There is an interesting angle to the ongoing tooth gnashing over the price of Sovaldi, Gilead Science’s breakthrough oral antiviral therapy for Hepatitis C.
For those unfamiliar with the drug, Sovaldi is a recently approved treatment for chronic Hepatitis C that costs ~$84,000 and up for a course of therapy in the US (depending on duration of therapy and genotype of virus). It’s an impressive therapy: unlike earlier drugs, Sovaldi is well tolerated and highly effective. It eradicates the virus in patients with chronic Hep C.
Since Sovaldi was introduced, its cost has elicited howls of protest from payers, politicians, and most recently cost-bearing employers. All are suggesting that the drug’s pricing is opportunistic (particularly since it is sold in the developing world for 99% less than in the US—a price that presumably reflects its marginal production cost).
In the summer, the Senate Finance Committee sent a strong letter to Gilead. Senators wrote:
Although Sovaldi has the potential to help people with HCV, at $1,000 per pill, its pricing has raised serious questions about the extent to which the market for this drug is operating efficiently and rationally…..The large patient population combined with the high price of each individual treatment creates a question as to whether payors of health care, including Medicare and Medicaid, can carry such a load.…Given the impact Sovaldi’s cost… we need a better understanding of how your company arrived at the price for this drug. In order for a marketplace to function properly, it must be competitive, fair, and transparent. It is unclear how Gilead set the price for Sovaldi. That price appears to be higher than expected given the costs of development, and production and the steep discounts offered in other countries. An efficient market needs informed consumers to keep costs down.
Solavdi isn’t the country’s most expensive drug. Naglazyme, which treats the rare inherited condition mucopolysaccharidosis type VI is more expensive than Sovaldi, at an annual cost of a half million dollars per year. But only 64 patients were treated with Naglazyme last year in the US, meaning that the company needs to spread its investment in research and development over a small number of consumers.
That’s not the case with Hep C, which has an estimated prevalence of 3.2 million chronically infected Americans, roughly three times more than the number of Americans living with HIV according to the CDC.
Nor, apparently, were Gilead’s R&D costs especially high. A recent editorial in Modern Healthcare suggested a pharmaceutical company named Pharmasset, with 82 employees, did the early work of discovering Sovaldi. It apparently spent several tens of millions of dollars on annual research and development before the company was purchased by Gilead Sciences for $11 billion in 2011.
Analysts today are projecting peak annual Sovaldi sales of $7 billion. Given that Gilead has the customary twenty-year patent on the drug, It’s not hard to come away with the impression that the company is on track to make hundreds of billions of dollars in revenue on an $11 billion investment.
I’m no apologist for the drug companies. But, I’d offer that Gilead’s situation is a bit more complicated than it’s made out to be. The antiviral pricing, I’d suspect, has a lot to do with the epidemiology of Hepatitis C. Forbes magazine, advocating a free-market approach to Sovaldi, hinted at this when if referred to Sovaldi’s “revenue sustainability questions.” Translating the corporate talk, I suspect that Forbes is referencing Gilead’s short time to recoup its investment given some hard truths about how Hepatitis C works. Gilead has to make hay when the sun shines.
Leaving aside the issue of me-too competitors on the horizon, all who will be fighting for the same patients, there is a critical nuance: like many infections diseases, Hep C spreads (and thus is eradicated) at an exponential, not linear, scale. Big changes in the number of people with Hep C happen in a short amount of time.
If you look at this graph of the growth in the number of cases of Hep C over time, you can see that the vertical scale is logarithmic. Hep C grew exponentially since the 1920s.
When patients with chronic Hep C are cured, the reservoir of virus is eradicated and future cases of Hepatitis are prevented. You’ve also prevented the multiple cases that those future cases would have infected, and so on.
Let’s dig into this a little bit: Contrast two diseases: 1) cystic fibrosis, which is caused by a genetic mutation and 2) Hep C, which is directly contracted from others with the virus.
A certain fraction of children are born with the cystic fibrosis (CF) mutation that leads to terrible pulmonary problems and an early death. Kalydeco is a new and expensive cystic fibrosis therapy. Its manufacturer, Vertex Pharmaceuticals has probably recognized that treating CF may actually lead to a (linear) slight increase in the future demand for its product. The annual demand for Kalydeco is determined by the number of patients born with CF (the incidence of disease), plus the total number of patients living with CF (prevalence)—now expanded due to the increased number of patients surviving due to the drug. Treating CF may actually lead to a larger number of patients buying the drug (because, fortunately, people with CF are living longer) but does not change the number of patients who develop CF or reduce the number of future cases of CF in the population. That’s a fixed number. Vertex is in this for the long haul.
In contrast curing Hep C with Sovaldi will likely lead to to a precipitous decline in the number of people with Hep C in the population –because you can only get Hep C from someone that already has it. Treating the source patient saves several others from Hep C down the road, each who would have infected multiple others as well. If you treat all 3.2 million cases of latent Hep C in the US, barring importation of outside cases you technically would never see another case again.
If I were smart enough, I could try to do the math that would tell you how long it would take for Hep C to be wiped out in America. The calculation revolves around what’s called the basic reproduction number (R0) which is the number of cases one case generates on average over the course of its infectious period, in an otherwise uninfected population. (Hep C isn’t particularly infectious, with a R0 of around 2.3).
Out of fear for embarrassing myself, I’m not going to try the math. But, I’ll bet Gilead has run the model. And, that it’s telling them that even though there are 3.2 million patients to treat, they had better make their money back fast. It’s a costly but ultimately good news story.
Image: courtesy 401(K) 2012 via cc license