing up.”

For the pharmaceuticals industry, there is nothing that causes greater anxiety than the idea that its cherished pricing freedom in the US could be imperilled. Annual US per-capita spending on pharmaceuticals is $1,010, more than double the $498 average among members of the OECD.

This high US spending underpins the economics of the global pharmaceuticals industry. More than half of all sales from new drugs launched between 2009 and 2013 were made in the US, compared with 23 per cent in Europe.

Seldom has the international disparity in drug pricing been starker than in the case of Sovaldi, a drug hailed as the biggest breakthrough in hepatitis C treatment since the virus was discovered in 1989. In more than nine out of 10 cases, the treatment will lead to complete cure within 12 weeks.

Gilead agreed to sell the drug in Egypt, the country with the world’s highest prevalence of hepatitis C, at a 99 per cent discount to the US price. The move was aimed at heading off the kind of controversy faced by drugmakers in the 1990s when the industry was accused of keeping HIV medicines out of reach of poor Africans.

However, while few would begrudge efforts to make the medicine more affordable in the developing world, many Americans have been asking why, if Gilead can afford to price Sovaldi at $11-a-pill in Egypt, does it charge $1,000 in the US.

“The answer is because it can,” says Dr Miller, one of Gilead’s fiercest critics. “Sovaldi has shone a light on the fact America is subsidising healthcare innovation for the rest of the world.”

US drug prices are high because, unlike in most other countries, the government does not use its purchasing power to contain them. There is nothing like the UK’s National Institute for Health and Care Excellence (Nice), for example, which acts as a gatekeeper for new medicines.

Before a treatment is recommended for use in Britain’s National Health Service, its manufacturer must convince Nice that the product represents value for money.

The result is that fewer new drugs are adopted in the UK and those that are command a lower price than in the US. Gilead, for example, has priced Sovaldi at a 30 per cent discount to its US price in Britain. Yet even that has not been enough to convince Nice of its clinical value. The agency told Gilead in June to come back with more data to support its case for the drug. France, too, is playing hardball.

To many in the US, the notion of government rationing drugs and regulating prices is wholly un-American. Republicans have long characterised Nice as a “death panel” that epitomises all that is wrong about European socialised healthcare. A study sponsored by the Pharmaceutical Research and Manufacturers of America, the industry lobby group, in July showed that almost 80 per cent of cancer drugs reviewed by Nice in the past seven years have had some type of restriction placed on access. This, said the lobby group, could explain why the average five-year survival rate for US breast cancer patients is higher, at 90 per cent, than the UK’s 78 per cent.

Yet the fact that the US industry issues warnings against “centralised, one-size-fits-all value assessments” across the Atlantic exposes its concern that such concepts could be gaining ground in the US.

Nobody expects a US equivalent of Nice or anything similar to be adopted in the foreseeable future. Political resistance is too strong and the health system too fragmented and privatised. However, there are increasing signs that politicians and health officials are taking a harder look at how to rein in rising costs.

“We can’t ignore the elephant in the room,” says Karen Ignagni, president of America’s Health Insurance Plans, which represents health insurers. “The Sovaldi case brings all these issues together in a very stark way: How much is too much? Can this price be sustained? What happens if it blows up your budget? This is a debate we’re just on the cusp of having in our society.”

Sovaldi is not the most expensive drug on the market. What sets it apart is the size of the patient population it aims to treat. There are an estimated 3.2m people in the US infected with hepatitis C, four times more than the number with HIV.

So far 70,000 patients have been prescribed Sovaldi but its impact is being felt throughout the healthcare system. WellPoint, one of the biggest US health insurers, for example, spent $50m on hepatitis C treatment in the first quarter – as much as the whole of last year. State governments warn that their social healthcare budgets risk being crippled. Louisiana would have to spend more than its entire transportation budget if everyone who was eligible was treated with Sovaldi, says Express Scripts.

While Sovaldi may be an exceptional case, there is a growing number of expensive speciality medicines emerging from laboratories that collectively promise to put further stress on budgets. As mass-
market blockbusters, such as statins and beta-blockers, have gradually lost patent protection, many drugmakers have refocused on speciality treatments. These are often cutting-edge biological drugs that draw on breakthroughs in genomic science over the past decade to target rare diseases and subtypes of more common conditions, such as cancer. In order to recoup high development costs from relatively small patient groups, prices tend to be very high. Take, for example, a cystic-fibrosis drug, called Kalydeco, made by Vertex Pharmaceuticals, which costs $300,000 a year.

Increased spending on speciality medicines explains why the average price of branded medicines in the US has almost doubled since 2008, according to Express Scripts. The overall drugs bill has been growing more slowly because of the falling price of generic medicines, which represent 86 per cent of all US prescriptions.

However, rising use of speciality products is expected to create more upward pressure in future. While they account for less than 1 per cent of total prescriptions, they drain more than a quarter of pharmacy spending.

Gilead and other drugmakers argue that their prices are justified both by the need to provide a return on investment in research and development and by their long-term value to patients. John Castellani, president of the PhRMA, says that, by curing hepatitis C, Sovaldi has the potential to save the US healthcare system $9bn a year in the long run by reducing hospitalisations from the liver disease that often results from the virus.

“It is penny wise and pound-foolish to focus solely on the price of a new medicine while completely ignoring the value it provides to patients and the healthcare system broadly,” says Mr Castellani. A broader debate is needed, he adds, about “outdated” insurance models that force patients to pay an ever-growing share of prescription drug costs while shielding them from the typical $5,000-a-day cost of hospitalisation.

However, industry leaders accept that they have a role to play in bringing healthcare costs under control. It has become almost obligatory for pharma executives to espouse a shift towards more “value-based” pricing models that reward drugmakers based on measurable health outcomes. This is code for acknowledging that the era of overpriced “me too” drugs is drawing to a close, while making clear the industry expects to be rewarded for true innovation.

“If you are not number one or two to market or you do not have a demonstrable clinical advantage over rival products you are going to be up against it,” says Daniel Hoffman, president of Pharmaceutical Business Research Associates, a consultancy.

This trend is already visible in the most competitive parts of the market. GlaxoSmithKline, the UK drugmaker, last week issued a profits warning in large part because of increased pricing pressure on respiratory drugs in the US. Sir Andrew Witty, chief executive, said several factors, including consolidation within primary care networks, were eroding pricing power. The Obama administration’s Affordable Care Act had “added some fuel to this fire” by making the whole system more cost-conscious, he added.

The question is whether such pressures will influence pricing of high-margin speciality drugs such as Sovaldi. A big test will come in the months ahead when AbbVie and
Bristol-Myers Squibb are expected to launch rival hepatitis C medicines. If they significantly lower prices, the controversy may be quickly forgotten and the primacy of market forces in the US healthcare system reasserted. If not, calls for some form of government intervention are likely to grow. “It will tell us,” says Mr Hoffman, “whether this is a competitive market or a cartel.”

Innovation: A young company reshaping the industry

Critics have cast Gilead Sciences’ $1,000-a-day pricing of its Sovaldi hepatitis C medicine as an example of drug industry greed at its worst, writes Andrew Ward. To others, it shows how market forces are the only reliable way to drive medical innovation. Founded in 1987 by a 29-year-old medical doctor with a Harvard MBA, Gilead is among a new generation of young US biotech companies that are reshaping the pharmaceuticals industry.

It is already bigger by market capitalisation, at $143bn, than some traditional pharma mainstays, including GlaxoSmithKline and AstraZeneca.

This reflects the phenomenal success of Sovaldi, on top of breakthrough treatments for HIV and flu. Sovaldi is on course to generate more than $10bn of sales in its first year on the market. The medicine is the first of a new category of hepatitis C drugs that treat the virus more effectively, more quickly and with fewer side effects than previous therapies.

While Sovaldi shows how much of the best drug innovation comes from biotech companies rather than traditional big pharma, Gilead’s own scientists cannot claim credit. The medicine was acquired in 2011 through an $11bn acquisition of Pharmasset, founded by Sovaldi’s inventor, Egyptian-born Raymond Schinazi. The speed with which Gilead has started to recover that investment is cited by critics as evidence that its drug is overpriced.

Addressing investors last week, John Milligan, the company’s chief operating officer, said the full value of Sovaldi was only now becoming clear. Patients who previously had faced up to a year of treatment with nasty side effects and patchy success rates are now cured within 12 weeks in most cases.

“I don’t think anybody disagrees with the fact that Sovaldi is a remarkable drug,” he said. “It’s an outlier because we are curing people of a horrible disease in a very rapid timeframe, and that’s a very unusual thing for payers to think about.”

Gilead’s success has intensified the race among rivals to catch up. AbbVie and Bristol-Myers Squibb are nearing market with similar drugs, and in June Merck & Co paid $3.85bn to buy Idenix, a hepatitis C specialist, to strengthen its position.

Copyright The Financial Times Limited 2016. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.

More on this topic

Suggestions below based on Gilead Sciences