How Much Should a Miracle Drug Cost?

Millions of hepatitis C sufferers now have access to a cure, but insurance companies and lawmakers are balking at the price tag.

Shima Andre, a 42-year-old freelance book editor in West Hollywood, Calif., learned she had hepatitis C while attending a Christmas party one evening in December 2011. Her doctor called via cell phone to say a routine blood test during her annual physical exam revealed she carried the liver-wasting virus. Now she and her husband—they’d married a few months earlier—would have to postpone their plans to have kids until she was clear of the potentially fatal disease. Andre concluded she’d probably contracted it from a drug habit she’d kicked years earlier.

More than 3 million Americans have hepatitis C, an infectious illness spread by addicts’ needles, poorly sterilized medical instruments, and, in the years before current blood bank screening standards, ordinary transfusions. Like Andre, many hepatitis C sufferers go for years without noticing symptoms. During that time the liver can scar, leading in some cases to cirrhosis, cancer, and organ failure. At the time Andre was diagnosed, the standard treatment included an injected medicine called interferon that offers uncertain prospects for a cure and causes such severe side effects as flu-like symptoms, anemia, and depression. After consulting her physician, Andre decided to delay treatment until the arrival of better medicines said to be in the pipeline.

Last October, Gilead Sciences of Foster City, Calif., introduced Harvoni, which completely cures the vast majority of people with the most common type of hepatitis C and does it in just three months with few significant side effects. Gilead charges $94,500 for the 12-week treatment. Andre, who pays $614 a month for health insurance for herself and her husband, applied for reimbursement for Harvoni. Her insurer, Anthem, the nation’s second-largest health insurer, turned her down. In a series of letters, the company noted she doesn’t have serious liver scarring. “This drug is considered not medically necessary,” Anthem told her.

On May 15, Andre sued Anthem in state court in California for breach of contract. “It is a life-threatening disease,” she says. “There is no reason I should have to wait until my liver deteriorates before I get a cure.” Already, she says, her urine has turned dark, and she’s experiencing sharp liver pain. Lori McLaughlin, an Anthem spokeswoman, declined to comment on Andre’s complaint because it’s in litigation. In general, McLaughlin adds, Anthem covers Harvoni “for members with more advanced stages of liver disease.”

Over the past 18 months, the emergence of Harvoni and its predecessor, Sovaldi, has given tens of millions of hepatitis C patients around the world hope that they can be permanently rid of a debilitating illness. Not since the introduction of HIV/AIDS drug cocktails almost two decades ago has the appearance of a therapy spurred such demand. Unlike drugs for HIV, which control infection and must be taken for the rest of a patient’s life, Harvoni and Sovaldi typically eliminate the virus they target and do so quickly. (Sovaldi is taken with interferon or a third drug; Harvoni combines Sovaldi with another Gilead compound into one pill and eliminates the need for interferon.)

The promise of a cure, however, doesn’t come cheap. After Sovaldi received approval from the U.S. Food and Drug Administration in December 2013, Gilead announced the drug would cost $84,000 for a 12-week course, or exactly $1,000 a pill. That’s more than double what Pharmasset, the biotech company that developed an early experimental version of the drug, initially said it planned to charge—until Gilead bought Pharmasset in 2011. For 2014, Sovaldi generated $10.3 billion in sales, making it one of the most lucrative pharmaceutical launches ever. In just the final three months of 2014, Harvoni added $2.1 billion. Gilead’s market capitalization has soared from $29 billion to $167 billion in five years. The net worth of its chief executive officer, John Martin, exceeds $1 billion.

Because of the blockbuster sales of Gilead’s two hepatitis C drugs, the company has become the focus of a backlash against the costs of expensive “specialty” drugs that target chronic diseases such as hepatitis, cancer, and multiple sclerosis. Drug spending in the U.S. totaled $330 billion in 2013, according to Anthem. By 2020, spending on specialty drugs alone could reach $400 billion. Patients who receive these treatments almost never see the total cost, but their insurers do. More than two dozen state Medicaid programs for low-income patients, as well as for-profit insurers such as Anthem, have restricted coverage for Sovaldi to those with severe liver damage. “Never before have drugs been priced so high to treat such a large population,” says Steve Miller, chief medical officer at Express Scripts, the country’s largest manager of drug benefits for employers and insurers. In December, Express Scripts announced it would reject coverage for one-pill-a-day Harvoni and instead steer patients to a less pricey rival drug that requires four to six pills a day.

Congress has also jumped into the fray. Last July, Ron Wyden (D-Ore.), then chairman of the Senate Finance Committee, and ranking minority member Charles Grassley (R-Iowa) demanded in an eight-page, single-spaced letter to Gilead that the company provide an itemized accounting of its R&D costs, marketing expenses, and plans for selling Sovaldi at lower prices overseas. “Given the impact Sovaldi’s cost will have on Medicare, Medicaid, and other federal spending, we need a better understanding of how your company arrived at the price for this drug,” they wrote.

Gilead executives insist that because their drugs quickly cure hepatitis C—saving patients, hospitals, and insurers the costs of long-term care—they’re well worth the price. The suggestion that the company’s pricing is motivated by greed is “perplexing,” says Chief Scientific Officer Norbert Bischofberger. “Price is the wrong discussion,” says Gregg Alton, Gilead’s executive vice president for corporate and medical affairs. “Value should be the subject.” Martin, the CEO, points out that before tackling hepatitis C, the company pioneered combination HIV drugs, blending compounds invented elsewhere with in-house discoveries to make medications easier for patients to take. “For a long time we’ve had innovation after innovation,” he adds. For many patients, Gilead’s drugs are indeed miraculous. But is the U.S. health-care system paying too much for them?
 
 
The son of husband-and-wife chemists, Martin received his doctorate in organic chemistry from the University of Chicago and then, before the age of 30, invented a drug that proved helpful in ameliorating certain HIV symptoms. He has received the prestigious Isbell Award from the American Chemical Society and in 2008 was inducted into the National Academy of Engineering. In an interview in his Spartan corner office at Gilead’s headquarters south of San Francisco, the media-averse Martin slouches, swallows his words, and rubs his head until his brown hair resembles a well-trafficked bird’s nest.

He gets up from the conference table to retrieve a visual aid: Several chapters inNucleotide Analogues as Antiviral Agents, a 1989 collection he edited, describe research that has since contributed to FDA-approved drugs. Picking up a green marker and moving to a whiteboard, Martin, 64, seems to relax. He sketches the intricate molecular structure of tenofovir disoproxil fumarate. Useful for treating HIV, he explains, this “reverse transcriptase inhibitor” put Gilead on the map in 2001. Using the drug’s trade name, he adds: “That’s Viread!”

Gilead was founded in 1987 by Michael Riordan, a physician with a Harvard MBA. He named the company for the “balm of Gilead,” an ancient healing resin mentioned in the Bible. Riordan sought to commercialize so-called antisense treatments for genetic disorders, but his plans fizzled in the lab. In 1996, Riordan was replaced as CEO by Martin, who’d joined Gilead from Bristol-Myers Squibb hoping to pursue antiviral therapies based on his research on nucleotides, organic molecules that serve as building blocks of DNA and RNA. The company’s chairman was Donald Rumsfeld, who stepped down in 2001 to become President George W. Bush’s secretary of defense. Martin later took on the chairman’s title as well.

In 2002, Martin engineered the acquisition of Triangle Pharmaceuticals, which brought Gilead a compound it combined with Viread to make Truvada, a best-selling anti-HIV drug. Gilead cut a deal two years later with Bristol-Myers Squibb to gain access to a third HIV drug, which Gilead added to the mix to create Atripla, the first AIDS medication that incorporated all the agents needed to treat the disease in a once-a-day pill. Atripla remains a major revenue source, generating $3.5 billion last year; Truvada brought in $3.3 billion.

Gilead learned from the blunders of old-line pharmaceutical companies that made first-generation HIV drugs but resisted lowering prices for patients in the developing world. In 2003 the company started a tiered pricing program for poor countries that included selling licenses to generic manufacturers in India. Halting at first, the initiative eventually became a model for the industry and has facilitated low-cost treatment for more than 7.5 million destitute AIDS patients.

Gilead’s 7,500 employees are driven to get drugs into the hands of sick people, whatever their earning power, Martin says. “For the U.S. there’s access [to the HIV treatments], and for Africa there’s access, too,” he says. That anyone would question the company’s motivations strikes Gilead executives as ignorant, or even offensive. “Patients want and need what we invent,” says Alton. “These are amazing products. It’s frustrating to hear the criticism that we’re asking for too much.”

 
 
By 2011, investors were fretting about the slowing growth of Gilead’s HIV franchise and the eventual expiration of patents of key components of its combination therapies. Gilead joined several companies that were shifting resources to hepatitis C. In addition to the 3 million victims in the U.S., some 150 million people worldwide are thought to have the disease. Manufacturers Merck and Vertex Pharmaceuticals introduced drugs in 2011 that boosted cure rates but still required many months of toxic interferon and caused additional side effects. Gilead’s biochemists searched for effective alternatives, Bischofberger recalls, but “nothing seemed to be working.”

Rather than simply double down on their own R&D, Gilead management ordered its researchers to synthesize and test every competing compound, with an eye toward acquiring the best. For hepatitis C, a clear winner emerged: PSI-7977, an experimental pill developed by Pharmasset, a Princeton (N.J.) startup with 82 employees, no product on the market, and a $91 million loss for its prior fiscal year.

In September 2011, Martin and John Milligan, Gilead’s president and another Ph.D. scientist, met with their counterparts at Pharmasset. They offered to buy the tiny company for $100 a share, or $8 billion. In early October, Pharmasset confidentially shared unpublished data showing that PSI-7977 cured all 40 patients in a clinical trial with no significant side effects. Martin and Milligan raised their offer to $125 a share. Sensing opportunity, Pharmasset responded by soliciting competing bids.

In November, Gilead went to $135 a share, then $137, or $11 billion, and there the deal was struck. With its three senior-most executives all recognized antiviral experts, Gilead could act decisively, says Geoffrey Porges, an analyst at Sanford C. Bernstein. “They didn’t have to have 15 different committees analyzing it and writing reports,” he says. The 94 percent premium Gilead paid above Pharmasset’s trading price at the time amounted to the richest of any large drug industry acquisition.

Merger documents later filed with the Securities and Exchange Commission indicate that the other companies Pharmasset contacted never submitted formal offers. Milligan says Gilead’s aggressive moves discouraged the competition. In a sense, though, Gilead bid against itself to secure the prize. Merger documents also revealed that Pharmasset tentatively considered introducing PSI-7977 with a price of $36,000, less than half the amount Gilead ultimately charged for a three-month treatment. (In an amended filing, Pharmasset later adjusted the projected price range to $36,000 to $72,000.)

Once it had PSI-7977, a nucleotide analogue known generically as sofosbuvir, Gilead moved to complete clinical testing while simultaneously shutting out competitors. At the time of the deal, Pharmasset had an agreement to test sofosbuvir in combination with another experimental hepatitis C drug made by Bristol-Myers. Ultimately, Gilead focused on its own in-house combinations, and the collaboration didn’t move forward. Bristol-Myers, meanwhile, spent $2.5 billion on a separate hepatitis C acquisition in 2012. By the end of the year, though, it scrapped the main drug it acquired because of toxic side effects.

In 2013, Gilead took sofosbuvir to the FDA, proposing to market the compound as Sovaldi. Edward Cox, a senior official in the agency’s drug evaluation center, called the approval that December “a significant shift in the treatment paradigm for some patients with chronic hepatitis C.” Researchers with Bloomberg Intelligence estimated sales of hepatitis C medicines could exceed $100 billion over a decade, and Gilead had the best product on the market.
 
More and more pharmaceutical manufacturers are seeking to develop specialty drugs because of the rich payouts associated with Sovaldi and Harvoni. Profits can be so hefty because the American health-care finance system allows companies to charge more or less what they choose. In Europe, governments negotiate directly with manufacturers, which keeps prices lower. In the U.S., that doesn’t happen. Medicare, the federal insurance program for senior citizens, is barred by law from using its size to negotiate discounts.

Until last year, specialty drug inflation had been partly masked by patent expirations on big sellers such as the cholesterol therapy Lipitor, which slowed the growth of overall spending on pharmaceuticals. But drug costs rose 13 percent in 2014, to $374 billion, the largest increase since 2001, much of it driven by a surge in spending on Sovaldi, Harvoni, and other specialty drugs, according to IMS Health, a New York consulting firm. Half of the 38 cancer drugs introduced since 2010 cost $10,000 a month or more. All were at least $5,000 a month, according to data from Memorial Sloan Kettering Cancer Center in New York. Some of those drugs merely extend life expectancy for a matter of months.

Contradicting a core lesson of Econ 101, competition among specialty drugs hasn’t curbed prices, as manufacturers tend to match one another’s increases. In the 1990s, multiple sclerosis drugs generally cost about $10,000 a year. As new MS treatments have hit the market, the prices of older ones have risen to the higher levels of newcomers, researchers reported in April in the journal Neurology. Today, all MS drugs cost $50,000 to $60,000 a year, or more.

It’s into this environment that Gilead introduced Sovaldi at $1,000 a pill. Before December 2013, the company provided few clues it would charge so much, according to Miller of Express Scripts, which creates lists of covered drugs and co-payments and negotiates prices on behalf of employers and insurers. The benefits manager provides services for about 85 million individual members. Gilead’s “choosing exactly $1,000 [a pill] makes it a lot harder to defend as a scientifically derived price,” Miller asserts. The high price “took our [corporate] clients totally by surprise,” he adds. “Here you have something that hits in the very last month of the year, and it is not in anyone’s budget” for 2014. Hospitals and insurance companies were blindsided by the introduction of Sovaldi, which was “a case study of how not to collaborate,” Betsy Nabel, president of Brigham and Women’s Hospital, said at a conference in Boston in late April. Her institution hadn’t planned for the stiff prices, she added, and that put pressure on the Massachusetts state Medicaid budget.

Some of the turmoil provoked by Sovaldi and Harvoni stems from their costs coming all at once. Many hepatitis C patients who weren’t yet experiencing the worst symptoms had postponed treatment—some for years—based on the hope that drugs as good as Gilead’s would eventually arrive. The pent-up demand caught everyone, including Gilead’s management, by surprise. “It was an instantaneous shock to the system that managed care had difficulty absorbing,” says Milligan.

And unlike drugs for HIV and most other chronic diseases, which patients take and pay for over decades, the bill for the Gilead hepatitis C medicines comes due almost immediately. Gilead’s Alton compares paying for AIDS treatment to carrying a mortgage, while paying for Sovaldi or Harvoni is more like buying a house with cash.

Four days after the FDA approved Sovaldi, Miller told Bloomberg News that as soon as rivals introduced roughly comparable hepatitis C remedies, Express Scripts would favor less expensive alternatives. “We will identify which drugs can be pitted against each other and make some really tough formulary decisions,” he said.

Gilead executives say they gave the industry plenty of notice about Sovaldi’s pricing, including in the press release that announced its approval by the FDA. Once hostilities erupted in 2014, however, Milligan concedes, “We weren’t quite sure how to respond to Express Scripts. They were out there beating the drum every day.” Martin still refuses to engage directly: “I’m not going to comment on a specific company,” the CEO says.

By November 2014, Harvard’s Center for Health Law and Policy Innovation had found that 27 state Medicaid plans had restricted access to Sovaldi to patients with severe liver ailments, while some states also instituted limits on access for people with recent substance abuse problems. Milligan responded to the mounting unease at Sovaldi’s $84,000 price tag during a symposium at the Brookings Institution in Washington. The company, he said, charged what it thought the market would bear. “We looked very hard at what value we were bringing to the system,” he explained, “but at the end of the day, the pricing analysis was relatively simple: What is the current cost of other therapies?” He continued: “We were providing more value, better outcomes, shorter duration, better patient experience at the same cost as the standard of care.”

Others at the Brookings event saw things differently. Sam Nussbaum, executive vice president for clinical health policy at Anthem, described Gilead’s pricing strategy as contributing to “a race to the top,” which was no compliment. “Is this trend of ever-increasing, more expensive medicines and increasing health-care costs sustainable for individuals and for our nation?” he asked.

In December, Express Scripts followed through on its threat to exclude Gilead’s Harvoni from its main list of covered drugs, beginning on Jan. 1. Express Scripts said it would allow coverage only for a competing hepatitis C medicine, Viekira Pak, developed by the North Chicago (Ill.)-based AbbVie. Twelve weeks of Viekira Pak goes for $83,319, but the biotech company offered a “significant discount” in exchange for exclusivity, Express Scripts said.

Gilead privately offered a less substantial single-digit percentage discount, according to Miller of Express Scripts. “This is exactly what our plan sponsors hire us to do—negotiate and try to make drugs more affordable,” he says. “We look at this as being the first of what will happen in the field of cancer, rheumatoid arthritis, and many other expensive specialty fields.”