(Bloomberg Opinion) -- While a world awash in a pandemic awaits a coronavirus vaccine, Gilead Sciences Inc. is bringing a treatment to market.
Remdesivir is an experimental drug that may help Covid-19 patients recover more quickly — but it doesn’t immunize them. Its price tag is $600 for a series of six treatments for patients who live in developing countries where Gilead, to its credit, allows a generic version to be sold. If patients live in a developed country and the government insures them or provides their health care, it costs $2,340. If they have private insurance and live in the U.S., it costs $3,120. (And that’s if six treatments work; some patients are expected to need 12 treatments, so those prices could double.)
That sounds like a lot of money to me. But it doesn’t sound like a lot to Gilead’s chief executive officer, Daniel O’Day.
O’Day noted in a letter posted on his company’s website on Monday that remdesivir is priced “well below” the “value” it provides. He defined that “value” as the amount Gilead has determined providers and patients save (about $12,000) by shortening treatment times in hospitals. “There is no playbook for how to price a new medicine in a pandemic,” O’Day wrote. “In normal circumstances, we would price a medicine according to the value it provides.”
Using already exorbitant hospitalization costs as a benchmark for value is a neat trick, but Geoffrey Porges, a prominent biotechnology and pharmaceuticals analyst, is on the same page as O’Day.
“It’s unprecedented to price the drug below the medical costs that it’s saving,” Porges told NPR, saying he thought remdesivir could save as much as a whopping $40,000 per patient. Wait, there’s more. “That ignores the enormous societal value that everybody else gets from making a patient less infectious, for getting a patient back into the community, for getting them back to work sooner,” he added. “All of those societal benefits aren’t even considered in this price.”
Just for speculation’s sake, what would all those societal benefits add up to? Another $40,000 per patient? $100,000? $1 million? Pick your number because any figure, in the context of squishy and hard-to-quantify externalities, will be squishy and hard to quantify.
Porges has also invoked history when weighing in on remdesivir’s price tag. “If you are going to war, or preparing for war in a capitalist country, you have to let business make money out of the process or business won’t work,” he wrote in a note to investors in early June, quoting a famous diary entry of former Secretary of War Henry Stimson during World War II.
There’s no question that the world is at war with Covid-19, and there’s nothing wrong with a business making money, of course. Profits are a fundamental incentive. But they frequently aren’t the only incentive. And the interesting and troubling arguments raised by remdesivir’s price have plagued the pharmaceutical and biotechnology businesses for quite some time. Mother Nature, clothed in a pandemic, is forcing an overdue adjudication of their merits.
Big Pharma has asserted for years that hefty prices are rewards for hefty expenses, traditionally identified as all of the research and development spending that contributes to the cost of inventing and producing blockbuster drugs. Pharma’s R&D costs are relatively lofty compared to other industries and may amount to about 17% of revenue — a figure surpassed only, perhaps, by the R&D spending of semiconductor manufacturers and some other tech companies.A Tufts University study published in 2016 said it costs, on average, about $2.6 billion to develop a drug that wins the federal government’s marketing blessing. The Tufts research group that prepared the study receives a significant portion of its funding from the industry, and its estimate was based on an analysis of 106 randomly selected drugs that 10 pharmaceutical companies tested on human subjects between 1995 and 2007.
Public Citizen, a consumer advocacy group, has fileted the Tufts study, saying only $1.4 billion of the $2.6 billion figure represents actual developments costs (with the other $1.2 billion accounted for as opportunity costs incurred by not pursuing other investments). Public Citizen said that even the $1.4 billion figure contained inflated assumptions about expenditures, derived in part from a focus on only the most expensive drugs. It said the Tufts study didn’t fully account for generous government grants that typically provide, perhaps, as much as a fifth of pharma companies’ research spending. Pharmaceutical companies also often enjoy monopoly pricing and have used patent laws to keep competitors at bay.
Sometimes, Big Pharma just buys pre-developed drugs, which means its R&D costs are even less substantial. For example, more than a decade ago, an Emory University professor who was also a government researcher developed a treatment for hepatitis C. He set up a small firm to develop the drug further. After more progress was made a big biotech firm came along in 2011 and bought the startup for $11 billion. That buyer was Gilead.Gilead priced its hepatitis C treatment, Sovaldi, at $84,000, allowing it to recoup most of the billions it spent buying the launch-ready drug by the end of the first year it went on sale. Sovaldi’s sky-high price, and Gilead’s pricing practices, subsequently became hot-button issues. Deploying the same argument it later used to defend remdesivir’s price, Gilead said Sovaldi’s rich price was warranted because the drug helped hospitals and patients spend less, overall, on treatments.
Public Citizen has criticized Gilead for how it’s now pricing remdesivir, pointing out that it received $70 million in public funds to develop the drug. Gilead says it will have spent $1 billion developing and distributing remdesivir by the end of this year. A nonprofit group that assesses how drugs are priced, the Institute for Clinical and Economic Review, or ICER, said Gilead demonstrated “restraint” by setting a “responsible” price for remdesivir. As my Bloomberg Opinion colleague Max Nisen has already pointed out, advocating a rock-bottom price for remdesivir that merely allows Gilead to recover its development costs is unreasonable — and possibly misguided if it undermines further private-sector incentives to pursue innovative research.
Still, the pharmaceutical industry has been stubbornly opaque about how much it truly spends developing drugs. It has successfully lobbied for years against regulations and revised accounting standards that might force it to be more transparent about how much all of its recipes cost.
As STAT, a health-care news site, has observed, ICER had a very elastic grip of Gilead’s costs and pricing for remdesivir. If remdesivir doesn’t end up saving lives, ICER said the drug might be worth just $310. It also pointed out that to recoup its expenses developing the drug, Gilead could charge anywhere from $10 to $1,600 per patient — a huge range that doesn’t instill confidence about how well outsiders truly understand Gilead’s costs.
And, again, that’s the core problem: There isn’t enough transparency in the pharmaceutical industry. Until the industry is far more open about its true costs, there’s no reason to take it at its word when it discusses expenses.
Stonewalling critics might have worked in the past, when the importance of public health could be shunted aside or the threat of pandemics seemed less apparent. Now that Covid-19 has taught the world that some diseases are freighted with economic and national security threats and have the capacity to expose social injustices along the way, figuring out fair drug prices probably won’t be left to private companies, investors and captive regulators alone.
A more muscular role for the federal government in drug development may lie ahead and Big Pharma may come to be seen and treated like a public utility — with all of the regulation and transparency that entails. Prices, in a post-pandemic world steeling itself against future pandemics, might not be set according to what the market will bear and what drug companies can get away with.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Timothy L. O'Brien is a senior columnist for Bloomberg Opinion.
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