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.