CHAPTER 1
THE $1000 PILL: THE FISCAL CONSEQUENCES OF CURING HEPATITIS C

The company in this case" is asking for a blank check which if granted will blow up family budgets, will blow up state Medicaid budgets, will blow up employer benefit costs and wreak havoc on the federal debt." This provocative comment was made by Ms. Karen Ignagni, former president and chief executive officer (CEO) of America's Health Insurance Plans, the trade association of health insurance companies. The cause of Ms. Ignagni's alarm was SovaldiTM, a breakthrough drug that cured the liver disease hepatitis C. Manufacturer, Gilead, priced its new medicine at $1000 a pill. Given that the standard course of treatment was once-a-day for 12 weeks, the cost of this cure was $84?000/patient. Ms. Ignagni's concern was shared. Dr. Steven Miller, chief medical officer (CMO) of Express Scripts, a prescription management company, called this drug pricing unsustainable [1].

The World Health Organization (WHO) estimates that globally 71 million people have chronic hepatitis C with roughly 3 million of those in the United States. The most common modes of infection are through exposure to small quantities of blood. While largely asymptomatic, the hepatitis C virus (HCV) resides in the liver and can lead to devastating consequences such as liver scarring, cirrhosis, liver failure, and liver cancer. Many of these patients will ultimately require liver transplants to survive - a surgery that costs more than $300?000.

Older treatments were modestly effective. Cure rates ranged from 40 to 80%, depending on the severity of the disease. Patients were given a cocktail of drugs plus injections of interferon for 24-48 weeks. However, these medicines are poorly tolerated, particularly the interferon component that causes flu-like symptoms in patients. As a result, many with hepatitis C often avoided treatment.

SovaldiTM provided new hope. The pill was found to cure hepatitis C in more than 90% of patients in just 12 weeks. Furthermore, it is safer and roughly 20% cheaper than the older treatments that cost over $100?000. One would think that the maker of such a wonder drug would be hailed for providing a major medical advance. Instead, Gilead was vilified.

At a Financial Times U.S. Healthcare and Life Sciences Conference in New York City, I had a chance to hear Ms. Ignagni talk about the high cost of SovaldiTM. During the Q&A session, I asked her the following question.

"SovaldiTM is a drug that cures hepatitis C. It actually saves the healthcare system money in that it will prevent patients from dying from liver cancer, cirrhosis and liver failure. Liver transplants alone can cost $300,000 and then patients must take anti-rejection drugs that cost $40,000 per year for the rest of their lives. The price of SovaldiTM, while high now, will drop, first when competitive drugs in late-stage development reach the market and then when the drug is generic. Given all of this, what price for SovaldiTM would have been acceptable to you - $60,000, $40,000, $10,000? What price are you willing to pay for innovation?"

Ignagni never answered the price question. Instead, she focused on the innovation part, saying that, for years, she has heard that high pricing is needed to sustain innovation. Yet innovation is still occurring. Her response ignores worrying trends that roil the biopharmaceutical industry - the mergers, the small company closings, the reductions in private investment in drug research and development (R&D). Yes, innovation is still occurring, but lower revenues result in less money invested in R&D. Less R&D equals less innovation.

Given the $1000 pill headlines, it was not surprising to see politicians jumping on the bandwagon and expressing outrage over the price. Rather than reacting to this medical breakthrough with applause, this furor sparked Senators Wyden and Grassley to probe all of Gilead's expenses, from the acquisition of Pharmasset (originator of SovaldiTM) to the costs of the development program. Their aim: to embarrass Gilead publicly and, perhaps, shame them into a price cut.

These senators and other politicians have little grasp of the intricacies of drug R&D. Sure, they know R&D is difficult and expensive. They might even appreciate that the entire process, from coming up with the initial idea to getting the US Food and Drug Administration (FDA) approval, can take 15 years. But they have little idea as to how and why drug prices are determined. Do patients or physicians really care how much a company spent in the discovery and development of a new medicine? What they want to know is whether the drug works and, relatively speaking, is it safe? The same can be said of payers. Again, they could not care less about R&D expenditures. They are much more concerned about the drug's short-term impact on their balance sheet.

Biopharmaceutical companies try to elicit sympathy by talking about failure rates. The industry works on the cutting edge of medical science, looking for novel compounds to prove or disprove medical hypotheses. This is difficult and often frustrating work. Far more projects fail than succeed. Thus, in justifying the high cost of new drugs, companies will cite figures showing that billions of dollars need to be invested across a portfolio of programs to get one new drug approved. Indeed, for a biopharmaceutical company to survive, it has to be profitable. It must provide a return on investment for its shareholders. However, patients, physicians, and payers do not shed tears over a company's litany of failures. The belief is that companies should be rewarded for success, and not for "nice tries."

Thus, in the minds of patients, physicians, and payers, the pricing of drugs should have little to do with the expense of biomedical R&D, nor should it be associated with recouping R&D investment. Pricing should be based on only one thing - the value that the drug brings to healthcare in terms of:

1. Saving lives.
2. Mitigating pain/suffering and improving the quality of life for patients.
3. Reducing overall healthcare costs.

OK, if one were to take that position, how do new, expensive medicines stack up in terms of delivering value? Are they worth the prices sought by drug companies?

In the case of SovaldiTM, we have a drug that cures hepatitis C and, in doing so, prevents the downstream consequences of patients contracting liver cancer or needing a liver transplant. Rather than questioning Gilead's management on the R&D costs generated in Sovaldi'sTM development, Senators Wyden and Grassley should ask the following questions:

1. How does this compound compare with existing hepatitis C treatments in terms of efficacy and safety?
2. How expensive are these other treatments?
3. Without this drug, how many patients with hepatitis C will die?
4. How many patients with hepatitis C will contact liver cancer or will need a liver transplant if their disease remains uncured?
5. Without SovaldiTM, what would be the ultimate cost to the healthcare system to treat the resulting cases of liver cancer and liver transplantations?

If these senators do this, they will find that even at $84?000 per patient, SovaldiTM is well worth the expense. Its value is neither the R&D costs incurred in its discovery and development nor in the years or time and money invested at exploring other approaches to hepatitis C cures that did not work. Its value comes from saving lives and ultimately saving the healthcare system millions. When it comes to drug pricing, to paraphrase a former President Clinton's advisor, James Carville: "It's the value, stupid!"

To this point, the focus has been on Sovaldi'sTM $84?000 price, which is its list price. This number is often the starting point in negotiations with payers to gain access to their formularies and healthcare plans. In the period when only SovaldiTM was on the market, payers had a relatively weak hand. That, however, all changed when AbbVie launched its hepatitis drug, Viekira PakTM. AbbVie's list price was modestly lower at $83?319 for a course of treatment. However, now payers had a choice and competition can drive costs down. Big payers like Express Scripts and CVS Health do not pay the list price - the one usually quoted by the industry's critics. Instead, given the vast number of patients in their plans, payers can negotiate significant reductions.

At a Forbes Healthcare Summit [2] shortly after AbbVie's launch of Viekira PakTM, the aforementioned Dr. Steven Miller, then the CMO of Express Scripts, could not hide his glee that SovaldiTM now had competition. In fact, he had selected Viekira PakTM for the 85 million members in the Express Scripts network. At the Forbes meeting he surprisingly announced that the price paid in the United States for hepatitis C drugs was less than in Europe. The Express Scripts number remains confidential. However, drug prices in Europe are public. At that time, the United Kingdom paid $55?000/patient for hepatitis C drugs and Germany $67?000. Given Dr. Miller's comments, we can speculate that the US price for these drugs was under $50?000.

After the launches of SovaldiTM and Viekira PakTM, however, a new generation of...