The Continuing Battle for Innovation

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  • 09/22/2014
From today's edition of the Washington Examiner.

America's other drug war

By Philip Klein

Critics don't dispute the drug's effectiveness, they take issue with the cost: $1,000 per pill.

Winston Churchill famously described an appeaser as "one who feeds a crocodile, hoping it will eat him last." Today, in a very different context, his remark captures the plight of the American pharmaceutical industry.

Roughly five years after lobbyists for drugmakers worked to help pass President Obama’s healthcare law in hopes it would fend off greater government intervention, the industry finds itself under attack.

As the nation focused on Obamacare’s implementation this year, a civil war has erupted within the healthcare industry over a miracle drug named Sovaldi.

The medicine has been shown to cure about 90 percent of common cases of hepatitis C, a condition that affects roughly 3 million people in the United States and can lead to severe liver problems. Sovaldi achieves this with fewer side effects than any previously available treatment, and it works more quickly, too.

Critics don’t dispute the drug’s effectiveness. But they are taking issue with the sticker price: $84,000 for a 12-week course of treatment, or $1,000 per pill.

The seemingly simple question, "Is a pill worth $1,000?" has triggered a fierce debate over drug pricing and the future of American medical innovation at a time when the healthcare system is undergoing radical transformation.

Critics led by insurers and pharmacy benefit managers (which help administer drug plans) have argued that Sovaldi’s price is completely unreasonable, putting a strain on the budgets of individuals, businesses, and state and federal governments.

If half of the estimated population in California with hepatitis C were treated with the drug, it would increase spending on the disease within the state by $22 billion in a single year, according to a report from the insurance industry-affiliated California Technology Assessment Forum.

Critics argue that Sovaldi is just the beginning of a wave of new high-priced specialty drugs that will trigger an explosion in medical spending in the years to come.

"If [Sovaldi] is prologue to future pricing decisions, we are talking about blank-check pricing that is simply not sustainable," lamented Karen Ignagni, president and CEO of lobbying group America’s Health Insurance Plans, which has launched a furious public campaign intended to shame drugmakers.

Express Scripts, the nation’s leading pharmacy benefit manager, has also jumped into the fray. "We’ve taken a strong stand on Sovaldi, because it’s the canary in the coal mine," said Steve Miller, the company’s chief medical officer. "If we let this price stand unchallenged and we don’t fix the system ... the system will not sustain itself. And we will not stay the innovative country we are today."

The pharmaceutical industry counters by arguing that beyond the costs associated with researching and developing new drugs and going through the arduous federal approval process, there is the tremendous long-term value created by breakthrough medicines.

For a long time, criticism of pharmaceutical companies focused on the fact that they merely created "me-too" drugs and were interested only in treating symptoms. But that’s where Sovaldi is different.

"We’re curing people of a disease,” said Gregg Alton, executive vice president for corporate and medical affairs at Gilead Sciences, which manufactures the hepatitis C drug.

Sovaldi launched in December 2013 and the Foster City, Calif., company reported sales from the drug totaling $5.8 billion for the first six months of 2014. The company’s profit nearly quadrupled during those six months compared with the same period a year earlier.

Although Gilead isn’t a member of the Pharmaceutical Researchers and Manufacturers of America, the industry lobbying group has taken to defending the pricing of Sovaldi because of the broader principles involved. The group argues that by curing a disease that is the leading cause of liver cancer and liver transplants, Sovaldi is making a significant contribution to public health and eliminating long-term costs associated with more severe medical interventions.

Lori Reilly, PhRMA’s vice president for policy and research, noted that the stepped-up attacks on drug pricing are coming at a time when society should be focused on how science and technology could usher in a new era of treating, even curing, destructive diseases.

“We’re never going to get there if we have price controls in effect or if we send chilling signals to pharmaceutical companies that we’re not going to value innovation when innovation happens,” Reilly said.

Though there haven’t been any proposals for direct government intervention to hold down the cost of Sovaldi, public pressure has begun to be felt on Capitol Hill. In June, Rep. Henry Waxman, D-Calif., and Diana DeGette, D-Colo., ranking Democrats on the House Energy and Commerce Committee, called for a congressional hearing on Sovaldi's price.

In a bipartisan letter to Gilead Chairman and CEO John Martin in July, Senate Finance Committee Chairman Ron Wyden, D-Ore., and Sen. Chuck Grassley, R-Iowa, wrote that Sovaldi’s “pricing has raised serious questions about the extent to which the market for this drug is operating efficiently and rationally.” The senators directed their staffs to investigate the matter due to its potential impact on federal spending and made extensive document requests of Gilead.

Such moves do not suggest an immediate threat to pharmaceutical companies from the federal government. But they need to be seen as a warning shot because this conversation over price is occurring when government is becoming a much bigger player in the nation’s healthcare system.

With governments under constant pressure to cut costs, it could only be a matter of time before drugmakers find themselves targeted by lawmakers. And on this front, the pharmaceutical industry cannot avoid blame.

On June 3, 2009, fewer than five months into the Obama presidency, Nancy-Ann DeParle, then director of the White House Office of Health Reform, emailed PhRMA’s chief lobbyist. As healthcare legislation was still being drafted in Congress, DeParle reported that the administration had decided, “based on how constructive you guys have been, to oppose importation on this bill.” This was a reference to allowing the importation of cheaper drugs from Canada, something favored by many Democrats but strongly opposed by drugmakers.

The email, one of many unearthed by a 2012 investigation by the House Energy and Commerce Committee, exposed the deal-making between the White House and the pharmaceutical industry during debate over Obamacare. It involved a journey for both sides.

During his 2008 presidential campaign, Obama attacked the cozy relationship between the drug industry and government. In an ad titled “Billy,” Obama highlighted the fact that Billy Tauzin, who helped push the 2003 Medicare prescription drug bill through Congress as chairman of the House Energy and Commerce Committee, became the president and chief executive of PhRMA shortly afterward. “I don’t want to learn how to play the game better, I want to put an end to the game-playing,” Obama vowed.

But once in the White House, Obama changed tack. As administration officials crafted their strategy for pushing national healthcare legislation, they determined that co-opting health industry lobbyists was crucial if they were to get the bill across the congressional finish line and to the president’s desk for his signature. In 1994, fierce industry opposition had helped wreck the Clinton administration’s healthcare initiative, and Obama didn’t want history to repeat itself. So he played the game he had sworn to eschew, and made a deal with Tauzin after all. (PhRMA has undergone a leadership change since the passage of the healthcare law, and is now headed by John Castellani.)

The pharmaceutical industry has had its own complicated relationship with government. Its business model depends on a vigorous defense of capitalism — of the right of innovators to reap profits based on the value they bring to the free market. But government has the industry in a chokehold, given its control over patent law. Drugmakers enjoy a limited period of exclusivity for their inventions, an idea that is rooted in the vision of America’s Founders to promote the arts and sciences.

In the modern era, the Drug Price Competition and Patent Term Restoration Act of 1984, known as Hatch-Waxman, helped establish a balance between allowing drugmakers to profit from their innovations for a period of time and introducing lower-priced generic alternatives into the market.

During the Bush era, PhRMA lobbied for passage of the Medicare prescription drug law, which brought billions of dollars of business to the industry, but also made the federal government a larger purchaser of prescription drugs. Drugmakers lobbied successfully to prevent the government from directly negotiating drug prices.

When Obama came to Washington in 2009 after a landslide election victory that also cemented huge Democratic majorities in both chambers of Congress, he created an air of inevitability about the passage of a national healthcare plan.

Facing the prospect of a bill passing over its objections and without regard to its concerns, the drug industry decided it was better to cut a deal. PhRMA agreed to support the law, take out ads promoting it, and produce $80 billion worth of taxes and other savings to help finance it. In exchange, Obama would protect drugmakers from liberal Democrats who wanted the federal government to drive down drug prices by negotiating with the manufacturers and by allowing imports from Canada. The law produced millions of newly insured Americans who became customers for prescription drugs.

Peter Pitts, who served as an associate commissioner of the U.S. Food and Drug Administration during the Bush administration and is now president of the Center for Medicine in the Public Interest, has been defending the drug industry during the Sovaldi fight. But he said PhRMA’s short-term calculation to save itself from Obamacare complicates the industry’s arguments.

“By saying, ‘We support Obamacare’ and all the things it means, both in terms of what was on paper and what it means spiritually to a lot of people, they really gave away the high ground on a free-market healthcare system and what that means relative to the ability to exist and produce innovation and reap the rewards,” Pitts said.

He explained: “You can’t cut a deal with a group of people who are fundamentally against your business model and expect that it’s going to save your bacon.”

The pharmaceutical industry had also overestimated the inevitability of Obamacare’s becoming law. By the summer of 2009, there was a strong public backlash against it, and it barely passed. Had PhRMA waited to see how well it progressed, it might have been able step in at a later stage and tip the scales against passage. But hindsight is 20/20.

“A lot of people in the pharmaceutical industry right now are unhappy with the fact that a deal was cut and the federal government still has the long knives out pushed against their throats,” Pitts said.

In a slap to drugmakers, after the healthcare law passed, Obama pushed for slashing the exclusivity period on drugs produced using biotechnology to seven years from the 12 years that was assumed in Obamacare.

This, Pitts argues, shows why it was naive for PhRMA to believe it could make a deal with the administration. “But in fairness to Billy Tauzin,” he acknowledged, “as the saying goes, if you’re not at the table, you’re on the menu.”

The drug industry now finds itself under fire once again. Though there have been more expensive drugs than Sovaldi, they have so far been treatments for relatively rare conditions. In contrast, an estimated 3.2 million people in the United States are afflicted with hepatitis C, a blood-borne illness most commonly transmitted through injection drug use. Many people aren’t symptomatic and do not get tested, so the actual number of people infected could be several million higher.

The release of Sovaldi "was an unprecedented event in the following way,” explained Miller of Express Scripts. “We’ve had higher-priced drugs. We’ve never had a drug priced this high for this many people.”

He added, “It’s a threat to healthcare economics that we’ve never seen before.”

Miller argued that the pricing of Sovaldi isn’t reasonable, especially because Gilead “didn’t invent this drug, they bought it. And so they didn’t have R&D costs sunk into it.”

Gilead’s Alton disputes this view and notes that although the company did acquire Sovaldi when purchasing Pharmasset for $11 billion in 2011, at that point the drug was still in the early part of Phase III trials (the largest and most expensive stage of drug testing). Thus, the drug required further development. “We did the vast majority of R&D on Solvaldi,” he insisted.

He also emphasized that Gilead isn’t claiming to have priced the drug based on research and development costs. “What we did was price it based on the standard of care that was used prior to Sovaldi,” he said.

Prior treatments for hepatitis C, he argued, took longer, and the overall treatment regimen cost the same. But those treatments weren’t nearly as effective and in many cases, couldn’t be tolerated by patients.

He also says it’s unfair to look at upfront costs without considering savings over time.

The California Technology Assessment Forum study concluded that if 50 percent of those estimated to have hepatitis C in the state were to take Sovaldi, after 20 years, the offsetting savings would recoup three quarters of the initial drug expenditures. But the study also found that if the drug were given only to those with advanced liver problems, the 20-year savings would exceed the costs by $1 billion. This is why several state Medicaid programs have restricted prescriptions of the drug to populations with more advanced liver disease.

Another factor weighing in congressional thinking is that, according to a survey cited by Sens. Wyden and Grassley, nearly a third of all people with hepatitis C are in prison, and treating prison populations with Sovaldi could pressure federal budgets.

Defenders of Sovaldi’s price note that the oft-cited $84,000 tag isn’t what people actually end up paying once the price has been negotiated down. Nor is everyone with hepatitis C going to get treated. Gilead estimates that Sovaldi will treat roughly 150,000 patients this year in the U.S.

But to Miller, this is all the more reason for a lower price. It would, he says, allow a national campaign to screen people for hepatitis C, and then get them cured. “If the cost were lower, wouldn’t you like to eradicate hepatitis C from the population?” he asked.

Gilead can make a substantial profit even with a lower price, he claims, because manufacturing costs are negligible. The company, he said, “should be able to make a great profit. But the profit shouldn’t be anything the market will bear.”

In other countries, Sovaldi is cheaper. In the United Kingdom, the 12-week course costs $57,000. On Sept. 15, Gilead announced a deal with generic drugmakers in India to produce a lower-priced version of the drug for poorer countries. This is an example of how Americans often subsidize global drug spending.

Sovaldi is expected to get more competition within the United States in the coming months, and its patent expires in March 2029.

Looking ahead, Miller said that other drugs, such as new cholesterol treatments called PCSK9 inhibitors, present an even more daunting payment challenge. He said the new treatments could theoretically be beneficial to 10 million Americans with high cholesterol who cannot tolerate current treatments and are expected to cost $10,000 per year. But unlike Sovaldi, these treatments would have to be repeated, meaning it could boost prescription drug spending by $100 billion annually.

In 2013, cumulative prescription drug spending in the United States was $272 billion, according to a report released in September by actuaries for the Centers for Medicaid and Medicare Services. As defenders of the industry point out, for all the criticism of drug pricing, it represents slightly more than 9 percent of all health spending, the same share that actuaries expect prescription drugs to take in 2023.

Critics of drug pricing from other health sector industries insist that they do not support government intervention, but rather, intend to pressure drugmakers to lower prices. In their comments, there’s an unstated warning to pharmaceutical companies to make their products more affordable or risk government meddling.

AHIP’s Ignagni said the insurance industry’s goal is “to find a private sector solution before anything arises on the public sector side.”

She argued that “hospitals that have pricing that is unsustainable and unaffordable have been challenged to reduce that pricing.”

She went on to explain that, with “everybody in the healthcare arena ... the conversation begins, ‘How can we work to reduce costs?’ ” But, she said, drugmakers represented “the only sector where that conversation is not occurring.”

Miller also pleaded with drugmakers to adjust their pricing voluntarily, before it’s too late.

“We think the market should fix itself,” he said. “But what we’re afraid of, remember, is the government becoming a bigger and bigger player in healthcare every year.”

In 2008, government at all levels accounted for 41 percent of total U.S. healthcare spending. That is projected to reach 48 percent by 2023, according to CMS.

“And so as the government becomes a bigger payer, what will happen is, if these prices keep going up, they’re going to go back to the playbook they understand, which is price control,” Miller warned. “And price controls would be a disaster for pharmaceutical innovation in this country.”

Gilead’s Alton agues that the long-term value created by Sovaldi is so apparent that it would “fare very well in a rational system that evaluates [drugs] on long-term value.”

Reilly of PhRMA said the concept of government interference is “always a concern” for the industry. She used Alzheimer’s as an example of a disease whose victims would benefit from a system that places a high value on innovation.

“If the signal that gets sent is, if you are the company that happens to solve that conundrum, or make significant progress against it, [you are] going to face government price controls, I’m not sure that there is the type of incentive or desire for companies to take that risk,” she said.

Obamacare didn’t pass in a vacuum. It passed after critics of private insurance spent decades pummeling insurers for imposing caps on coverage, denying coverage to individuals with pre-existing conditions, and dropping seriously ill patients. Now, insurance companies find themselves at the mercy of federal regulators who dictate the benefit packages they must offer and limit the amount of profit they may make after paying out medical claims, effectively treating them as public utilities.

Federal lawmakers have levers at their disposal that could pressure drugmakers. Congress could shorten patents, for instance, or allow the government to negotiate drug prices in public programs, or simply pass laws to control drug prices.

Politicians often cite the cost to public health programs when it comes to imposing nanny-state policies such as banning trans fats or smoking in public places. It’s easy to see how, with healthcare costs consuming a growing share of government budgets, there could be a powerful campaign against drugmakers who charge high prices for popular drugs. Drugmakers wouldn’t have much recourse against those in power who see medical innovations as public goods.

“You don’t know what you don’t have yet,” Reilly said. “And the promise of future innovation sometimes gets lost on people.”

For decades, drug companies have lobbied to have it both ways, to reap the benefits of a bigger government while enjoying the profits of the market. But the philosophy underlying big government is incompatible with a free enterprise system that allows innovators to price products based on their market value. And if the pharmaceutical industry hasn’t learned this lesson yet, it probably soon will.


Center for Medicine in the Public Interest is a nonprofit, non-partisan organization promoting innovative solutions that advance medical progress, reduce health disparities, extend life and make health care more affordable, preventive and patient-centered. CMPI also provides the public, policymakers and the media a reliable source of independent scientific analysis on issues ranging from personalized medicine, food and drug safety, health care reform and comparative effectiveness.

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