Healthcare Business News

Why Sovaldi shouldn't cost $84,000

By Merrill Goozner, Editor
Posted: May 3, 2014 - 12:01 am ET

The healthcare payment world is justifiably upset over the escalating cost of treating those carrying the hepatitis C virus, which leads to 19,000 deaths a year from cirrhosis and liver cancer. A 12-week treatment with Sovaldi costs $84,000—approximately $1,000 a pill.

Medicaid managed-care plans are demanding relief from state officials to meet mounting outlays for Gilead Sciences' wonder drug, while insurer WellPoint called Sovaldi its “biggest watch item.”

The pharmaceutical industry's defense of the price tags placed on specialty drugs such as Sovaldi hasn't changed in decades: Their price reflects the cost and risks of research and development. Gilead also points to Sovaldi's comparative effectiveness. It has a 90%-plus cure rate with minimal side effects. Interferon, the prior treatment, is only half as effective, triggers flu-like symptoms with every shot and still costs up to $50,000 a year.

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Given that the CMS has approved screening for the estimated 3.2 million people with hepatitis C, the uproar over pricing has just begun. One analyst last week conservatively estimated Sovaldi sales of $4 billion this year will grow to nearly $9 billion in 2016. And that doesn't include the accompanying physician visits, screening tests and follow-up exams.

Given this looming fiscal disaster, it's fair to ask if the financial risk that led to Sovaldi justifies its price. The history of its development suggests not.

Since the AIDS crisis hit in the 1980s, the government has had hepatitis C in its cross hairs. The risk factors for transmission of the two diseases are similar: unprotected sex, shared needles by intravenous drug users and tainted transfusions. The structure of the two RNA viruses is similar, too, which has made hepatitis C a natural fit for virology investigators.

The National Institutes of Health invested heavily in university-based scientists to understand the genetic weak points of hepatitis C, just as it did for HIV. It gave grants to build virology labs, come up with potential drugs and conduct clinical trials.

One of those scientists was Raymond Schinazi, director of the Laboratory of Biochemical Pharmacology at the Emory School of Medicine in Atlanta. During the past 20 years, Schinazi's laboratory received at least $7.7 million from the National Institute of Allergy and Infectious Diseases. He wasn't alone. Some, like Kevin Raney, chair of the biochemistry and molecular biology department at the University of Arkansas for Medical Sciences, even developed drugs on their government grants, although his never made it into clinical trials.

Schinazi, a serial entrepreneur, took a different path. In the late 1990s, he formed the pharmaceutical company Pharmasset, to develop an antiviral drug invented at Emory. The company also worked on cures for HIV and hepatitis B. The original drug candidate went nowhere, he told me in a telephone interview. But chemists working inside Pharmasset—at the time of its sale to Gilead in 2011 it had only 82 employees—developed several novel therapeutics for the diseases, including one that eventually became Sovaldi.

Securities and Exchange Commission filings for Pharmasset during its years as a stand-alone research and development company revealed it spent under $7 million on R&D in 2003. In its early years, it received $1 million in government grants. Its total losses through 2011 came to $314.8 million. It was also investigating drugs for HIV and hepatitis B throughout that period.

The company hit the jackpot with hepatitis C and Sovaldi though, which led Gilead, whose initial success came from HIV drugs, to pay $11 billion for the company. Schinazi, who had retained a sizable stake in the firm after cutting his ties in 2006, walked away with over $400 million, according to a published report.

Gilead spent tens of millions of dollars to complete Sovaldi's clinical trials. Yet last August, the NIAID issued a news release touting its role in running one of those trials when positive results were reported in JAMA. The government, it turns out, had kept its hand in the development of Sovaldi.

While the risk of failure was always there, the returns on success for stockholders have been nothing short of spectacular. Gilead will recoup its total purchase price in less than three years. If Gilead had paid $5.5 billion, would the drug's price be half as much?

Some argue that the cost of new drugs must cover all the failed R&D efforts within pharmaceutical and biotechnology firms. But if that's true, where's the risk?

It's not fair to ask public and private insurers and patients through their co-pays to be the only parties at risk in the nation's search for miracle breakthroughs. The long history of taxpayer-financed involvement in the development of Sovaldi only adds insult to the financial injury.

Follow Merrill Goozner on Twitter: @MHgoozner

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