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Drug costs and prices: Here we go again

The views expressed are those of the author and are not necessarily those of Scientific American.

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Gilead's hepatitis C drug sofosbuvir (Sovaldi)

Misleading statements and conclusions regarding drug costs and prices are again being thrown around. It started with a post right here on Scientific American Blogs with the title “The Quest: $84,000 Miracle Cure Costs Less Than $150 to Make”. As the title indicates, the post is about a new hepatitis C drug called Sovaldi developed by Gilead Sciences. The $150 was the manufacturing cost, the $84,000 was the price. The medicine is considered a real breakthrough and both Gilead and its shareholders have been rewarded with handsome profits during the last quarter. Sovaldi is also regarded as a first-in-class treatment for what was always considered a highly refractory disease.

To its credit the piece was measured and did make the point that the $84,000 was less than the hospitalization and liver transplant costs incurred by hep C patients until now. But unfortunately I think the title of the post was inevitably misleading because it made it sound like every extra penny in addition to the $150 was a profit margin. It also did not put the cost of developing the drug in the context of the very significant barriers to new drug development in the form of formidable scientific challenges, patent cliffs and FDA hurdles. The fact is that drug pricing is a very complex beast and while the system is definitely in need of reform and rational thinking, comparing actual drug production costs with price is basically a futile endeavor that is far more likely to mislead than to enlighten.

Was I mistaken in thinking the title was misleading? Not really. A day later, a Facebook post by Scientific American highlighting the same post ran with the headline “Profit Margin for Hep C Drug: Approximately one gazillion percent”. This headline is egregiously, woefully wrong: the quarterly profit margin for Gilead was 44% during the last quarter, but the standard profit margins for pharmaceutical companies are about 20%. The title is grossly simplistic and says nothing about the cost of discovering (not manufacturing) the drug. Scientific American has 1.7 million followers on Facebook so this title is going to mislead quite a few, as is evident from the comments section of that post.

The bigger question to ask is, why are the profit margins so apparently high for Sovaldi? And that’s a question the post did not address. The fact is that this class of hepatitis C drugs constitutes a real breakthrough in the treatment of the disease, and one that has been sought for decades. Until now the standard of treatment for the disease consisted of a combination of PEGylated interferon and ribavirin, a stop-gap measure that results in debilitating flu-like symptoms acutely affecting quality of life. The new class of medications directly targets a viral protein called a polymerase that the virus uses to make new copies of itself. It hits the source and is, by any definition, a vastly superior treatment compared to what we had before. For years the pharmaceutical company has been rightly lambasted for making “me-too” drugs, medicines that are marginally better than what existed on the market and whose high sales and profits are driven mainly by aggressive marketing rather than by real benefits. In this case we actually have a novel drug that provides real benefits, a significant achievement on the part of drug research that needs to be appreciated. Let’s criticize high costs, but let’s not ignore the improvements in quality of life for patients that simply did not exist before. And let’s not fail to congratulate the teams of researchers who actually discover these novel medicines floating in a sea of me-too drugs; it’s as big a testament to human ingenuity and perseverance as anything else in scientific history.

Does the price of Sovaldi sound high? Undoubtedly. But that’s when I invoke my own “Law of Large Numbers” which roughly says, “The kind of reaction you have when you see a large number seldom has much to do with what that number really means”. As with many other numbers we have to put the price in context. As the original post notes, it’s still lower than what the price of hospitalization and liver transplants would have been. If you have insurance then your insurance company – encouraged largely by this comparative calculation – should take care of it. Is it still not accessible to a vast number of people in poor countries? Of course; I would like that to happen as much as anything else, especially since hep C is still a disease that puts most of its burden on the poor. But it’s at least accessible to a few people whose quality of life will now be much better and it’s still better than nothing. That’s an important step in the right direction. As happened with AIDS drugs, at some point the medication will in fact become cheap enough, especially when generics take its place a few years down the line. But none of this would have happened if pharmaceutical companies stopped making profits and had to shut down because they couldn’t recover R&D costs.

The most important context we need to understand again is one that is often neglected: a comparison of the price with the high cost of drug discovery and development rather than manufacturing which is always going to be low. The bare fact of the matter is that it takes about $5 billion to develop a new drug and this has little to do with profit margins. As a hypothetical example, even if the profit margin on Sovaldi was 0% it would still cost about $50,000 dollars and you would still hear a lot of criticism. The cost of a drug is not $5 billion because there’s much profit to be made – as I indicated above pharmaceutical profit margins are about 20% – but because drug discovery is so hard. One can quibble about the exact number but that would only serve to obscure the real challenges. I have written four posts on the complexities of drug discovery science and I intend to write more. The reality is that Sovaldi would not have been invented in the first place had companies like Gilead not put enough money from profits into the R&D that went into its development. And sure, some pharmaceutical CEO’s make obscene bonuses and and we need to have important conversations about that, but even that part does not significantly contribute to the high costs.

One thing I find amusing is that the same critics who talk about high drug costs also seem to have some kind of an exaggerated picture of drug company scientists as infallible oracles, discovering drugs with their left hand and then sitting back in their sleek sofas, cackling and waiting for the shower of green. But the truth could not be more different. As a drug discovery scientist I have very few moments when I actually think I am any closer to discovering even a new lead, let alone a new drug (and sadly no, I am also not rolling around in money). As I have quoted another scientist in one of my posts, the reason why drugs cost so much is not because we are greedy, it’s because we are stupid. A lot of the times we feel the way Yamamoto must have felt in 1943, knowing that he was about to fight a war of attrition that he could not possibly win.

Drug discovery is one of the most wasteful research activities on the planet and it’s all because most of the times we have no idea of how to go about discovering a new drug or what’s going to happen when we put it inside the human body. The complexities of human biology thwart us at every stage and luck plays an inordinately large role in our success. Even basic issues in drug discovery – understanding how drugs get past cell membranes for instance – are generally unsolved problems, and the profligate inefficiency of the process would truly shame us if we knew how to do it better. The path from a new idea in pharmaceutical research to an actual drug is akin to a path trodden by a blind man along the edge of a cliff at night; any survival, let alone success, seems like a miracle in retrospect. No drug scientist will admit it, but every drug scientist crosses his or her fingers when a new drug makes it to the market because we are just not smart enough to figure out exactly what it will do in every single patient. That is why most drugs fail in advanced clinical trials, when hundreds of millions of dollars have already been spent on them.

The scientific challenges in drug discovery are a major reason why drugs are so expensive. Of course manufacturing costs are going to be low; once you have wasted so much money on R&D and hit the right solution you only have to make the actual substance (and I don’t say “only” lightly here). Would one also decry the low manufacturing costs of integrated circuit boards and ignore the massive, extensive, often unsuccessful developments in R&D that resulted in the system being able to beat Moore’s Law? It’s the same for drug discovery, except that in this case nobody has any idea how we would even start to approach Moore’s Law, let alone beat it. So criticize drug costs and CEO bonuses and profits all you like – and continue to have a much needed debate about healthcare costs in this country – but keep in mind that those numbers are more likely to wildly obfuscate than educate if you take them at face value.

Ashutosh Jogalekar About the Author: Ashutosh (Ash) Jogalekar is a chemist interested in the history and philosophy of science. He considers science to be a seamless and all-encompassing part of the human experience. Follow on Twitter @curiouswavefn.

The views expressed are those of the author and are not necessarily those of Scientific American.

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  1. 1. Christine Gorman 4:10 pm 04/24/2014

    Hi Josh,
    Glad you are bringing more eyeballs to this issue. As the writer of the original post, I agree that pharmaceutical companies deserve fair recompense for their research and development costs.

    But as you know, and as I discussed in the comments that accompanied the post, R+D expenses are becoming unsustainably stratospheric. If the true costs of new drug development are really $5 billion per successful medication then maybe the pharmaceutical model is broken.

    Many in industry are aware of this–including at one time Gilead–which participated in discussions about alternatives that delink R+D expenses from medication prices (See

    Despite the headline of your post “Here we go again,” I think you might find that this time is different.

    Link to this
  2. 2. Christine Gorman 4:16 pm 04/24/2014

    Sorry, mistyped. Ash, not Josh

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  3. 3. Chryses 6:24 pm 04/24/2014

    Thank you for a refreshing dose of reality. It was due and overdue.

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  4. 4. z34aa 7:13 pm 04/24/2014

    The idea of delinking R&D in the article you linked doesn’t seem to do anything about how much it actually costs to develop the drug, at least if I’m reading it right. It seems to be talking more about shifting the cost away from the recipient and onto governments and donors.

    A possible problem I can see is that in these days of fiscal belt tightening getting any government, or all governments combined, to budget the sum needed for this doesn’t seem likely. Using Ash’s 5 billion per new drug, how many drugs can we expect those funding the project to actually fund? And of course, that doesn’t even take into consideration the companies developing the drugs making a profit.

    As for the 5 billion cost to produce one drug meaning that the pharmaceutical model is broken…I don’t know. It doesn’t seem so much to be a model as much as an insurmountable obstacle. Changing how the drugs are paid for won’t change the actual costs, and I’m sure if the pharmaceutical companies knew of a way to bring down the R&D while still being able to produce the medicine, they would be doing so.

    It would be interesting to know how much world wide pharmaceutical R&D costs are. It could have a substantial impact on how feasible the delinking idea is.

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  5. 5. z34aa 7:28 pm 04/24/2014

    Ah, I read over the linked article on delinking again and on a second read through noticed that it was talking about drugs for developing countries.

    It seems like a pretty good idea to me from that vantage point. Give the pharmaceutical companies a big roll of cash, metaphorically speaking, that covers the manufacturing costs, plus a hefty profit, and give the drugs to people who never could afford the price in America. The drug companies were never going to see the drugs bought from the people this is meant to help in any case, so any profit from giving them the medication is better than no profit at all.

    The one problem, and the problem that probably makes the pharmaceutical companies hesitant, is that of a black market in the drugs developing. If the cheap medication meant for people in the developing world is instead smuggled back into first world countries, it could cause a big problem for their bottom line.

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  6. 6. vapur 12:50 am 04/25/2014

    Start with the low-hanging fruit: rich people who can’t wait to be rid of an STD and the attached stigma. Once they supplement the cost of research for a few years, then costs will come down to where they should be so that the poor can afford it (or government programs).

    While they need to take into consideration how long they can exploit drug pricing under patent protection, they might need to worry about medical tourism to poorer countries where they broker price deals (which the most capable [rich] may take advantage).

    Profits from their other products, expected profits overtime from this one, and government grants should cover the cost of the research. Rolling it all into one medication’s cost makes it so unaffordable and causes unnecessary suffering to continue. It appears the convenience of profit has a greater priority than providing healing to the worldwide community. Of course, do as they will, but on the surface it looks bad.

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  7. 7. CPO_Ryback 7:05 am 04/25/2014

    Right on, Ash. If that pharm had FAILED — would Ms. Gorman have helped pick up the lives of the MD/PhDs who risked much?

    Of course not. Like 99.99% of people, she wants all the upside — for free or one penny.

    Well, news-flash, madam: MD/PhDs don’t work for free.

    That is HARD, difficult work, 1000% harder than writing “critques” or being a lawyer. Fear of failure is intense.

    Inventors — with thinking like that B.S. of Ms. Gorman, don’t stick out your necks.

    Find a nice, easy government job that lets you loaf 40% of time, and have a life.

    Ignorance is epidemic and huge today — don’t waste your lives, battling penny-pickers who don’t want to pay you.

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  8. 8. CPO_Ryback 7:11 am 04/25/2014

    Also, her column was a dumb and ignorant as Obama’s people doing the Medicare data-dump, and all the uproar that some MDs made “huge money.”

    Then .. over the days .. it was discovered that those MDs did certain treatments that were lumped together and warped the data-dump.

    Shades of “well .. never mind.”

    “Writers” like Ms. Gorman will have the USA living in caves, with her “critiques.” No one will want to work for nothing. The USA can be France and Greece. Great.

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  9. 9. curiouswavefunction 11:07 am 04/25/2014

    Hi Christine, thanks for your comment; the “here we go again” title of the post was not really about your post as it was about reactions to it. I couldn’t agree more that a system in which it takes $5B to discover a drug is unsustainable and broken. What I want to emphasize is that a significant reason for this is the formidable and exceedingly higher scientific barriers in drug discovery and this is something that’s often not appreciated. I think there are a lot of both scientific and non-scientific solutions to lowering drug research costs, but the fundamental problems with the science aren’t going away anytime soon. Nor are FDA regulations which – in many cases rightly – set higher and higher bars for new drugs.

    You make a good point about competition, but I don’t think competition is a problem with pharmaceutical research since any company which thinks it can reduce cost will make every effort to do so. I think the bigger problem is the lack of sharing of data which basically results in people reinventing the wheel and being unable to learn from each other’s mistakes. And it’s also the FUD (fear, uncertainty and doubt) which plagues scientists working in the industry today, especially in Big Pharma.

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  10. 10. GaryLG 2:00 pm 04/28/2014

    Oh please, enough with the “poor drug comapnies and the cost to develop drugs. Here’s the real facts and until those change, I hope they get regulated and forced into fixed reimbursement:

    1. Average net profit by the top ten pharmacy companies per year is more than $70 billion EACH.

    2. Pharmacy companies spend almost 20 times more on marketing and sales than they do on research

    3. The US market accounts for more than 75% of the total annual net profit every year.

    And we could easily go on. All of this information is in public records so I won’t bother quoting sources. As far as I’m concerned we can nationalioze all of the drug companies and fund research that is in the best interests of the public from the profits obtained. Not to mention increasing production of critically needed generic drugs that Big Pharma has stopped because of lack of margin. Or how about the orphan drugs and research. And if the current companies want to whine and moan about the cost to bring a drug to market, they should welcome becoming nationalized to take the pressure off of them.

    I could go on for pages. This defense of the pharma industry is completely ridiculous and insane. I assume the author is trying to get a job with pharma somewhere, or is simply completely oblivious to reality.

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  11. 11. Oldchemist4 2:11 pm 04/28/2014

    When I was in big pharma and needed to respond to comments about the cost of drugs, etc. in a social situation, I said (quite truthfully) that “You are not paying for the drug. You are paying for all the things that didn’t work.”

    About a dozen years ago the cost of a new drug was estimated at $802MM in a study by Tufts. Not having any market analysis resources of my own at that time (2002), I looked at Merck’s performance since 1985 – at that time the gold standard for big pharma. I added up all the R&D dollars noted in the annual reports, corrected for inflation, and divided by the number of New Chemical Entities (I ignored new vaccines as I didn’t know that field). The results was $936MM (in 2002 dollars). Corrected for the last 12 years of inflation, that number should be about $1.5BB today.

    Hitting the wall – the cost-point where R&D expenses can never be recovered – is a real problem. But I would blame financial market expectations more than complex science or regulatory burdens. Simply to keep a company’s stock price stable there must be increasing profits year-on-year; to obtain and increase in stock price, profits must increase at more than a linear rate over time. Indefinite revenue growth is not a sustainable business model regardless of what business is being performed.

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  12. 12. Oldchemist4 2:21 pm 04/28/2014

    Missed two points. First, when I would be asked about big pharma’s spending more on advertizing rather than R&D, I would simply ask “What consumer goods company doesn’t spend more on marketing than anything else they do?” I never got an answer; that criticism is a cheap shot and uninformed.
    Second – despite my comments, I will not defend big pharma. The industry has a complete lack of vision and is a failing organizational model. “Bigger” is not “better”, and “more” is not “good”; “better” is better, and “good” is good. Let’s start there.

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  13. 13. Bryan H 7:49 pm 04/28/2014

    First, the author of this piece works for a biotechnology company. This potential conflict of interest is not clearly disclosed in the piece itself or the author’s biography.

    Second, I’m not sure where you get the number that Sovaldi would cost $50,000 with a zero percent profit margin. While I agree with the author that drug development is expensive and using $150 as the cost of the drug is ridiculous, its also true that the $84,000 price tag reflects more than just the cost of R&D. For example, in its first quarter of sales, Gilead made $2.2 billion in sales, so at the current price it would seem to have no trouble recouping the costs of R&D even if they significantly exceed $5 billion.

    Thus, Sovaldi’s pricing is not, in fact, based on the cost of the drug but rather on the market’s ability to pay for the drug. Indeed, Hepatitis C is prevalent among low income individuals (who are covered by Medicaid) and in prisons (according to the CDC 1 in 3 prisoners has HCV). Because the US government is legally barred from negotiating drug prices, Gilead must know that it can charge very high prices for Sovaldi in the US. Thus, at heart, the issues are economic, not scientific. The high price of Sovaldi in the US does not reflect R&D cost, but the failure of public policy in the US to institute adequate controls on healthcare spending.

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  14. 14. z34aa 8:42 pm 04/28/2014

    @Bryan H

    “First, the author of this piece works for a biotechnology company. This potential conflict of interest is not clearly disclosed in the piece itself or the author’s biography.”

    While it is true that it is not stated plainly anywhere, that I can find at least, that Ash works for a biotechnology company. The third paragraph from the bottom of the article shows that he isn’t actively trying to hide the fact.

    I have always found it somewhat annoying when people act like working in an industry, or in someway being connected to it instantly means anything that person says is a lie meant to make their boss look good. Not that you seem to be doing that Bryan. Your pointing out Ash’s working in the biotech industry and thus having a potential bias seems fair enough to me, even if it doesn’t seem needed all that much with the paragraph I indicated saying it in so many words. But I hate it when other people dismiss points out of hand because of someones association, irrespective of their value or truthfulness. Not even giving consideration to such people seems ill advised when there is a good chance that their understanding of a field is much better than most anyone else who might weigh in.

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  15. 15. larkalt 10:19 am 04/29/2014

    @z34aa Exactly, discounting or ignoring what people say because they have a vested interest – means discounting and ignoring expertise that disagrees with you.

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  16. 16. borhani 10:33 am 05/1/2014

    Solvadi actually targets the HCV NS5B RNA-dependent RNA polymerase, not the viral protease.

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  17. 17. curiouswavefunction 11:20 am 05/1/2014

    Thanks, fixed.

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  18. 18. LanceMH 12:08 pm 05/1/2014

    I have no problem with drug companies charging the requisite amount money necessary to make profits. Otherwise there would be no incentive to do the R&D, nor manufacture the drug.

    However, I would like you explain to me why I can get my prescription for Lamotrigene (generic Lamictal)in Canada for 1/10th the cost I would pay in the U.S.? Of course, it’s a rhetorical question.

    The answer is that Big-Pharma owns Congress, so the FDA regulations literally “price-fix” the drugs by limiting who can import/sell in this country. Please don’t give me the “we have to protect our citizens from tainted drugs”, etc. Most drugs are manufactured in Third World countries, and the testing procedures in Canada are just as rigorous as the U.S.

    The fact of the matter is that drug pricing in the U.S. is controlled by Big Pharma. And Medicare Part D, as well as ACA (Obamacare) would not have passed in Congress WITHOUT the “blessings” of Big Pharma Lobbyists. In fact, Medicare Part D was the Bush Administration and Republicans “thank you” to Big Pharma for helping them get control of the White House/Congress (Campaign $$$$).

    Even the Obama Administration made no bones about the fact that they were among the first one’s invited to sit at the conference table in the White House when that law was first contemplated.

    So another rhetorical question, “Why”?

    The question answers itself . . . just look at “the river of ‘dirty’ money” running from K Street Pharma shops to the White House and Congress.

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  19. 19. sciencebasedmedicine 12:57 pm 05/1/2014

    No LanceMH, you are wrong. The situation is far more complex, and your suggestion that all of the questions you ask are rhetorical shows quite clearly you have not thought deeply about this complex issue.

    The reason drugs are more expensive in the US vs other countries is that in the US pharma companies set the price of drugs, while in other countries some other government body sets the price. Pharma companies have a choice to make regarding selling their products in other countries: they can either sell them at a reduced price and make a little bit of money, or they can maintain the same price as in the US and make no money in other countries (because the government entities will not pay for them). They choose to make a little bit of money rather than none.

    The reasons the US government has chosen to maintain this structure are complex and boil down to a whole lot more than “pharma is paying everyone off.” Give me a break, stop being so lazy, dig deeper. Congress also has a choice to make: they can allow prices to be very high in the US relative to other countries, and in so doing support a healthy drug discovery and development enterprise, at the expense of Americans and to the benefit of all of mankind. Or they can overturn pharma’s pricing power in the US, turn that power over to some agency, and force pharma to sell their products for much less. Why don’t they do this? Ask yourself that question. Is it really because ALL of them are being paid off by big pharma? Really? Or is it because there’s a very real risk of destroying the entire industry by doing so?

    Surprisingly enough, some members of congress see actual value in the pharmaceutical industry. If you can’t see the value that some of the industry’s products bring, then frankly you’ve lead a charmed and sheltered life, and I congratulate you on never having had to watch one of your loved ones suffer.

    The industry as a whole DEPENDS on strong profits to stay in business. This is difficult for many to understand, because they can’t understand that there are industries that operate on a different business model than Walmart. Simply put, if Wall Street loses faith in the ability of pharma to produce a return on investment, Wall Street will stop investing in pharma, and the industry will cease to exist. That is a fact: pharma’s very existence is fully dependent on outside investment. Would some drugs continue to trickle out of academia? Sure – and with 1/1000th the funding and a corresponding rate of production. Congress understands this to be true, and as imperfect as the system is (namely, the rest of the world leaches off of American investment), it produces life-altering products that are nearly guaranteed to be extermely cost effective, if not right away then in some reasonable amount of time once the drugs are off patent.

    So give us all a break with your pharma-congress conspiracy bs, and realize that most people (in congress AND in pharma) are doing the best they can within the bounds of medical science to balance long term costs and investment and ultimately provide a net benefit to humanity.

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  20. 20. borhani 3:35 pm 05/1/2014

    @18, LanceMH: Lamictal (lamotrigine) was invented by Wellcome…the patent describing it is from 1980 (EP 1980-103032; “1,​2,​4-​Triazine derivatives, pharmaceutical compositions and intermediates utilized for their preparation” Baxter, Elphick, Miller & Sawyer). At the time, Wellcome (now GlaxoSmithKline=GSK) was a British company, and the invention of lamotrigine occurred in Wellcome’s laboratories in England.

    I think @19 has it right. The situation is very complex, and even ex-US companies use the higher prices obtainable in the US to recoup the costs of all the drugs that *don’t* make it to market (and also to maintain some very attractive [to shareholders] profit margins).

    By the way, generic lamotrigine has been available since 2005 (and in all dosages since 2008). If it’s not a lot cheaper than brand-name Lamictal, then complain to Teva (and Israeli company) or others who manufacture and/or sell it.

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  21. 21. MikeW6 3:16 pm 05/7/2014

    Gilead had nothing to do with discovering Solvadi, so the premise that the drug’s cost/pricing is related to the high cost of discovery and development is not valid. Gilead paid $11 billion to acquire the company that did discover it. If anything patients are paying for Gilead’s decision to spend that much money to get the drug. It’s not like the drug would never have been discovered or developed if Gilead had’t stepped in. Also, if the pricing is really related to the high cost of the discovery and development, have Gilead disclose the actual costs. Research on drug discovery and development would suggest the total costs, all inclusive of discovery and development, would be closer to $1 billion at most, and in this case I suspect the total costs would be a lot less.

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  22. 22. sciencebasedmedicine 12:23 pm 05/9/2014

    @MikeW6 Sovaldi was hardly a “sure thing” when Gilead bought Parmasset in 2011. In fact, the $11B that Gilead paid was considered a “huge and risky bet.”
    The compound had just entered PhIII clinical trials, you can search the internet tubes yourself to find out how many drugs that enter PhIII actually get to market.
    Large pharma and biotech companies can and have paid high proces for products that are ultimate failures. And anyway, do you think Pharmasset planned to give the drug away for free if they took it to market themselves?

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  23. 23. MikeW6 5:28 pm 05/12/2014

    sciencebasedmedicine you missed the point. Not a single dollar of that $11 billion that Gilead spent to acquire Pharmasset went to drug discovery or development of the drug which is what is implied in the article and espoused by Pharma as the reason for having to charge high prices for their drugs.

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