The November issue of MIT Technology Review investigates why drugs are so expensive in its cover article. (It also has an excellent business report on healthcare costs.) The two drugs of the article's title are Kalydeco, the first drug to treat the underlying cause of cystic fibrosis, which was approved by the FDA after only 3 months of review, and was priced at $294,000 a year. (Its price later increased to $307,000.) The company did pledge "to provide it free to any patient in the United States who is uninsured or whose insurance won't cover it", but "insurers and governments readily paid the cost" because "it offers life-savings health benefits and there is no other treatment."
In contrast, Zaltrap, which was approved to treat colorectal cancer, "worked no better in clinical trials than Roche's cancer drug Avastin, which itself adds only 1.4 months to life expectancy for patients with advanced colorectal cancer." Yet "Sanofi priced Zaltrap at $11,000 a month, or twice Avastin's price." Following unexpected resistance, it agreed to provide rebates for 50% of the price, which is not quite the same thing as dropping the price by 50%.
The author, Barry Werth, makes an important point when he writes: "The primary customers in the United States are not patients or even individual physicians, although physicians can drive demand for a drug; rather, the customers are the government (through Medicare and Medicaid) and private insurance companies." The prices we see are a result of insurers and governments picking up the tab rather than individuals: increasing the price doesn't reduce how much the drugs are used, so pharmaceutical companies try to charge as much as they can: what they think the market will bear. (Werth knows Vertex well: he wrote the famous book The Billion Dollar Molecule: One Company's Quest for the Perfect Drug about it in 1995.)
But even Kalydeco's price is enormously high, notwithstanding its life-saving characteristics, and Werth discusses at length the concerns and protests of a group of scientists led by David Orenstein, co-director of the Palumbo Cystic Fibrosis Center and chair of the ethics committee at Children's Hospital of Pittsburgh. As a revenue management expert, what struck me in that conversation is that the physicians really wanted Vertex Pharmaceuticals, which manufactures Kalydeco, to use cost-plus pricing in setting the price (i.e., you compute the cost and add a markup because you do want to reward your investors, but since there is no other treatment you don't want to make a fortune from sick people who absolutely need it) instead of revenue (or profit) maximization. This being a publicly traded company, this argument is unlikely to gain traction with Vertex, although there is something fundamentally worrisome about shareholders who hope (do they?) that a pharmaceutical company will price its life-saving drug as high as possible so that they can reap a cushy reward from their investment.
As a mitigating factor for Vertex and Kalydeco (and something I wish the author had explained), drug prices are not only set to recoup past development costs and other drugs' failures. They are set to fund current operations: current development costs, current trials, with many promising compounds bound to fail after years in the pipeline. It also happens that Kalydeco is only designed to treat about 4 percent of the cystic fibrosis patients worldwide or 2,400 patients altogether. (It fixes what is called a gating mutation while most patients have what is called a folding mutation of a critical protein.) I don't know how much of the $307,000 tag price helps fund current operations at Vertex and how much really goes to enrich shareholders, but since it treats a chronic condition, they are looking at a potential income of $720 million a year until the drug goes off-patent, not taking into account price increases. (It is said to be valued now at $311,000.) Whether you view this as high or low depends on what they are doing with the money and what is left over - their net income.
Now, Vertex is not a newcomer in the pharmaceutical field. It was in fact created in 1989 and now counts about 1,800 employees including 1,200 in the Boston area. It worked for 13 years with the Cystic Fibrosis Foundation to develop the drug. If you look at its financial numbers on Yahoo! Finance, you'll notice that all its performance ratios are negative. It has a negative operating cash flow. It has negative EBITDA (earnings before interest, taxes, depreciation and amortization). Perhaps this has something to do with the fact that Vertex is building a $800m new campus on the South Boston waterfront. Morningstar gives it four stars but also an F in profitability (and A in growth), and a credit rating of BBB. It was recently announced it is laying off 15% of its workforce due to disappointing sales of its drug Incivek. So the question (left unsaid in the article) also becomes: if a pharmaceutical company hits it big, especially in an area where there is no alternative (and so its discovery is clearly benefiting the public good), how much should we as a society tolerate that it milks its discovery for everything that it is worth, given all the failures and disappointing results that it has had along the way and is still facing in other product lines? (Also worth reading: the JAMA editorial penned by David Orenstein and his colleagues.)
It's worth pointing out that cystic fibrosis patients with the gating mutation can be correctly identified by diagnosis tests, so Kalydeco won't be given to people who won't benefit from it - only to people who will. We used to think that technology would help decrease drug costs by better identifying the subgroups of patients who would most benefit from this or that drug, but the journalist takes a far more pessimistic view of the future, "a likely future in which extremely costly drugs are common."
A danger, it seems to me, is that one of these days a good PR professional working for health insurers will put together a campaign where we see sick children being denied their medicine because the greedy pharmaceutical companies are eating up all the insurers' money, with their enormous prices for orphan drugs that go to only a handful of patients - and those are chronically ill to boot. Viewers will relate to the children in the ad and their common condition, and mayhem will ensue. Or put a cystic fibrosis patient on television saying "my $300,000 a year drug goes toward their $800 million brand new building on the waterfront!" (And the PR person will put an executive in the ad who laughs and says: "Heck no, that's what last year's $800 million we made in revenue from people like you paid for! Our palace is paid now! Hahaha!") Then the drug companies risk becoming the Enrons of our generation.
Werth concludes: "Ultimately, what matters in pricing a drug is its value. Vertex succeeded in pricing Kalydeco because the medicine really works, because the company's scientists knew the exact genetic profile of the people who would benefit, because they were able to show definitive clinical results in well-designed trials, and because the company ensured that the right patients got the drug and that access was no issue."