The Drug That Is Bankrupting America

Guest Post by Jeffrey Sachs

America is the land of breakthrough science — and health care scams. The two seem to go hand in hand in the case of the new hepatitis C virus (HCV) cure named sofosbuvir, sold under the brand name Sovaldi by the drug company Gilead Sciences. There is no question that Solvadi is a godsend — a lifesaver for millions of Americans, and perhaps someday for hundreds of millions of people around the world infected by Hepatitis C. Yet Sovaldi is also the poster child of a U.S. health care system that is being bankrupted by greed, lobbying and indefensible policies on drug pricing.

The basic facts are these. In December 2013, the Food and Drug Administration approved Sovaldi, and another formulation, Harvoni, which is sofosbuvir used in combination with another drug. Gilead set the price for a 12-week treatment course of Sovaldi at $84,000, amounting to $1,000 per pill. Gilead set the price of Harvoni at $94,000.

According to researchers at Liverpool University, the actual production costs of Sovaldi for the 12-week course is in the range $68-$136. Indeed, generic sofosbuvir is currently being marketed in India at $300 per treatment course, after India refused to grant Gilead a patent for the Indian market. In other words, the U.S. price-cost markup is roughly 1,000-to-1!

How can Gilead Science charge $84,000 for a drug that costs less than $300 to produce? First, Gilead’s patent on sofosbuvir runs until 2028, giving it a monopoly in the U.S. market. Second, a range of Federal and state government programs will cover the $84,000 for a sizeable number of patients. For those not covered by government programs, some will be covered by private insurance, a few will pay out of pocket, and still others will likely die because they lack coverage and can’t afford the treatment.

In the first year of marketing, Sovaldi and Harvoni are already blockbusters, reaping a remarkable $12.4 billion of market sales in 2014, more in just one year than the $11.2 billion price that Gilead paid in January 2012 to buy sofosbuvir from a biotech start-up named Pharmasett.

The standard defense by the drug companies of these astronomical prices is that drug discovery is costly and their high profits reimburse the R&D costs. Here is where the story of Sovaldi gets even more interesting. The total private-sector outlays on R&D were perhaps $300 million, and almost surely under $500 million, meaning that the decade-long R&D outlays were likely recouped in a few weeks of drug sales.

Here is the background. Sofosbuvir was developed under the leadership of Prof. Raymond Schinazi, a brilliant professor of biochemistry at Emory University. The U.S. Government heavily funded Prof. Schinazi’s research, with major grants from the National Institutes of Health (NIH) and support from the Veterans Administration. Like many academic researchers, Schinazi has frequently parlayed his government grants into private companies to market his discoveries. He set up Pharmasset Inc. as a Delaware corporation in 2004 as his business to develop sofosbuvir and hold the patents on the new prospective drug.

Pharmasset raised around $45 million in a 2007 IPO and used those funds and others to supplement the R&D. According to the company’s SEC filings, the total Pharmasset R&D on sofosbuvir up through 2011 totaled around $62.4 million. In January 2012, with an eye on sofosbuvir, Gilead paid $11.2 billion to purchase Pharmasett. Schinazi pocketed an estimated $440 million for his shares in Pharmasett.

By the fall of 2011, sofosbuvir was ready for Phase 2 clinical trials, which were carried out between October 2011 and April 2012 by the NIH, which published the results in the Journal of the American Medical Association in 2013. Phase 3 trials were then carried out in mid-2013 and were paid by Gilead, at a cost of perhaps $50-$100 million for a two-month trial that covered around one thousand patients. (Gilead has not disclosed the exact costs of the Phase 3 trials).

We can therefore estimate that private investors spent perhaps $300 million in R&D outlays for sofosbuvir over the course of a decade, and perhaps well below that sum. Those R&D outlays were likely recouped in a few weeks of sales in 2014.

With a rational U.S. drug pricing system, private investors would expect to earn a reasonable multiple of their R&D for a highly successful drug, perhaps even 5 to 10 times the R&D outlays, in order to reflect the long time horizons and high uncertainties surrounding drug development. Yet at a treatment course of $84,000, the multiple for Sovaldi looks to be around 40 times or more.

With a rational drug pricing system, Gilead might have paid $1 billion rather than $11.2 billion for the drug, and Prof. Schinazi might have pocketed $40 million rather than $440 million. Sovaldi would most likely still have been developed and brought to market on the same timeline, but with taxpayers spared of perhaps $10 billion a year in outlays.

Gilead has worked the political system to protect its windfall by ramping up its lobbying activities. That soared to $2.2 million in 2013, the year of FDA approval, and $2.9 million in 2014, the first year of sales. The lobbying helped to smooth the way to the massive uptake of the drug and the substantial financing by the U.S. Government of Gilead’s inflated prices.

Sovaldi therefore represents the best and the worst of the U.S. health system. It represents the best of U.S. produced science, and the government’s support for it. Sofosbuvir is a remarkable, life-saving medicine at the cutting edge of science.

Yet Sovaldi also shows how publicly financed science easily turns into arbitrarily large private profits paid for by taxpayers. The challenge facing the U.S. is to adopt a rational drug pricing system that continues to spur excellent scientific breakthroughs while keeping greed in check. Big Pharma and the U.S. public are on a collision course when they should be partners for the advancement of health.

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Westcoaster
Westcoaster

Just another example of drug companies raping insurance providers and ultimately consumers. We sheeple in the U.S. have zero protection from government agencies whose job is to protect us. Windfall profits about from cases such as this, and unchallenged monopolies in oh so many industries.

Spinolator
Spinolator

If you have hep C, fly to India and buy it there or stay there until you have taken the treatment. It will be cheaper…

Capn Mike
Capn Mike

I’m no phan (get it? haha) of big pharma, BUT:
You need to factor in the costs of ALL R+D and testing, including drugs that NEVER made it through FDA to market. That changes the calculus more than a little bit.
That said, they’re STILL greedy bastards and deserve to roast in Hell.
There, I’ve cravenly sucked up to both sides of the issue!

Sensetti

Costly Vertex Drug Is Denied, and Medicaid Patients Sue
Kalydeco, a $300,000-a-Year Cystic Fibrosis Treatment, Sparks Legal Battle in Arkansas and Shows Dilemma States Face

LITTLE ROCK, Ark.— Vertex Pharmaceuticals Inc. ‘s $300,000-a-year cystic-fibrosis drug has sparked a legal battle here, where the state’s Medicaid program is restricting access to the expensive therapy.

In a lawsuit filed in Arkansas federal court last month, three people suffering from the fatal lung disease allege Medicaid officials have for two years denied them access to Kalydeco because of its cost. The plaintiffs allege state officials have violated their civil rights under federal law governing Medicaid, the government-run insurance plan for the poor.

The patients all meet the eligibility criteria established by the Food and Drug Administration when it approved Kalydeco in 2012, including the presence of a rare genetic mutation it is designed to correct. But Arkansas officials have said the patients must prove their disease has failed to benefit from older, less-expensive therapies, a policy their doctors say contradicts treatment guidelines.

Arkansas officials declined to comment on specific allegations but said they are mainly restricting access because existing data don’t support the drug’s use as a first option. Cost also appears to be a factor: Emails obtained by the patients’ attorneys show officials discussing Kalydeco’s cost, and their worries about the expense of future cystic fibrosis drugs.

The legal flap is the latest example of the pressure expensive new drugs are putting on cash-strapped government insurance programs. State prison systems and some Medicaid programs in recent months have limited use of another expensive new drug— Gilead Sciences Inc. ‘s hepatitis C pill, Sovaldi, which has a wholesale price of $84,000 for a full course of treatment—to all but the sickest patients. The American Society of Clinical Oncology, meanwhile, recently said it would begin publishing a cost-benefit guide to cancer drugs.
http://www.wsj.com/articles/costly-drug-vertex-is-denied-and-medicaid-patients-sue-1405564205

llpoh
llpoh

Capn Mike is correct.

And here is the deal – folks can sell their stuff for whatever the market will bear. Patent law protects companies’s intellectual property.

If you change patent law, then you very well may see no new drugs developed.

It is a catch 22 bitch.

llpoh
llpoh

Sensetti – the cf drug I think is $300k per year forever. Fuck funding that shit. I am sorry they have cf. But it could amount to tens of millions of dollars per patent over their lifetime. The world cannot afford to fund that kind of treatment.

Anonymous
Anonymous

I knew a guy that failed all his drug tests but they would not jail him because they couldn’t cover his medical costs.

Sensetti

LLPOH , they won the lawsuit and now their are five patients in AR on the 300K a year drug all on the States dime.

llpoh
llpoh

Sensetti – ain’t that swell. The road to hell that way lies.

AC
AC

Has anybody suggested having the drugs smuggled in from India? Hell, India should open low cost clinics and pharmacies in their diplomatic sites in the US. That would be hilarious.

DC Sunsets

Medical. Tourism.

Llpoh, patent law is so corrupt now (not like it wasn’t when Bell ripped off a bunch of innovators by being first with their ideas to the patent office) that defending it is surely questionable.

The bottom line is that the medical system is going to bankrupt the country.

It really is that simple.

Another system would be for a company like Gilead to sell its wares the same way electronics companies do: You want the latest and bestest? Only the RICH are served first. Only when the product goes Mass Market do the hoi polloi get it.

So Warren Buffet pays a $100,000,000 for the first course of treatment. A year later, it’s a few hundred bucks.

I’m not saying this is “how it should be.” I’m saying that “we” can’t afford to put a new set of hips and knees in everyone over 70.

I’m saying that if a drug were invented that allowed people to live another 20 years, but it cost $10,000,000 per treatment, there would be no way, no how to have Medicare/Medicaid cover it.

llpoh
llpoh

DC – that is correct. I do not have any answer or suggestion. Almost any action will result in bad unintended consequences.

Visitor from Germany
Visitor from Germany

llpoh – “If you change patent law, then you very well may see no new drugs developed. ”

…now, what happened to the likes of Jonas Salk, I wonder?

Llpoh

Visitor – the low hanging fruit has been picked. Plus getting new drugs through the FDA and trials costs enormous sums – hundreds of millions perhaps. Without patent protection those enormous outlays will be unrecoverable.

But thanks for playing.

flash
flash

Taxpayers take it up the ass twice for this drug.Once In paying for the development of the drug and twice in paying the medicaid payments for the destitute who can’t afford it, which I imagine is about all of those who need this drug.

And third, if we account for the asshats at FDA who suckle off the taxpayers teat.

DC Sunsets

Llpoh,

My occupation for 17 years has *depended* on new drugs coming to market. I have the FULL experience of what patent protection means in the real world.

You absolutely NAILED it. The low hanging fruit has been picked. For the last 20 years Pharma has been engaged in 1) inventing new maladies to treat [e.g., “high cholesterol,” “low testosterone,” “over-active bladder,” and “erectile dysfunction”] and attempting (so far unsuccessfully) to use the FDA to make vitamins and supplements the “new frontier” for Big Pharma.

The industry is dying. For good reason. Its business model is just as dependent upon the corruption and capture of the regulatory Leviathan as is the banking industry. Both have become full-blown parasites on society.

Antibiotic resistance? Heavily caused by antibiotics in animal feed, which is about the most stupid thing anyone ever imagined…yet here we are, the FDA rolling over so industrial concerns can scratch its managers’ bellies.

Hypertension and other cardiovascular diseases? The early-onset stuff is diet related, thanks to the likes of ADM, Monsanto and the Big Food Processor firms, all *protected” industries in the political world. The late-onset stuff——well—–we’re all going to die of SOMETHING. Old age is not a disease to be cured with a drug. Everything that has a beginning has and end.

Cancer? Big Pharma is getting big rewards for next to no benefits conferred. Nearly 50 years after Nixon declared “War” on cancer, and who knows how much money has been squandered, not really all that much has changed. Aggressive cancers still kill pretty much in the same time frame as they did 50 years ago, and overtreatment of non-malignant tumors grows faster than the tumors themselves.

At every turn, the involvement of the government bureaucracy actually makes things worse. It entrenches paradigms past their use-by date and causes vast sums of money (scarce capital) to be squandered chasing useless questions. Worst of all, as scientific inquiry came to be paid almost entirely by the state, only politically-popular avenues of inquiry get funded. Political popularity and science don’t belong in the same sentence.

For this reason, I see the patent protection issue through a jaundice-green lens.

If your house is on fire and someone drives up with a fire truck full of water and says, hey, I’ll put out the fire but the cost is 90% of the value of the property I save, plus I want to sleep with your wife, do you consider that a “market transaction?”

I don’t.

If your child has bacterial pneumonia and their only hope is a course of Rocephin (ceftriaxone, a 3rd generation cephalosporin useful for bacterial pneumonia and generally safe for kids) but the only firm that has it right now (and they have an unlimited supply) says they want EVERY DAMN THING YOU OWN, what would you do?

Is such a “transaction” moral? I aver it is NOT.

It is one thing to charge twice list price for a generator in a major black-out, because rising prices pull in supply and shift uses to areas of highest priority (and willingness to pay).

But what Gilead is doing is much more like the kid/Rocephin thing. By choosing to charge a sum far beyond investment-recapture, they are acting as extortionists.

Allowing such behavior encourages firms to be entirely cost-insensitive in development, and DEVELOPMENT INCLUDES what they pay to the FDA.

Do you really want the patent system to become the fulcrum by which the FDA (a monopolist of approvals) says, Okay, you want a Really Big Drug approved, we’ll charge you $20 billion to put our stamp on it. The firm says, Okay, as long as we can pass that cost along to Medicare/Medicaid, we have no problem with that.

Thus we see fascism at its best. An ostensibly “private” firm reaps huge profits by laundering what amounts to a huge TAX INCREASE through the medical industry, and the bureaucrats at the FDA don’t need Congress to raise taxes, they can just do an end-run.

This is already exactly what the FDA does. Firms pay the FDA DIRECTLY for approvals.

This isn’t free market capitalism.

Gilead’s actions are just the poster child for how broken is this entire system.

flash
flash

FDA …keeping you safe from being exploited by Big Pharma….seriously…what else then?

http://www.slate.com/articles/health_and_science/science/2015/02/fda_inspections_fraud_fabrication_and_scientific_misconduct_are_hidden_from.single.html
Are Your Medications Safe?
The FDA buries evidence of fraud in medical trials. My students and I dug it up.
By Charles Seife

Agents of the Food and Drug Administration know better than anyone else just how bad scientific misbehavior can get. Reading the FDA’s inspection files feels almost like watching a highlights reel from a Scientists Gone Wild video. It’s a seemingly endless stream of lurid vignettes—each of which catches a medical researcher in an unguarded moment, succumbing to the temptation to do things he knows he really shouldn’t be doing. Faked X-ray reports. Forged retinal scans. Phony lab tests. Secretly amputated limbs. All done in the name of science when researchers thought that nobody was watching.

That misconduct happens isn’t shocking. What is: When the FDA finds scientific fraud or misconduct, the agency doesn’t notify the public, the medical establishment, or even the scientific community that the results of a medical experiment are not to be trusted. On the contrary. For more than a decade, the FDA has shown a pattern of burying the details of misconduct. As a result, nobody ever finds out which data is bogus, which experiments are tainted, and which drugs might be on the market under false pretenses. The FDA has repeatedly hidden evidence of scientific fraud not just from the public, but also from its most trusted scientific advisers, even as they were deciding whether or not a new drug should be allowed on the market. Even a congressional panel investigating a case of fraud regarding a dangerous drug couldn’t get forthright answers. For an agency devoted to protecting the public from bogus medical science, the FDA seems to be spending an awful lot of effort protecting the perpetrators of bogus science from the public.

DC Sunsets

Here in our “modern world” the FDA (partnered with Big Industry) is selling indulgences.

Llpoh

DC says I “nailed i”. I get two down. Dc, deservedly gets lots of ups for that post. But we said much the same thing.

Some folks are just plain spiteful.

Visitor from Germany
Visitor from Germany

@Llpoh – forgive me, but, methinks that to Dr. Salk, his vaccine in the 50s hung as high, or even higher, than sofosbuvir today.

Consider the methods, which he had to work with, and compare them to the methods which are available today: computers, genetics, biotech.

So, to borrow your metaphor: the fruits might hang higher today – but we have significantly impoved ladders. Ok, these ladders come at a price – but 1000$ per pill?

This ist just greed imho. Sheer greed, and no excuse.

MuckAbout

And all the time, they are nibbling at your balls from the rear, raising co-pays for everything 15-20% a year and doubling the cost of insurance too.

Actually, sometimes the Rx plans don’t raise copays, they just reclassify a drug to the next higher “tier” – even for generics. Results are the same – higher copays. Look at your Rx guide, compare where one of your meds were two years ago with which “tier” they are today.. Result, no low tier generic drugs any more, you pay a higher copay for the same drug and they increase the cost of the insurance at the same time.

Gonna be a lot of people dying over this mess sooner than later..

MA

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