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Prescription Drug Pricing: The Fine Line Between Value and Greed


Xconomy Boston — 

Value. It’s one of the most frequently used buzzwords on both Wall Street and in healthcare. Virtually every press release from a publicly traded company assures us that its latest acquisition/layoff/tax inversion/sale of assets was designed “to increase shareholder value.” But what exactly is “value” and how is it measured? Here are some definitions from the online Merriam-Webster dictionary:

1: a fair return or equivalent in goods, services, or money for something exchanged

2: the monetary worth of something: market price

3: relative worth, utility, or importance

4: something (as a principle or quality) intrinsically valuable or desirable

These definitions remind me of Supreme Court Justice Potter Stewart’s famous characterization of pornography, “I know it when I see it.” Wikipedia’s description of Potter’s phrase as “a colloquial expression by which a speaker attempts to categorize an observable fact or event, although the category is subjective or lacks clearly defined parameters” could just as easily be applied to the word “value.”

What’s got me pondering the meaning of the word “value”? Drug pricing. I’m trying to figure out when a drug’s price crosses over the invisible and undefined threshold from value into greed. How much should a drug really cost, and how are drug prices actually calculated? This mysterious process takes place behind closed corporate doors with a secrecy that would make the National Security Agency proud. It’s a process that, to the public at least, is as transparent as mud. It’s understandable why companies want to keep secret the details of how they set a drug’s price, but this lack of transparency leaves them open to charges of price gouging. Numerous questions must be answered. What price will the market bear? How likely is it that insurers will reimburse the cost? Can patients afford the co-pays? How much is likely to be sold at any particular price point?

I don’t think many people would argue with the concept that a drug’s price must cover manufacturing costs as well as reimburse the company for money expended on getting the drug to market. Beyond covering expenses, of course, is profit. That translates into money that companies claim will be reinvested back into R&D to enable future drug discovery. The fact that most Big Pharma companies actually spend more money on marketing than they do on R&D makes this argument a bit dicey. Cash can also be used to pay for upcoming mergers and acquisitions and to fund stock buybacks. Big profits will drive up the stock price, benefiting shareholders as well as employees with stock options, especially senior management.

The current poster children in the debate on drug pricing are Gilead Sciences’s (NASDAQ: GILD) hepatitis C drug sofosbuvir (Sovaldi) and it’s follow-on sibling Harvoni (which contains a mixture of sofosbuvir and a second drug, ledipasvir). Sovaldi recently set the record for the fastest drug launch ever. The cost for a standard course of treatment with it is $84,000, while Harvoni costs $94,500. The FDA recently approved Johnson & Johnson’s (NYSE: JNJ) hepatitis C drug simeprevir (Olysio); it’s meant to be taken in combination with sofosbuvir. Since simeprevir costs $66,000, the combination will cost a whopping $150,000. If these prices seem high to you, keep in mind that sofosbuvir actually ranked only 19th on the 2013 list of most expensive drugs.

These hepatitis C drugs, if you’re not familiar with them, are truly groundbreaking medicines. Researchers who work in drug discovery strive to create and bring to market exactly these kinds of medicines. Not only are they much more effective than previous treatments, they have fewer side effects . They are curative for the vast majority of patients taking them. These medicines are not home runs; they are knock-it-out-of-the-ballpark grand slams. New drugs that actually cure people are extremely rare. And because these drugs only need to be used for a limited amount of time (unlike drugs for chronic diseases such as rheumatoid arthritis and diabetes), a company has only a relatively brief period to recoup its investment on a per-patient basis.

The price, however, has been very controversial. Several members of Congress sent a letter to Gilead asking company executives to come before them to explain how the price of the drug was arrived at and how it would be made available to low-income patients, among others. Many feel the cost is simply too high, a feeling I share. Steve Miller, the chief medical officer of Express Scripts (NASDAQ: ESRX), a pharmacy benefit management company, argues that the price of sofosbuvir is indefensible. He wrote, “What we’re seeing today in hepatitis C is orphan-drug pricing for non-orphan drugs,” and remarked, “The cost of [sofosbuvir] is unsustainable for many of our plans.” There are about 3.2 million patients in the U.S. who are chronically infected with hepatitis C and would be eligible to take these drugs. Medicines receiving orphan disease indications are generally limited to populations with fewer than 200,000 people in the U.S. Paying for sofosbuvir and similar drugs will have a huge impact on state Medicaid programs in particular, because they cover large number of hepatitis C patients.

On the flip side, defenders of sofosbuvir’s pricing have suggested that folks who think the drug is too expensive, unjustifiable, and unsustainable “are philosophically opposed to a market system in medicine or those who are willing to sacrifice the long-term cost savings of the drug for the short-term savings on immediate costs (government) and profits (health insurance companies).Supporters of the free market argue that the government has no business deciding what prices are “just and reasonable. ”

We don’t know how Gilead came up with the $84,000 price tag for sofosbuvir. Let’s assume for the sake of argument that the price is reasonable. After all, Gilead sold some $2.8 billion of it in the last quarter, so many insurers were willing to pay the cost. But suppose it had been priced at $104,000, or $124,000, or $204,000. Which of these costs would have still provided “value,” and which would have been price gouging? Overcharging, like beauty, is in the eye of the beholder. Would the drug be a “value” at $64,000?

Specious arguments pop up in the midst of discussions of drug pricing. In the case of sofosbuvir, it’s often pointed out that the drug is significantly cheaper than a liver transplant. This isn’t really relevant. We don’t live in the world depicted in Kazuo Ishiguro’s dystopian novel Never Let Me Go, where wealthy people have clones that they can turn to whenever they need a replacement body part. Even without effective drugs, only a small percentage of hepatitis C patients are likely to develop the advanced cirrhosis or liver cancer that necessitates a transplant. There are only about 6,000 liver transplants done in the U.S. every year, with about 16,000 Americans on the waiting list (and for a variety of diseases, not just hepatitis B and C). So it’s highly misleading to say that we will be collectively saving billions of dollars by avoiding expensive transplants for a large number of infected individuals.

Some insurers are balking at paying for this medication. Even if yours will pay, you may be stuck with a 20 percent co-pay on your drug prescriptions, which in this case could cost you $16,800 (those covered under the Affordable Care Act are in better shape: their out of pocket costs are capped at $12,700). Interestingly, Gilead is selling sofosbuvir in India for a 99 percent discount from its cost in America. To me, this seems like an invitation for U.S. hepatitis C patients to schedule a vacation in India in the near future. See the Taj Mahal, stay at the Lake Palace, and pick up a prescription for sofosbuvir for only $900. For many, the entire trip would cost significantly less than the U.S. co-pay.

Prescription drug prices cover an extraordinary range. At the low end are a large number of generic drugs, many of which are widely available for about $4 per month. At the high end would be Alexion Pharmaceuticals’s (NASDAQ: ALXN) drug eculizumab (Soliris), which is used to treat several rare diseases. It costs about $500,000 per year, or $40,000 each month. This price range covers some four orders of magnitude. I tried to think of other items that consumers can buy that might cover a 10,000 fold range of prices, and all I could come up with is jewelry, real estate, fine art, businesses, and stocks. If I restrict the list to tangible goods, then it only leaves the first three categories.

A graph plotting the number of drug prescriptions against their prices would resemble a long tail, with generic drugs (which make up about 85 percent of all prescriptions written in the U.S.) on the left and specialty/orphan drugs on the right. Predictions are that this latter category of drugs will make up 19 percent of the drug market by 2020 (and account for up to 50 percent of total pharmacy spend by 2018), despite the fact that they are only used by relatively small numbers of patients. By contrast, plotting the price distribution of these other items (e.g. jewelry, home prices) more closely resembles the bell shaped curve that many of us are familiar with. Most of us would say that items that occupy the far right portion of a bell shaped curve in these categories are luxury items. Think of a $2 million diamond ring, a $75 million house, or a $40 million painting. In the pharmaceutical category, however, items on any portion of the curve are not luxuries, but necessities. People who take drugs for orphan indications, which are often among the most expensive medicines, would likely die much sooner without them.

So how are the drugmakers doing financially? An analysis of drugmakers’ profit margins in 2013 revealed some pretty impressive numbers: Jazz Pharmaceuticals (NASDAQ: JAZZ): 54 percent; Celgene (NASDAQ: CELG): 47 percent; Regeneron Pharmaceuticals (NASDAQ: REGN): 44 percent; and Alexion: 43 percent. Not too shabby. Big pharma companies had profit margins that ranged from 10 to 43 percent. Most industries can only dream of earning these types of profits, but this is what monopoly pricing of necessary items can do for the bottom line.

Unfortunately, it’s not difficult to find plenty of examples of greed in drug pricing.

Look at the rise of drug prices during our nation’s worst financial crisis since the Great Depression. Since 2007, at the start of the Great Recession, the consumer price index has risen 12 percent. During a time that most Americans could least afford to pay more for their medicines, however, the price of 73 branded drugs increased by about 75 percent, and dozens of established drugs doubled their prices during this time frame. A few examples: Sodium oxybate (Xyrem), which is used to treat narcolepsy, went from $2.30 to $20 per ml; EpiPens that treat allergic reactions went from $90 to $200; Sildenafil (Viagra) went from $22 per pill to $35; and imatinib (Gleevec), used to treat chronic myelogenous leukemia, went from $221 to $350 per pill. Prices have also been soaring for a number of generic drugs, which has pushed lawmakers to look for ways to assist patients that are struggling to pay for even these “bargain” medicines.

As bad as these numbers are, there are a few companies that make these price increases look cheap. Retrophin (NASDAQ: RTRX) jacked up the price of its cystinuria drug tiopronin (Thiola) from $1.50 per pill to $30; Catalyst Pharmaceutical Partners (NASDAQ: CPRX) is planning on increasing the price of 3,4-diaminopyradine (Firdapse, used to treat a rare muscle disorder) to a level that has been described as “unconscionable”; and K-V Pharmaceuticals (now known as Lumara Health) raised the price of its drug hydroxyprogesterone caproate (Makena, used to prevent premature births) from $20 to $1500 per dose until protests forced it to drop the price to $690 and institute a patient assistance program.

Drug makers tell us that they price their drugs to reflect the value that they bring to patients. Much has been written about the refusal of doctors at Memorial Sloan Kettering Cancer Center to initially prescribe ziv-aflibercept (Zaltrap), a new cancer drug from Sanofi/Regeneron. This action was based on their feeling that the drug offered no advantage over existing medicines, and that it was priced far too high. Faced with bad publicity, the companies wound up slashing the price of their drug by about 50 percent. The doctors’ refusal to prescribe the drug illuminated a clear difference of opinion as to the value of this medicine. The price cut, in turn, reflected the companies’ concession that this medicine was indeed priced too high. This public relations fiasco may have contributed in part to the recent ouster of Sanofi CEO Chris Viehbacher.

In the U.K., the government’s Cancer Drug Fund, which pays for expensive drugs not approved by the National Institute for Health and Care Excellence for cost reasons, has overspent its budget. As a result, it will be is reassessing whether it can really afford to provide a number of medicines due to their high prices. Whether such a move will convince drug manufacturers to reduce their prices remains to be seen.

Much of the current excitement in cancer treatments is tied to uncovering the genetic mutations responsible for the uncontrolled growth of each tumor. Next generation DNA sequencing has now been used on tens of thousands of different tumor samples. The data indicate that, in most cases, each tumor contains a fairly large number of mutations, with 50 to 100 not being an uncommon number. While defining the number of mutations is fairly straightforward, the interpretation of these data is much less clear. Some of these mutations are likely to be the key “driver” mutations that are primarily responsible for the transformation of the normal cell into a cancerous one. Picking out which of the many mutations have this “driver” status is still largely guesswork at this point. In general, it is the concerted action of these “driver” mutations that results in the transformation of the cells.

There are actually some drugs available now that can inhibit the action of a small number of these “driver” mutations. Most of the observed alterations, however, are not actionable: there are no available drugs that can modify the deleterious biological effects of the mutation. Let’s assume that in the near future 1) we can accurately identify which are the important “driver” mutations in any given tumor, and 2) there actually are drugs that interfere with the action of most of the common ones. If this were true, then a future strategy for treating cancer would be to simply give patients a combination of drugs that hit each of these mutations. Drug combinations have shown recent success in mouse models of lung cancer and Ewing sarcoma, and are likely to be needed to treat cancers with intra-clonal heterogeneity such as multiple myeloma.

Unfortunately, there are two issues that might prevent such a strategy from reaching fruition. One is biological, the other financial. Most cancer drugs have side effects; some of these are minor, while others can be serious. A combination of five or more drugs to treat the most important driver mutations might be very difficult for an already weakened cancer patient to tolerate. Many of the current generation of targeted cancer drugs are among the most expensive medicines on the planet. The cost of treating a patient with a five drug cocktail from different manufacturers is highly likely to run in the neighborhood of $500,000,based on the current prices of similar cancer drugs. Given the number of cancer patients in the U.S. (according to the American Cancer Society, there will be about 1.66 million people diagnosed this year), this cost would be simply unaffordable. Treating these new cancer patients at a cost of $0.5 million each would add up to a total of $830 billion. If this number seems large, consider that the U.S. government spent about $2.8 trillion on healthcare in 2013. Not all of these newly diagnosed individuals would require this much treatment, but I haven’t included in this calculation patients who have previously been diagnosed and are now in need of treatment. Medical breakthroughs such as these cannot happen in the absence of rational pricing. Some are wondering not if we will have the medical ability to beat cancer in the clinic, but whether we can afford (both individually and as a nation) to financially pull this off.

I recently came across the following passage, which describes the challenge in changing an industrial mindset, “The deep problem with the system was a kind of moral inertia. So long as it served the narrow self-interests of everyone inside it, no one on the inside would ever seek to change it, no matter how corrupt or sinister it became – though even to use words like “corrupt” and “sinister” made serious people uncomfortable…” Michael Lewis wrote this blistering description of Wall Street behavior in his latest exposé, Flash Boys, but he could just as easily been describing our healthcare system. It’s clear that something has to give in the way that drugs are priced and paid for, as we are heading into an unaffordable future. New models are being tested in drug development with collaborations, partnerships, and virtual companies. A similar effort needs to be made by pharma and insurance companies to develop breakthrough medicines and treatments that are affordable not just for the rich, but for all of us. One such idea being looked at, called V-BID (for value-based insurance design), ties expenses to efficacy and cost. The issues here are complex, but wise thinking and novel solutions are clearly needed. Greed cannot be allowed to triumph over value. As Mahatma Gandhi once put it, “There is sufficiency in the world for man’s need, but not for man’s greed.”

Stewart Lyman is Owner and Manager of Lyman BioPharma Consulting LLC in Seattle. He provides strategic advice to clients on their research programs, collaboration management issues, as well as preclinical data reviews. Follow @

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  • US_Moderate

    This was a very interesting and valuable article- thank you!

  • the_caganer

    I think you crossed the line to greedy if you accepted any money for this article. Good thing, I don’t set your prices. Of course, I have little knowledge of what you actually do, but I won’t let that deter me.

  • Bob

    drug industry as a whole is antichrist, just think what health we could have if they had the mind of Jesus instead

  • bittergradguy

    Regarding spending more money on marketing than R&D. Isn’t that true of EVERY industry? Biopharma’s R&D/SG&A ratio is incredibly high when you compare it to industries like IT and tech.

  • Karen

    Many people are blaming the FDA or Obamacare for the dramatic increases of prices, especially of generic drugs. I feel that we need to
    put the blame with it actually belongs…to the perpetrators…pharma companies .

    Many years ago when my boss was not treating me right…I used to blame myself…what did I do, what did I say to cause him to do this to me? I
    tortured myself for a number of years until I realized that he was responsible
    for his own actions.

    Blaming Obamacare for the enormous increase in medicines is misplacing the blame. Other European countries with similar health plans do not allow price gauging by pharma drug companies or by doctors. We do and call it capitalism and we all pray and hope that the market will “right itself.”

    No one really questions why Americans who represent 4 to 5% of the world’s population takes over 50% of the pharmaceuticals in the world, and pay many many times more for it than other countries. We don’t even
    get the large buyer discount…we are being drugged, hooked, and fleeced. Now that most of us are dependent on these drugs…the price gets jacked up. hmmmmm. How did that happen??

    Think about it…guidelines for treating conditions (some not even diseases) like hypertension, high cholesterol, diabetes, have been lowered and lowered over the last 40 years. Most of the doctor on these panels for making these decisions have direct financial ties to the pharma companies which produces the “remedy”. In some health surveys of countries, the Unitied States typically scores among third countries.

  • Karen

    I also wish to add that I really appreciate the inclusion of topics discussed in this article. Especially, your talk on the outrages profit margins that the pharma companies are currently enjoying. I just wish that some of the executives/CEOs involved in this would have a near death experience; one that would include a life-review of their actions and of the suffering it is costing numerous others.
    I think a single payer system with negotiating powers be initiated. I have read the some insurance CEO’s are paid in double digit million dollars; I’m certain that this applies to pharma exectives as well.. This is ridiculous…and perhaps the reason why my health insurance in the early 80’s used to be around $60 per month and now it has inflated to over $700.00. If food went up this high, we would scarely be able to afford it.
    Perhaps our government should set up its own pharmaceutical practice…in the making of generic drugs. As citizens we are entitled to know what the expenditures and salaries are of government workers. This is not the same with private enterprises where access to this type of information is nearly impossible. We have no rights to accountability of private corporations; a government ran company would be very different. Especially in that no one, and I do mean no one would be allowed to earn salaries of millions and millions of dollars at the expense of the citizens. Also, it would be very important to include that employment must be free of significant interest with pharma companies.