"Sovaldi can cure ninety per cent of patients in three to six months, with only minor side effects. There’s just one catch: a single dose of the drug costs a thousand dollars, which means that a full, twelve-week course of treatment comes to more than eighty grand."
To put this in perspective, the treatment of 3 million people at $80,000 per pop will run up a bill of $240 billion. Can such an extraction from the public purse be justified in any way?
"….prices for brand-name, patented drugs aren’t really set in a free market. The people taking the drugs aren’t paying most of the cost, which makes them less price-sensitive, and the bargaining power of those who do foot the bill is limited. Insurers have to cover drugs that work well; the economists Darius Lakdawalla and Wesley Yin recently found that even big insurers had "virtually zero" ability to drive a hard bargain when it comes to drugs with no real equivalents. And the biggest buyer in the drug market—the federal government—is prohibited from bargaining for lower prices for Medicare, and from refusing to pay for drugs on the basis of cost. In short, if you invent a drug that doctors think is necessary, you have enormous leeway to charge what you will."
When one asks why drugs cost so much, the stock reply is that the revenue flow is required in order to cover the costs of research and development (R&D). Let us pause for a moment and consider how big pharma actually uses its money.
The World Health Organization (WHO) provided this opinion on the state of affairs with respect to the pharmaceutical industry:
This bit of data was also provided:
By this reckoning, R&D costs can’t be more than about 15-20% of revenue. And how could marketing costs conceivably be twice as high?
Doctors seem to change their habits slowly. There is inertia involved in accepting the efficacy of a new drug, and there is similarly inertia in switching away from a drug once accepted. It has been estimated that it takes about 10 years for new medical knowledge to wend its way throughout the medical profession. This source provided this extreme example:
Drug companies spend enormous amounts of marketing money convincing doctors to use their products because time is money to them. To fully take advantage of their pricing leverage they must have their drugs prescribed as soon as possible after hitting the market. Waiting around for word-of-mouth recommendations or dispersion of published articles is too slow and too risky a process.
There is a significant return on a successful marketing campaign. Once a significant base of drug prescribers is established, the drug company can go ahead and raise the prices as much as it wants with little fear that the doctors will notice or care.
Robert Langreth provided an example of how this pricing strategy works in an article in Bloomberg Businessweek: Big Pharma’s Favorite Prescription: Higher Prices.
"Largely because of price increases, Avonex’s U.S. sales have grown 75 percent since 2007, reaching $1.9 billion last year."
So, once a market is established it is little affected by price. If sales fall, just raise the price to maintain or increase the cash flow.
Mariana Mazzucato provides more insight into drug companies and their finances in her book The Entrepreneurial State: Debunking Public vs. Private Sector Myths.
"….in recent years, CEOs of large pharma companies have admitted that their decision to downsize—or in some cases eliminate—their R&D labs is due to their recognition that in the ‘open model’ of innovation most of their research is obtained by small biotech firms or public labs."
Big pharma can use its immense wealth to purchase the best of little pharma and make a small company quite wealthy, while it makes the big money in commercializing the drug.
In dealing with public labs, they barely even have to pay for the drug. Mazzucato provides this example:
Mazzucato also provides us with another example of how big pharma uses its wealth in ways that have nothing to do with R&D. It seems that buying back shares of their own company in order to make short-term market moves is more important to the drug companies than R&D.
Surowiecki wonders if the case of Sovaldi and its price may have been that one step too far. The point at which the public realizes that these prices and the associated profits are no longer sustainable and action must be taken.
However, he is not optimistic—at least not in the near term.
Marcia Angell is the author of The Truth About the Drug Companies: How They Deceive Us and What to Do About It.