Pharma firms’ extortionist pricing cannot continue

You create a drug that cures a hitherto difficult and expensive-to-treat killer disease. How much should you charge for your invention?

Do you price it at a level linked in some way to the cost of development and manufacture? Or should you mark it up for the “value” you believe you are offering the patient — even if that far exceeds what the market may be able to bear?

The drugs industry has little difficulty answering this question. Increasingly it opts aggressively for the value-based approach.

Perhaps the best example is Sovaldi, a recently launched blockbusting treatment for the potentially fatal liver-wasting virus, hepatitis C. Unlike previous drugs, which have nasty side effects and cure only one-third of patients, it eliminates the virus in about 95 per cent of those who take a largely uneventful 12-week regimen.

The snag is the cost. Sovaldi’s manufacturer, Gilead Sciences, has set a list price for that regimen of $84,000 (Dh308,280). The company says this is justified because it compares favourably with the cost of liver transplants for patients whose condition has degenerated into cirrhosis.

But this is a last-ditch treatment applying to only a minority of cases.More than 3 million Americans suffer from hepatitis C, out of an estimated 150 million worldwide. Just treating those US patients would cost almost $300 billion — a budget-busting sum for creaking healthcare systems.

Sovaldi’s price has of course thrilled Wall Street, and Gilead is now valued at $170 billion: more than Merck, the world’s fifth-largest pharmaceutical company by sales. But it has incurred considerable odium among the healthcare systems that must pay.

Medicare and Medicaid, two US public insurance programmes, stumped up $6 billion for Sovaldi last year (out of the drug’s total $12 billion of sales worldwide). The latter now says it has no option but to ration access to the most serious sufferers.

Medicaid’s boss, Jeff Myers, compares Gilead’s conduct unfavourably with those of past drug inventors. “If Jonas Salk had priced the polio vaccine like Gilead, we’d still have polio,” he grumbles. The economist Jeffrey Sachs is even more scathing: “Gilead’s mark-up over costs may be close to 1,000-to-1, probably a world record.”

Gilead isn’t alone in setting very high prices for new “precision” drugs. Vertex, another up-and-coming pharma group, recently launched Kalydeco, a cystic fibrosis pill that costs $300,000 a year. Sanofi’s Praluent, a new cholesterol treatment, will retail at $14,600, against statins that cost a few hundred dollars a year.

These prices help to explain why the total US drug bill rose 14 per cent in 2014.

Value-based pricing may sound plausible. After all, many healthcare systems have some sort of accounting measure that ascribes a cost to a life — however morally queasy that may sound. Britain’s National Health Service does some complicated sums to calculate “quality adjusted life years” — the amount it might pay for an additional year of life a patient would otherwise have missed.

But it is very questionable whether this is the right model for drugs companies to employ. Think of the businesses where value-based models are common.

Airlines use it to allocate scarce seats on popular flights. Manufacturers of luxury goods use it to justify prices for goods that are out of all proportion to the cost of production. As the healthcare economist Jack Scannell points out, it is a way of charging more.

The public accepts all this because it can respond by walking away; by not taking that flight to Bali, for instance, or spurning that Chanel handbag. That is not the case, however, with life-saving remedies, especially when alternatives are non-existent — or far less effective. Aggressive value maximisation also sits ill with a patent system that suppresses competition by awarding a drug company a legal monopoly for a time to sell a drug it has discovered.

Rationing is the ultimate consequence of high drug prices. Unsurprisingly, this is unpopular and is causing a backlash. In a number of US states, politicians are seeking to pass legislation forcing drug companies to disclose more information about the cost of producing their high-priced remedies. There is even talk of capping prices.

The industry argues that such caps would drive capital out of the industry, cutting innovation and ultimately harming patients. But that is a hard argument to sustain when companies such as Gilead and Vertex are earning gross margins of 90 per cent and share prices are sky high.

Pharmaceutical innovation has been one of the great successes of the past century, improving the lives of people immeasurably round the globe.

But if the current dispensation is to continue, the industry must learn to price with greater restraint.

Financial Times