A New Approach to Pharmaceutics:
Gilead Sciences and its Cure for Hepatitis C

Many viruses in the world today still have no cure or vaccine. Ebola and HIV are two of the more well-known viruses that are currently treatable but not curable.  Until recently, hepatitis C was another to fall under this category of viruses.  Hepatitis C is a contagious virus that attacks the liver, leading to inflammation, scarring, and potentially cancer.  Of patients infected with hepatitis C, approximately 75-85% develop a chronic condition.  In the US, over 3 million people are affected with chronic Hepatitis C.

Gilead Sciences Inc., a research-based pharmaceutical company specializing in HIV and hepatitis treatments, made headlines this past summer by announcing the first cure for hepatitis C.  The research-based pharmaceutical company presented Sovaldi, a 12-week long pill treatment shown to cure hepatitis C in over 90% of patients.  Already, Sovaldi is on pace to become one of the world’s best selling drugs. Gilead reported $6 billion in sales in only the first half of the year (Sovaldi has only been developed for half of a year), which is on pace with the record for first year drug sales of $12.9 billion.  These numbers are no surprise – scientists are praising Sovaldi as a huge step in the future of hepatitis C treatment. However, the number that is generating more surprise, as well as criticism, is the price tag on Sovaldi.  For a 12-week treatment course, Sovaldi costs $84,000.  At one pill per day for 12 weeks, the cost boils down to $1,000 per pill.  Despite the drug’s remarkable success at treating hepatitis C, a formerly non-curable disease, doctors are hesitant to prescribe Sovaldi, opting instead for alternative treatments that treat symptoms but do not cure the actual disease. Gilead defends this cost by stating that Sovaldi’s price reflects its medicinal value. Unlike the long-term or indefinite treatments for other diseases in the same market as hepatitis (HIV and cancer to name two), Sovaldi offers a cure that significantly reduces long term costs albeit at a somewhat high initial cost. So if treating HIV is like paying the mortgage on your house, Sovaldi is the equivalent of buying your house in full at the start. While the former demands more reasonable payments, over time, the latter yields the lower cost. The CDC estimates lifetime cost of treating HIV to be approximately $380,000, much higher than the cost for Sovaldi – yet the public outcry is smaller because the annual bill is much lower. Although the long-term savings sound fruitful, the high immediate cost still carries a burden, especially on insurers.  The way healthcare is structured currently in the United States, costs are usually predictable.  Although costs may pile up after many years, healthcare insurance providers can see the progression and vary the insurance premium accordingly.  Sovaldi introduces many significant changes to this system. To begin, we look at the built-up demand for the drug.  As the first cure for hepatitis C, Sovaldi faces demand from all patients in the past that have only now are being presented with the option of a cure.  In the future, the demand for Sovaldi may become more predictable, becoming dependent upon the incidence rate of hepatitis C.  Currently however, there is a large immediate consumer demand for Sovaldi, resulting in an immediate and unpredicted shock on the healthcare system. Furthermore, insurers that pay for Sovaldi take on huge risk.  After all, the drug comes with a huge price tag.  Kaiser Family Foundation, a health care research group, estimates that Medicare drug benefit premiums could increase by 3 to 8% - assuming that only a fraction of eligible seniors receive the treatment.  If every Medicaid patient receives the treatment, states could be liable for $55 billion, as Medicaid requires states by law to pay for any FDA approved drug. Private insurance companies are hesitant to cover Sovaldi despite its long-term savings because people change insurance providers frequently.  Paying for one patient’s Sovaldi treatment is an investment that may yield a loss if the patient switches providers later – as is often the case when patients switch jobs or become eligible for Medicare.  In this scenario, the first insurance provider becomes unable to earn back the initial investment in Sovaldi, while the second insurance provider receives the benefit of covering a patient with a now healthy liver.  Economically, the patient will face a lower premium from the new insurance provider, giving more incentive for the patient to switch providers.  All of the above result in a large risk to the provider of Sovaldi. Assuming the drug progresses past the initial crisis, Sovaldi produces results beyond that of a typical treatment.  Many patients with hepatitis C end up with permanent liver scarring and life-threatening liver damage.  A liver transplant typically costs nearly $600,000, much more than the cost of a 12-week Sovaldi treatment.  Because Sovaldi cures over 90% of hepatitis C patients, it can also drastically reduce the spread of hepatitis C, effectively eliminating the future healthcare cost of treating hepatitis C.  Eventually, the built up cost of curing years of untreated hepatitis C will pass.  It remains to be seen whether these long-term benefits outweigh the initial cost. Moreover, Gilead Sciences has received further criticism for its deal to sell cheaper Sovaldi generics in poorer countries.  The general pharmaceutical business model is as follows:  companies research and develop a drug, perform clinical trials to validate success, and patent the drug to protect profit from the initial sales of the drug.  The patent is crucial to a drug’s profit – it allows the drug to be sold at a higher price than a competitive market would determine, and protects the drug from other manufacturers. After a patent expires, other companies are free to manufacture their own versions of the drug, termed generics, and sell for much lower prices to join in the market.  The typical pharmaceutical company aims to maximize sales before a patent expires – a generic typically signals the end of the profit reaping stage. In an interesting and innovative development, Gilead Sciences has signed deals with seven generic drug makers in India to sell lower cost versions of Sovaldi there. Gilead will price the generic at 1% of the United States Sovaldi cost, and the generic drug companies will likely price their generics even lower. In pharmaceuticals, the main cost of producing a drug is the research and development stage, where scientists design and optimize the drug formulation.  Once it becomes FDA approved, manufacturing a pill may cost only a few cents.  Gilead and its generic counterparts therefore, are still taking in profit at 1% of Sovaldi’s price in the United States. This unusual step in Gilead’s business strategy is uncommon, but the intentions are clear.  While over 3 million patients in the United States are infected with hepatitis C, the prevalence worldwide is much higher.  Since the cost of manufacturing more Sovaldi pills is now relatively negligible, Gilead is able to maximize its profit by targeting a larger consumer base.  Gilead and its seven partners will sell generic versions of Sovaldi in 91 developing countries where more than 100 million people are infected with hepatitis C.  According to the deal signed by Gilead, its seven partners agree to pay royalties to Gilead for manufacturing generic Sovaldi pills. With this deal, Gilead seeks to market Sovaldi to the huge number of hepatitis C patients worldwide that are waiting for a cure before Sovaldi’s patent expires.  Furthermore, Gilead hopes to avoid the criticism that befell companies developing expensive HIV/AIDS treatments a decade ago, where people around the world viewed the new HIV/AIDS treatments as immoral because patients in Africa and other developing nations who could not afford the treatment were consigned to die.  By selling two versions of Sovaldi – an official form in the United States and a generic form worldwide in poorer countries, Gilead markets Sovaldi to a wider consumer base. This business decision comes with a fair amount of criticism.  The deal does not allow Gilead’s partner companies to sell Sovaldi generics in some middle-income countries, where the $84,000 price tag is strictly speaking affordable, but in practice, out of reach.  Furthermore, Gilead faces criticism for the high price of Sovaldi in the United States, given the knowledge that the company still makes a profit when selling the generic form for 1% of its cost in the United States. In an effort to suppress critics, Gilead has been working on optimizing their hepatitis C treatment options to hopefully lower the cost in the United States.  Only very recently in October, Gilead won FDA approval for Harvoni, a second generation of Sovaldi.  This new drug, priced slightly higher at $1,125 per pill compared to Sovaldi’s $1,000 per pill, has a 99% success rate compared to Sovaldi’s 90% success rate. In clinical trials, most patients were able to take Harvoni for only 8 weeks compared to Sovaldi’s 12 weeks, resulting in a total cost of $63,000, lower than Sovaldi’s $84,000.  A replacement of Sovaldi with its second generation form, Harvoni, could potentially mitigate the shock to the healthcare system in the United States and suppress criticism over unfairly high costs. In the end, Gilead’s pricing strategy is not unheard of – it boils down to a concept of selective pricing.  In the market for a hepatitis C vaccine, consumer demand is largely determined by consumers’ economic status.  In less developed or developing countries, expensive drugs are out of reach and achieve a low demand among patients – Gilead would fare well to lower the pricing in this scenario. In more developed countries, it may be worth maintaining a high price because a decent fraction of the consumer base can afford it.  The business strategy is grounded in economic theory.  But Gilead is the first to bring this innovative strategy into the pharmaceutical business market.

  • Richard

    I agree. A wise businessman in the Caribbean named Sir Kyffin Simpson always said that the key to success is progression and humility, and clearly he’s done very well for himself as a self made man!

  • John Andrews

    The Airgain IPO launches this week, and they’re a one-brand company.

    Some investors don’t think it’s a good stock though:

    http://seekingalpha.com/article/3997291-risky-signals-antenna-maker-airgain-launches-ipo

  • Cincinnati World Cinema

    Well said, Joe, and worth rereading on a regular basis! Another advantage of small-to-midsize city living is pace and competition. Living in NYC, LA and SF entailed a hectic pace, hallmarked by capital S striving, as one realized there were a ton of others doing what I do. Spending so much time in one’s car in SoCal meant much less time for quality pursuits and pleasures. A smaller pond with relaxed pace allows one to savor life and special moments.


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