The Drug That Is Bankrupting America

02/16/2015 11:01 am ET | Updated Apr 18, 2015

America is the land of breakthrough science -- and health care scams. The two seem to go hand in hand in the case of the new hepatitis C virus (HCV) cure named sofosbuvir, sold under the brand name Sovaldi by the drug company Gilead Sciences. There is no question that Solvadi is a godsend -- a lifesaver for millions of Americans, and perhaps someday for hundreds of millions of people around the world infected by Hepatitis C. Yet Sovaldi is also the poster child of a U.S. health care system that is being bankrupted by greed, lobbying and indefensible policies on drug pricing.

The basic facts are these. In December 2013, the Food and Drug Administration approved Sovaldi, and another formulation, Harvoni, which is sofosbuvir used in combination with another drug. Gilead set the price for a 12-week treatment course of Sovaldi at $84,000, amounting to $1,000 per pill. Gilead set the price of Harvoni at $94,000.

According to researchers at Liverpool University, the actual production costs of Sovaldi for the 12-week course is in the range $68-$136. Indeed, generic sofosbuvir is currently being marketed in India at $300 per treatment course, after India refused to grant Gilead a patent for the Indian market. In other words, the U.S. price-cost markup is roughly 1,000-to-1!

How can Gilead Science charge $84,000 for a drug that costs less than $300 to produce? First, Gilead's patent on sofosbuvir runs until 2028, giving it a monopoly in the U.S. market. Second, a range of Federal and state government programs will cover the $84,000 for a sizeable number of patients. For those not covered by government programs, some will be covered by private insurance, a few will pay out of pocket, and still others will likely die because they lack coverage and can't afford the treatment.

In the first year of marketing, Sovaldi and Harvoni are already blockbusters, reaping a remarkable $12.4 billion of market sales in 2014, more in just one year than the $11.2 billion price that Gilead paid in January 2012 to buy sofosbuvir from a biotech start-up named Pharmasett.

The standard defense by the drug companies of these astronomical prices is that drug discovery is costly and their high profits reimburse the R&D costs. Here is where the story of Sovaldi gets even more interesting. The total private-sector outlays on R&D were perhaps $300 million, and almost surely under $500 million, meaning that the decade-long R&D outlays were likely recouped in a few weeks of drug sales.

Here is the background. Sofosbuvir was developed under the leadership of Prof. Raymond Schinazi, a brilliant professor of biochemistry at Emory University. The U.S. Government heavily funded Prof. Schinazi's research, with major grants from the National Institutes of Health (NIH) and support from the Veterans Administration. Like many academic researchers, Schinazi has frequently parlayed his government grants into private companies to market his discoveries. He set up Pharmasset Inc. as a Delaware corporation in 2004 as his business to develop sofosbuvir and hold the patents on the new prospective drug.

Pharmasset raised around $45 million in a 2007 IPO and used those funds and others to supplement the R&D. According to the company's SEC filings, the total Pharmasset R&D on sofosbuvir up through 2011 totaled around $62.4 million. In January 2012, with an eye on sofosbuvir, Gilead paid $11.2 billion to purchase Pharmasett. Schinazi pocketed an estimated $440 million for his shares in Pharmasett.

By the fall of 2011, sofosbuvir was ready for Phase 2 clinical trials, which were carried out between October 2011 and April 2012 by the NIH, which published the results in the Journal of the American Medical Association in 2013. Phase 3 trials were then carried out in mid-2013 and were paid by Gilead, at a cost of perhaps $50-$100 million for a two-month trial that covered around one thousand patients. (Gilead has not disclosed the exact costs of the Phase 3 trials).

We can therefore estimate that private investors spent perhaps $300 million in R&D outlays for sofosbuvir over the course of a decade, and perhaps well below that sum. Those R&D outlays were likely recouped in a few weeks of sales in 2014.

With a rational U.S. drug pricing system, private investors would expect to earn a reasonable multiple of their R&D for a highly successful drug, perhaps even 5 to 10 times the R&D outlays, in order to reflect the long time horizons and high uncertainties surrounding drug development. Yet at a treatment course of $84,000, the multiple for Sovaldi looks to be around 40 times or more.

With a rational drug pricing system, Gilead might have paid $1 billion rather than $11.2 billion for the drug, and Prof. Schinazi might have pocketed $40 million rather than $440 million. Sovaldi would most likely still have been developed and brought to market on the same timeline, but with taxpayers spared of perhaps $10 billion a year in outlays.

Gilead has worked the political system to protect its windfall by ramping up its lobbying activities. That soared to $2.2 million in 2013, the year of FDA approval, and $2.9 million in 2014, the first year of sales. The lobbying helped to smooth the way to the massive uptake of the drug and the substantial financing by the U.S. Government of Gilead's inflated prices.

Sovaldi therefore represents the best and the worst of the U.S. health system. It represents the best of U.S. produced science, and the government's support for it. Sofosbuvir is a remarkable, life-saving medicine at the cutting edge of science.

Yet Sovaldi also shows how publicly financed science easily turns into arbitrarily large private profits paid for by taxpayers. The challenge facing the U.S. is to adopt a rational drug pricing system that continues to spur excellent scientific breakthroughs while keeping greed in check. Big Pharma and the U.S. public are on a collision course when they should be partners for the advancement of health.