The Price of Sovaldi: A Pound of Flesh

sovaldiA new hepatitis C treatment was approved in December 2013 via an expedited FDA program because the new drug, used in combination with one or two existing (relatively inexpensive) drugs has a virtually 100% cure rate. The drug, Sovaldi, marketed by Gilead (Nasdaq:GILD), is not one of the new, complex pharmaceuticals falling under the moniker “biologics.” It’s just a few carbon rings around a phosphorus linkage that just happens to stuff itself into the RNA polymerase enzyme that the hepatitis C virus requires to reproduce. Outside estimates of the actual cost to manufacture the drug (excluding development costs) is about $150-$250 per treatment course per person. So how much is Gilead charging?

About $84,000 for the shorter 12-week treatment course, double that for the longer 24-week treatment (which treatment a patient needs depends on the particular genotype variant of their infection, and whether they can take the helper drugs or not – Interferon and Rifampicin).

Okay, full-disclosure, I can be accused of having a biased view of the price for this drug, since I currently work for UnitedHealth, and the only reason I heard about the drug is UnitedHealth announced in its quarterly earnings report that the unexpected price of this drug had helped to subtract about $100 million from Q1 earnings. That said, I don’t actually hold any stock in UnitedHealth at the moment, and while I like having a job, the precise quarterly earnings of my employer are not very high on my mind. I’m just a programmer. I don’t speak on behalf of UnitedHealth, and no one at UnitedHealth has ever mentioned this drug (or even drug costs) to me. Also, as other stories have indicated, sooner or later the cost of this drug will simply be transferred to premiums for everyone (and taxes, for Medicaid), so the cost of the drug isn’t ultimately very important to UnitedHealth or any other insurance company – they will either choose to exclude coverage, or cover it, and either way, they will recoup the price in premiums. Anyone that wants to dismiss my view on grounds of bias will have their work cut out for them. (Fortunately, I also do not have hepatitis C – but anyone that thinks this is a fair way of deciding bias should consider that plenty of people contracted hepatitis C through absolutely no fault of their own, such as through blood transfusions. This doesn’t make their opinion dismissible on grounds of bias.)

That said, Gilead apparently defended its price this way:

…a vice president at Gilead, says the high price is fully justified. “We didn’t really say, ‘We want to charge $1,000 a pill,’ ” Alton says. “We’re just looking at what we think was a fair price for the value that we’re bringing into the health care system and to the patients.”  – Gregg Alton, Gilead vice president

About three million Americans have hepatitis C (the largest contributor to liver transplant backlog of 17,000), while about 170 million are infected, world-wide (much worse than AIDS). Since Gilead thinks only the American medical system will pay $84,000 for treatments, they are working with Indian generic pharma manufacturers to produce the drug for the Third World at a price of just

“…from the high hundreds to low thousands for these types of markets.”

Alton says critics should “look at the big picture.”

“Those who are bold and go out and innovate like this and take the risk — there needs to be more of a reward on that,” he says. “Otherwise, it would be very difficult for people to make that investment.”

Okay. Who were the innovators and how much did they pay to develop the drug? It turns out Gilead purchased the smaller company that developed the drug, Pharmasset, completing the purchase in January, 2012, for about $11.2 billion. The deal amounted to Gilead, hearing that Pharmasset had completed development and was starting the final clinical trials for the drug, offered Pharmasset shareholders an 89% markup on their stock, as of the closing price prior to the announcement. (If you look at a long-term chart of Gilead’s stock price, you see that they’ve been relatively flat for years – but rose to 400% their previous 5-year valuations in the year following this purchase. So they purchase a drug for $11.2 billion, and as a result move from a market cap of ~$45 billion to a market cap of $130 billion – and they call this risk?)

I wonder how much stock the researchers who did the real work possessed at the time of sale, and how much was held by mere speculative shareholders that capitalized the work (and by “capitalized,” we’re excluding any bank loans and bonds, which capitalize the enterprise but do not benefit from success or failure), and then the executives that, um, …facilitated... the other two.

Anyway, let’s suppose that Gilead spent an additional $1-2 billion taking the drug the final leg to market. How many American treatments are needed to recoup Gilead’s “risk” at the current price? About 150,000. If we suppose two million American’s actually get the (short) treatment, Gilead’s profit will be… (drum roll….) $145 billion (I subtracted $1000 from each treatment to cover Gilead’s “production” and “logistics” costs).

Who will be paying that $145 billion? Not the patients! 99% of Americans can’t afford that bill. Besides, what appears to be happening here is Gilead has decided that now that most Americans are required to have insurance, they can set the price a little higher since the insurance will most likely take up most of the costs. Otherwise, the patient will simply not receive the treatment. Since the liver damage caused by hepatitis C is progressive, and since organ donation rates in the US are so low (and even when available, the price of the surgery is even more than the drug), patients that delay the treatment face a bleak choice: consider mortgaging everything they and their family possess – and live – or accept a short and painful life of treating their symptoms, terminated by liver failure – and death.

A pound of flesh. Gilead would make Shylock proud.

Will Gilead lower the price once they’ve recouped their profits?

“That’s very unlikely that we would do that,” responds Alton, Gilead vice president. “I appreciate the thought.”

Just stop and appreciate the “risk” that $145 billion is rewarding. Can you feel it? Ahh…. that’s good Capitalism!

Suggestion

We do need to reward the people that work in the face of uncertain results to produce technological advances. However, far too many people have deluded themselves into thinking that the only reason anyone does any work is to amass financial rewards in the future. This isn’t why people work – and even for those that really do work with this as their primary motivation, the reason it is their primary motivation is due to an evolutionary pursuit of the social status they believe the money will impart to them. Consider: suppose the US government cuts Gregg Alton a check for $145 billion. Mr. Alton will be happy. Then the next day the same quantity is given to everyone else. Mr. Alton is no longer happy. Even if you could do this “experiment” without causing inflation – ie – despite everyone holding $145 billion, the price of all goods stayed the same – Mr. Alton will not be happy with his money for long. He will soon learn, as almost everyone that has ever won the lottery has learned, that a pile of money doesn’t make you feel completed. Sooner or later, human beings get bored once we’ve acquired everything we wanted prior to receiving the pile of money – unless we transform our desires into some new pursuit. But you don’t need a pile of money as a prerequisite to realizing that personal fulfillment comes from the pursuit of some goal.

Gilead will never actually get their $145 billion. It’s just too much money for too few people for doing so little. (And I do realize that in the current legal environment they need to plan for $5-15 billion in legal charges). The price will have to come down to something that median (American) patients can afford – or, equivalently, a price that insurance groups and Medicaid can tolerate. But in the meantime, Gilead really will extort $84,000 from quite a few patients. As a society, we ought to recognize this for what it is – criminal. The rewards to Gilead are so high that it actually creates an incentive to them to pay people to go out and spread hepatitis C.

It’s about time that we revamp the way we fund “innovation.” There are far too many stupid, almost worthless “patents” built-in to expensive (due to mass-production) systems – such as the idiotic iPhone – Android patent battles. Likewise, far too many valuable innovations are being locked-up and made relatively useless by current patent and copyright laws, such as this drug (assuming it really is as effective and side-effect free as it appears). Rewarding innovation is crucial – not because people wouldn’t take risks to produce anything if they weren’t exponentially rewarded – but because rewarding innovation is a fairly reasonable way to fund the people with the best ideas. We should see it as a way of paying them to go back to the drawing board and produce another hit. Giving people billions doesn’t make them more (or as) productive. Giving them billions is just as likely to make them (and their progeny) social liabilities.

With that in mind, we ought to make a crucial change to patent law. Patents should not have a fixed time period. Rather, patents should expire as soon as the developers recoup their development costs (if any), or 10 years. In the case of a good drug, this might occur in just one or two years. In the case of a failed product (or one that has no real cultural/economic value, such as the iPhone’s rounded corners – a trademark, not an innovation), this might be never. Suddenly, stupid patents become stupid again. Right now, stupid patents are smart because even stupid patents confer some capacity to extort monopoly rents.

But all too often the developers of a patent may struggle to invent anything else after creating their blockbuster product. In addition to recouping their costs, a successful patent ought to reward the people that developed the product with a Nobel-like payment (or regular payments) as both a continuing reward, and an expression of appreciation, but also as a way of subsidizing their work and facilitating future innovations. However, future innovations should still have to go through the “funding process” that any new innovation needs to go through. The Nobel prize confers only $1.3 million (or so, if not shared). This isn’t enough to encourage indolence, and it likely isn’t even enough to fund another scientific project. But a one-time, inflation-adjusted lump sum of $2 million or so – or 10-20 years of $100k-$200k annual payments – is enough to confer the kind of economic “security” that at least has a good chance to facilitate and encourage future development, without purchasing the “reward for innovation” at such a high price that it actually suppresses progress for the rest of society, preventing too many people from using the innovation, and/or encouraging development of alternatives that do the same thing in a slightly different without bringing any new value to the market (other than avoidance of royalties) (example: smartphone single-press links to place a call. Apple holds a patent on this “innovation” so Android manufacturers, not wanting to pay the price of the royalty Apple wanted for this “technology,” made their phones require that users press a second button before a call can be placed).

As for legal risks, once a patent has “expired,” it’s legal liabilities should be transferred to the society at large, in the same way that liability for the wheel does not fall on any existing person or company. If a product is later found to have hidden costs or side-effects, victims should be compensated for damages, but punitive damages would be unnecessary and pointless. If the developer of the product can be found to have known about the hidden costs or side-effects, they should be charged with a crime. Otherwise, their award payments would be terminated and possibly clawed back, depending on the degree of “ultimate worthlessness” of their product. That said, for good products (the ones that people continue to use safely for years afterward), the removal of this legal liability alone would tend to foster a significant cultural change, both toward discouraging a whole class of frivolous lawsuits, and removing one of the largest uncertainties potential inventors face – and while necessity might be the mother of invention, uncertainties are its enemy.

 

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About stormculture

In pursuit of reality.
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2 Responses to The Price of Sovaldi: A Pound of Flesh

  1. Pingback: Sovaldi: What Price Innovation? | Stormculture’s Weblog

  2. Pingback: Sovaldi: Risk vs Uncertainty, Innovation vs Facilitation, and How Patents and Ownership Don’t Differentiate Them | Stormculture’s Weblog

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