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Over the past two decades, U.S. Representative Henry Waxman has given the drug industry good reason to fear him.
Waxman (D.-California) humiliated
Now Waxman, who has said he will retire in 2016, has fired one more shot across the drug industry’s bow: he’s taking on the high drug prices that have been the lifeblood of the drug business over the past decade.
Witness a sternly written letter, authored with fellow Democrats Frank Pallone Jr. of New Jersey, and Diana DeGette of Colorado, to
Henry Waxman
“Our concern is that a treatment will not cure patients if they cannot afford it,” they write. “In cases where Sovaldi is prescribed with other treatments, the costs could be even higher.”
This is, in the words of International Strategy & Investing Group’s Mark Schoenebaum, a “public shaming campaign.” And there are plenty of defenses for Gilead to use. Schoenebaum says that the sticker price for Incivek, previously the most effective treatment for hepatitis C, is $100,000 per course, including a longer course with the drugs ribvavirin and pegylated interferon, which cause severe flu-like symptoms. Gilead, the argument goes, is actually saving the health care system money with its expensive new pill. And it is potentially doubling the percentage of patients cured, from about half to 95%.
But it might not feel that way to government bureaucrats who are watching how much Sovaldi is costing. Most new drugs struggle to reach $1 billion in annual sales. Sovaldi is now expected to bring in $1.5 billion in its first quarter. Sovaldi’s launch will almost certainly be the best in pharma’s history. It could top $5 billion this year, and could unseat Lipitor, the now-generic heart drug, as the best-selling medicine, in dollar terms, of all time. Lipitor was a $12 billion drug.
And that money, the Congressmen note, could come disproportionately from low-income, minority patients, including those on the Medicaid drug program funded by the federal government and the states.
ISI Group’s Washington analyst, Terry Haines, debating Schoenebaum on the matter, put it simply: “This letter is a "bank shot" that gets things going, with the goal of getting Gilead to significantly lower the price of Sovaldi.”
Getting a drug company to cut its price is harder than it sounds. Haines spoke on a conference call with ISI clients Friday about Waxman’s probable intent of embarrassing regulators. The Food and Drug Administration rushed to approve Sovaldi, the argument goes, and then Gilead goes and charges $84,000 per patient?
But the FDA is bound by law not to consider price at all. And Medicare’s ability to make decisions based on drug price is extremely limited. Drug prices in the U.S. are not regulated, so there are no regulators to shame. And Gilead, when it’s already going to be bringing in billions of dollars a quarter, would be foolish to simply back down, not matter how intense the criticism.
Except that the stakes here are actually even higher. Sovaldi is a potent drug by itself, but the real excitement is about using it as part of an all-oral single-pill combination that would cure hepatitis C patients without interferon and ribavirin. Analysts have speculated that such a pill could cost $100,000 per patient.
More than that, generally speaking, profits in the drug industry are based as much on price increases of existing drugs as on introducing new ones. Consider that between 2006 and 2009, U.S. dollar sales of Viagra increased 21% even as the number of prescriptions actually written fell 13%. The industry’s constant price increases can make even a drug that is becoming less popular into a sales gainer. Richard Evans, an analyst at Sovereign & Sector, has estimated that 145% of U.S. pharma sales growth in the five years ending in 2011 was due to increases in price.
So what could Waxman feasibly do? Just making noise about Sovaldi’s price could help foster competition. Other companies are developing their own all oral hep C combos. AbbVie and Enanta are in the lead, followed by Merck, and Bristol-Myers Squibb. AbbVie’s entry looks worse that Gilead’s; it includes many more pills. But might patients be willing to use it instead if their insurance company tells them it is saving them money?
Or, at the very least, could political pressure help prevent Gilead from taking the normal price increases the company expects?
And keep in mind that the prices paid by insurers, Medicare, and Medicaid can be much lower than the list price, which is, in Schoenebaum’s words, like the price tag on a car for sale at a dealership. And there is very little price transparency among users. Germany has been making noise about making the prices it pays for medicines public. That kind of action could hurt pharma’s hand during price negotiations with insurance plans.
All of this, though, is still kind of a long shot. There isn’t a mechanism for Waxman to force Gilead to cut Sovaldi’s price. But he does have one last weapon worth considering: Gilead’s soaring stock, which has been bolstered by a biotech boom, bringing in lots of generalist investors. Biotech die-hards tend to believe that drug companies will keep their pricing power. New investors are likely to be less confident, especially when they are afraid of being left holding the bag when the bubble bursts. Ironically, the thing that could most put pressure on drug pricing might be the worry that the government could put pressure on drug pricing -- even if it is not all that likely to happen.
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