For biotech investors, the news that
But there is another, longer view on this news: this is a reminder of the way the pharmaceutical market has always worked and of the importance of me-too drugs, which have been heavily criticized as proof that drug companies are not innovative, in controlling prices. In areas outside cancer and rare diseases, this is how the pharmaceutical market has always been. It’s not an out-and-out disaster for Gilead, which still has the first and best drug in what could be one of the modern era’s biggest pharmaceutical markets. But it shows that there is price competition pharma, and that is a good thing. Drug prices are too high, and they are rising too fast, and it would be best for everyone if we can find a free-market solution for fixing that problem. This is exactly that.
When Gilead launched the $1,000-a-day Sovaldi last year, it quickly became the best pharmaceutical product launch in history, with forecast 2014 sales of $12.7 billion. But one of the most amazing things about this breakthrough medicine (the pill can cure 95% of patients depending on the strain of virus, preventing eventual liver failure) was that insurance companies did so little to try to slow its ascent.
Gilead couldn’t have been clearer about its intentions to charge a high price. It purchased Sovaldi by buying the drug’s developer, Pharmasset, for $11 billion in 2011, and then, in an ethically dicey move, stopped developing the drug in combination with a Bristol-Myers product so it could control all of the economics itself. It couldn’t have been clearer that Gilead expected to make bank on this new drug.
Yet insurers did very little to restrict Sovaldi to the patients who were most likely to lose liver function as a result of the virus. The severity of a patient’s liver disease is measured by a fibrosis score of between F1 (least severe) and F4 (most severe). As of June 2014, 60% of the patients getting Sovaldi had fibrosis scores of F1 or F2, according to investment bank Evercore ISI. More relatively healthy patients were getting the drug than very sick ones.
In a very real way, this was a story not of drug company avarice but insurer impotence. If any company can sell a product at a higher price without seeing volumes decrease at all, it will – that goes for underpants as well as drugs. But the government payers and insurance companies who actually pay the cost of drugs in the U.S. couldn’t do anything to slow down Sovaldi.
"I think it's a volume issue not a price issue," Douglas Paul, a consultant at Medical Marketing and Economics who advises companies on how to price their medicines told me earlier this year. He says that the price that Gilead paid for Pharmasset, which developed Sovaldi, should have warned insurance companies that they were about to face a sales explosion. "I’m disappointed that their pipeline reviews did not prepare the payor market for a product that was purchased in an $11 billion dollar deal."
Volume spikes in the drug business are an old story – so old, in fact, that they really haven’t been seen in a decade. In the past few years, top-selling drugs have been speciality treatments that cost a lot of money – think $120,000 for Merck’s new Keytruda for melanoma, or $300,000 for Vertex’s Kalydeco for cystic fibrosis. Oddly, these can be easier for insurance company to deal with because the costs are predictable. You can budget for the risk that you might have a cancer patient or a cystic fibrosis patient; you know how common those diseases are. And you can manage the cost.
But that’s not the way things used to be – or the way they have been with Sovaldi. Surprisingly effective drugs can bring patients out of the woodwork. Consider, for instance, the proton pump inhibitors, the incredibly effective drugs against heartburn and ulcers that were introduced in the late 1990s and are now available over-the-counter. The first of these,
That led to a war for access on insurer formularies, as other drugs liked Prevacid and Protonix were introduced. All became blockbusters, but Prilosec never lost its dominance. AstraZeneca transitioned it to being a big over-the-counter brand, and was able to introduce a second pill, Nexium, that remained a blockbuster despite having paltry advantages over its competitors.
But Nexium sold at a massive discount to its list price. In 2012 I looked at the difference between the net sales of major drugs and what companies actually reported as gross sales. The difference is largely the amount that the drug company pays to insurance companies in order to get them to give it favored status, or in the case of the more draconian negotiation tactics now being used by
At that time AstraZeneca’s net sales were 60% below its gross.
Gilead at first seemed to have amazing pricing power. This year, it introduced Harvoni, which combines Sovaldi with a new drug to create the first one-pill regimen for Hep C. It costs $1,125 per pill, 12.5% more than Sovaldi, and can cure some patients in just 8 weeks, while allowing them to forego both interferon, which causes flu-like symptoms, and ribavirin, which can cause anemia and heart problems.
On Friday, the Food and Drug Administration approved AbbVie’s Viekira Pak. Abbott priced it at $83,319 for 12 weeks, or $991 per day. Since some patients on Harvoni can be treated for eight weeks for $63,000, that’s actually more expensive than Gilead’s treatment in some cases. It was like a price war had been called off.
But today Express Scripts announced that it had made a deal with AbbVie to sell Viekira Pak exclusively. Twenty-five million patients on its plans will not be able to get Sovaldi at all, and will have to use Viekira. In return, AbbVie is going to pay a huge rebate. The move will probably cause negotiations with other plans, and Gilead may have to offer rebates too.
Patients may protest loudly enough that health plans will opt out of Express Scripts’ decision. For many, taking Viekira instead of Harvoni will mean taking many more pills, taking ribavirin, and being on medicine for another month. Those aren’t minor concerns.
Will this pricing battle mean move to other drug classes? Possibly, in areas like rheumatoid arthritis (a top area for AbbVie and Amgen) and in high cholesterol, where both Amgen and the team of Sanofi and Regeneron are expecting to launch very, very similar new medicines. But probably not in areas like cancer, where it can be very hard to introduce a me-too medicine because you can’t ethically re-run the placebo-controlled trials that got the first drug approved.
The great irony: it looks like the super-expensive hepatitis C drugs, which became symbols of high drug costs, are actually going to lower the cost of treating a hepatitis C patient. According to a piece in the Journal of the American Medical Association by Troyen Brennan, the chief medical officer at CVS, the cost of treating a hepatitis C patient with the regiment tha was available before Sovaldi became available – a combination of Incivek, a drug sold by Vertex, interferon and ribavirin -- was between $112,000 for a 24 week treatment and $143,000 for a 48 week treatment, with lower cure rates.
What’s really changed is that the drugs can now be used in all of the as many as three million people who have hepatitis C, many of them without knowing it. The question is how do you decide who gets a cure, who doesn’t, and who should settle for a cure that’s a little less pleasant.
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