Drug profits go to shareholders, not innovation
With high drug prices still in the political crosshairs on Capitol Hill, pharmaceutical industry bosses are at pains to explain why a cure for hepatitis C has to cost a budgetbusting $1,000 per pill, or a promising cancer treatment should carry a list price of $373,000.
That duty most recently fell to John C. Martin, the executive chairman of Gilead Sciences, which happens to be the owner of both of those stratospherically priced drugs. In an interview published Friday in the Wall Street Journal, Martin listed a few reasons for the controversial pricing. One is that average Americans overestimate how much drug prices contribute to overall healthcare costs and how much drug manufacturers themselves pocket from list prices. Another is that drugmakers need big profits so they can “continue to innovate.”
Martin didn’t get much pushback in print from the interviewer, Tunku Varadarajan, a former Journal writer and editor who is a fellow at the conservative Hoover Institution at Stanford University. So we’ll unpack these representations instead.
To begin with, the evidence that Gilead itself uses its profits to “innovate” is thin at best. In 2016, the company reported profit of $13.5 billion. It spent $11 billion to repurchase its own shares, and about $2.5 billion on stock dividends. So the buybacks and dividends together came to $13.5 billion, in effect consuming 100% of the company’s profit.
All that spending benefits shareholders — the repurchases prop up the value of their shares and enhance their gains when they sell, and dividends are, of course, a direct payout. Innovation? Gilead spent $5 billion on research and development, according to its annual report.
In 2015, a similar phenomenon reigned. Gilead recorded $18.1 billion in profit, and spent $10 billion of it on buybacks and $1.87 billion on dividends. R&D cost $3 billion. Since 2011, the Gilead board has authorized stock repurchases totaling $37 billion, of which $9 billion was still unspent as of the end of 2016. Gilead declined to comment for this column.
Gilead doesn’t do much
research and development itself. Instead, it has acquired firms that have done the heavy lifting and market their successes. It acquired its blockbuster hepatitis C drug, Sovaldi, by paying $11 billion for the drug’s developer, Pharmasset, in 2011. Its promising new lymphoma treatment, which will be branded Yescarta, came via a $12-billion acquisition of that drug’s developer, Kite Pharmaceuticals, announced in August.
Martin’s general theme is often heard from Big Pharma. “The approval of a drug,” he told Varadarajan, “is the culmination of many years of hard work by dozens, sometimes hundreds, of scientists, with at least as many dead ends as new insights, supported throughout by major investments with no guarantee of return.”
The industry estimates it costs $2.6 billion on average to develop and win marketing approval from the Food and Drug Administration for a new drug. That benchmark is typically accepted as gospel, as it was by President Trump during a photo opportunity in January with a passel of drug company executives. But it’s open to question. Its source is a series of surveys out of a Tufts University institute that is heavily funded by the industry. The surveys’ raw data are confidential, so outsiders have no way of knowing if they’re representative of industry experience generally.
Gilead’s Martin points out that prescription drug prices generally have remained stable as a share of total healthcare costs. The industry maintains that prescriptions account for about 14% of spending year after year, growing at about the same pace as other healthcare costs. But that generalization conceals the impact of high prices for some specific treatments. Martin acknowledged that the cost of Sovaldi, the company’s wonder cure for hepatitis C that won FDA approval in 2013, was a shock to budgets. The drug, which was priced at $84,000 for a 12-week, one-pill-a-day regimen, had a cure rate of more than 90% and none of the side effects of the previous therapy, interferon.
Demand was torrential, with much of the cost burden falling on public programs such as Medicaid and Medicare. In 2014, Medicare actuaries pegged the oneyear leap in prescription drug costs for the program at 12.6%, almost all of which was due to Sovaldi.
Gilead rationalized the price by noting that the near-term cure of hepatitis C meant even greater savings over time from a reduction in liver disease; but that was cold comfort to public budget makers and private insurers. They were faced with the prospect of laying out millions of dollars in a single year for benefits that would appear over decades, often reaped by other insurers or programs.
The near-term consequences included rules that limited approvals for the new drug to the sickest patients — ironically, those who probably would benefit from Sovaldi the least. Because of the price, potentially millions of hepatitis sufferers went without a cure, if temporarily, until the company and insurers were able to work out discounts.
Evidence produced in 2015 by the Senate Finance Committee showed that Gilead executives didn’t spend much time on the consequences for patients deprived of the cure by budgetary pressures. Instead, they calculated how high they could set the price of Sovaldi without shrinking its potential market so much that total profits would fall. The executives concluded that Gilead could make a profit by charging $55,000 per 12-week treatment. But the company decided to charge $84,000, which would deliver higher profits, albeit from fewer patients. A follow-on drug known as Harvoni, which incorporates Sovaldi, was introduced in 2016 at a price close to $100,000 for a full treatment.
Gilead at first refused to offer anything but minimal discounts to big insurers and Medicaid programs, even though they acknowledged that thousands of patients might have to go without the treatments. The company didn’t seem concerned about a public backlash over its pricing, figuring that complaints from patient advocates wouldn’t lead to problems with regulators or legislators. “Let’s not fold to advocacy pressure … whatever the headlines,” one top executive counseled his colleagues.
It’s certainly true that drug development doesn’t come cheap. But there’s reason to believe it doesn’t cost nearly what the industry claims, and no reason to believe that the enormous profits reaped on some drugs get funneled back into research and development. When drug companies have a potential blockbuster in hand, they’ll charge whatever the market will bear to maximize profits. And funding “innovation” isn’t always the goal.