Charles Clift
Senior Consulting Fellow, Centre on Global Health Security
Kevin Outterson
Associate Fellow, Centre on Global Health Security
John-Arne Røttingen
Associate Fellow, Centre on Global Health Security
The pricing of medicines is under scrutiny as a result of recent controversial company decisions which are putting national health financing systems under severe strain. What can be done about it?
Sovaldi, a hepatitis C treatment, costs $1,000 per pill, or $84,000 for a 12-week treatment course. Photo via Getty Images.Sovaldi, a hepatitis C treatment, costs $1,000 per pill, or $84,000 for a 12-week treatment course. Photo via Getty Images.

The pricing of medicines has always been an issue of great social, political and economic significance across the globe. Early in this century the price of treatments for HIV/AIDS was a cause celebre when patients in developing countries were being asked to pay $10,000 per annum to purchase drugs which would keep them alive – which, of course, the overwhelming majority could not. A combination of public pressure by HIV activists, the availability of cheap generic versions of brand name drugs from India and additional financing from the international community resulted in treatment costs falling to $100 or less per annum. As a result there are now 15 million people globally receiving treatment, and new HIV infections have fallen by one third. It is possible now to foresee the end of the epidemic – something few envisaged 15 years ago.  

Yet the prices asked in 2000 for antiretroviral drugs pale into insignificance compared to those now being charged for some medicines. In 2013 Gilead Sciences received approval for its drug Sovaldi for hepatitis C, selling at a cost in the United States of $84,000 per 12-week course of treatment (or $1,000 per pill), although it is heavily discounted in a group of developing countries. In 2014, all the new cancer drugs approved by the US regulator were priced higher than the equivalent of $120,000 per annum. Most recently a small company, Turing Pharmaceuticals, achieved notoriety by increasing the price of a drug it acquired from another company from $13.50 to $750 per pill. In August this year, the UK competition authorities accused Pfizer, the world’s largest pharmaceutical company, of raising prices for an anti-epilepsy drug to the extent that the NHS’s bill for it rose from £2.3 million before 2012 to £50 million in 2013. 

As the patents on their so-called blockbuster drugs expire, companies increasingly seem to be testing what the market will bear by trying to sell lower volume products at very high prices. But this is not small beer. Mainly as a result of its new hepatitis drugs, Gilead’s global sales rose from $9.7 billion in 2012 to $24.9 billion in 2014 and its net income from $2.8 billion to $12.1 billion.

Thus pharmaceutical pricing is now again rising up the political agenda, particularly in the US where prices are largely unregulated. An electioneering Hillary Clinton has produced a plan to lower drug prices, as has Bernie Sanders, her fellow Democratic presidential hopeful, and Jeff Sachs, the influential economist.

Setting priorities

The fact is that most drugs actually cost relatively little to make. It has been estimated that Sovaldi costs less than $140 to manufacture for a 12-week course. The main controversy is about how much of the return companies make is necessary to finance the research and development (R&D) that leads to new discoveries, and how much represents the monopoly profits conferred by patents (or by the costs competitors would incur in bringing a drug to market) which enable exclusion of competitors for a decade or more. Another controversy is how countries at different income levels and purchasing power should contribute to these returns through different pricing levels.

Pharmaceutical companies base their defence of their pricing policies on the former proposition – without the pricing freedom allowed by patents R&D spending, which is costly and risky, would dry up. And, in any case, drugs like Sovaldi, even at the price charged, more than pay for themselves in the cost of avoided hospital treatments (such as liver transplants). Critics point to the fact that that most companies spend more on marketing, and earn more in profit, than they spend on R&D and that they rank about the same as banks in their net profit margins.

From a public policy point of view the question is how much it is necessary to pay for the R&D we need and if the current system of financing R&D through drug pricing is the best way. Is potential profit the best way of setting R&D priorities? There are many diseases of great public health concern in the developing world which companies are not investing in because there is little prospect of profit – for example tuberculosis, malaria, sleeping sickness and, topically, Ebola.

More relevant in the rich world is the threat posed by antibiotic resistance. Very few large companies now conduct antibiotic R&D because profitability, outside a few niche areas, is very low. As public health authorities around the globe are increasing their efforts to restrict antibiotic use to limit the spread of resistance, and ideally reserving new antibiotics to be used only as a last resort for that reason, it is easy to see that the sums for pharmaceutical companies simply do not add up under the current business model. 

Towards a new model

A Chatham House working group has just published the report Towards a New Global Business Model for Antibiotics which proposes delinking revenues from sales volumes as a way forward. The report proposes that companies would be rewarded for antibiotic R&D in various ways, none of which depend on sales volume, so that it would be possible to earn a satisfactory return on investment even if a new antibiotic was left entirely on the shelf. This also benefits public health by removing the financial incentive to oversell these drugs. Jim O’Neill’s Review on Antimicrobial Resistance has made very similar proposals which it continues to develop. Some companies, such as GlaxoSmithKline and AstraZeneca, also seem favourably disposed. 

As the working group report makes clear, there are many steps still necessary to make a delinked business model operational. If companies can be fairly rewarded for R&D other than through the price of the product or sales revenues, then it opens the way for companies to sell their products at close to their much lower manufacturing cost. That way we might get the R&D and inventions we need at a price we can afford.

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