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Should some patients pay more than others for a new blockbuster drug?

By IMD Professor John Walsh - August 2014

Is a system fair if people pay different prices for the same service? Such "price discrimination" is not only found in economics textbooks—it's also at the center of a debate surrounding a new multi-billion dollar blockbuster drug to cure Hepatitis C.

Economics students typically learn that price discrimination can be in the interest of society. Take the example of a ferry operator who incurs a $10 cost every time he makes a voyage and has two potential passengers: A, who is willing to pay up to $8 for the journey, and B, who will pay up to $4. If the operator is forced to charge everyone the same price, he will never provide the service. If he charges $8, only A will pay and the operator would incur a loss of $2. And if he were to charge $4, both A and B would sign up to travel but the total revenue would not cover his costs. 

If the operator is allowed to charge A and B different prices, everyone is better off. A and B make a voyage they want for prices they are each happy to pay ($8 and $4, respectively) and the operator makes a profit of $2. But what happens when the price discrimination takes place on a global stage with billions of dollars at stake?  

From ferries to pharma 

I was reminded of the ferry example recently when pharmaceutical company Gilead Sciences introduced Sovaldi, a new pill-based cure for Hepatitis C virus (HCV). Its course of treatment lasts only 12 weeks, much less than competing products that require up to 48 weeks. HCV treatments normally require patients to take complementary drugs such as interferon and ribavirin, which can have side effects including depression and skin rashes. Sovaldi's shorter treatment time increases the likelihood that patients make it to the end of the treatment, increasing success rates to over 90%. And for some sub-types of the disease the U.S. Food and Drug Administration (FDA) has approved the use of Sovaldi without these side-effect inducing drugs.  

HCV is a pervasive illness, with an estimated 3.2 million sufferers in the US, or approximately 1% of the population. Untreated, it can lead to liver cancer or cirrhosis and is the leading reason for liver transplants in the US. Treating HCV early, rather than later when graver procedures such as transplants are necessary, is obviously better for the patient and costs less.  

Gilead accepts that competing drugs with longer treatment periods cost less per pill. But it says they cost more in total to treat the illness, and in addition are less effective. The potential savings to insurers and health systems from Sovaldi would justify a high price for treatment. Gilead charges $1,000 per pill, or $84,000 per 12-week course of treatment. 

A pill costing $1,000 has caused outrage among many in US medicine, not least insurance providers, some of whom are refusing to pay for the treatment. But despite the price (or because of it, depending on your view), Sovaldi is on track to bring in over $10 billion in revenue in 2014. This would make it one of the highest-yielding drugs of all time (Lipitor, from Pfizer, holds the record, making $12.9 billion in 2006).  

In part, the fire is fueled by the fact that Gilead acquired, rather than developed, the technology when it bought a company called Pharmasset for $11 billion in November 2011. If 3 million Hepatitis C patients were treated with Sovaldi at the current price, Gilead would have $250 billion of revenue from the US alone, presumably leading to a healthy and quick return on investment.  

Since HCV is a global disease, Gilead is also selling Sovaldi outside the US. Although its price in Europe is similar to that the US, in Egypt and India Sovaldi can be had for $900 per treatment, or approximately 1% of the $84,000 price in the US. Gilead had hoped to avoid the criticism often directed at pharma companies selling high-priced life-saving drugs in poorer countries. In addition, cynics would suggest that Gilead was trying to prevent some poorer countries ignoring its patent and permitting cheap local generic versions of the new drug. In any event, the company found itself having to defend its US price to the US market. 

Time to travel? 

This is where Gilead's pricing reminded me of the ferry operator. His pricing structure is dependent on one key factor—that A can't take advantage of the lower price offered to B. With such stark differences in price for Sovaldi, how can Gilead ensure pills from India don't make it to the US? Although the FDA will prevent the importation of the drug for resale, some form of illegal black market will emerge with mark-ups that would make cocaine distributors envious. So instead of importing drugs, could US and European patients be exported? Perhaps 12 weeks in Sharm el-Sheikh or Goa, in a first-class hotel with $5,000 in spending money, might make a treatment more bearable for both HCV patients and insurance providers.  

John Walsh is Professor of Marketing at IMD and directs Building on Talent (BOT), a program for high-potential managers early in their career looking to take on greater responsibility.

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