You can’t put a price tag on Sovaldi (unless it’s over $84K)

Gilead Sciences has developed a new drug (Sovaldi) that cures hepatitis C.

This is a huge deal: about 150 million people world wide are chronically infected with the hepatitis C virus (HCV); according to the CDC 60-70% of people with chronic HCV will go on to develop chronic liver disease, 5-20% will develop cirrhosis over 20-30 years, and 1-5% will eventually die from the direct consequences of chronic infection (liver cancer or cirrhosis).

Sovaldi, which cures patients about 90% of the time with minimal side effects, could change all of this. John Castellani, President of Pharmaceutical Research and Manufacturers of America says that this breakthrough is so valuable, that “you just can’t put a price tag on it.”

But of course, a price tag has been put on it: $84,000 for the 12-week course of treatment (or $1,000) per day.

Pricing of new pharmaceuticals is always a highly nebulous issue; production costs are difficult to ascertain, and trying to incorporate the sunk cost of R&D and of stimulating future R&D makes it harder.

However, Gilead is working to offer lower prices in dozens of developing countries (of the 150 million patients with HCV, only about 1% are in the USA).

To me, this implies one of two things. Either Gilead will be selling the drug in developing countries at a price that allows it to make normal profits (in which case Gilead is capturing enormous rents in the USA market from $84K price tag), or whoever pays for the treatment of patients with HCV in developed countries will be subsidizing the treatment of patients in the developing world.

We might get a little insight into the issue from observing how prices in the USA change in response to the following two possibilities. First, Merck has announced that it could be launching a direct substitute for Solvadi as early as 2016; increased competition might lead to lower prices, but of course, a two-firm market is not exactly the textbook example of perfect competition.

However, it’s not inconceivable that generic drugmakers in countries like India or Brazil might convince their governments to deny patents to Sovaldi. This would mean that Gilead would have to make all its profits from the markets in developed countries, which might increase the drugs price in those markets (but it might not if it turns out that they’re already high enough!)