May 31, 2014

I WANT ONE THAT’S STEPHEN GREEN APPROVED. Would You Pay $84,000 For A New Liver?

As always in the development of pharmaceuticals, we have once again washed up on the shoals of marginal versus average cost pricing. Drug development has a very high fixed cost, thanks to all the research needed to find drugs and bring them to market. The cost of actually making the pills, on the other hand, is trivial. So the optimal pricing strategy — for everyone, not just pharmaceutical companies — is to charge rich countries a lot and sell the drug at near-marginal cost in poor countries. If the rich countries insist that they should also get the drug near-marginal cost, then they benefit in the short term. But over the long run, the company loses money on its products, and then we don’t get any new drugs.

That gets the drug in as many hands as possible while still providing the incentive, and the cash flow, to research new drugs. This is one reason we shouldn’t be that unhappy that the U.S. shoulders a disproportionate share of the cost of drug development.

Yet when I look at it, Sovaldi seems like a bargain. Here’s a drug that likely cost hundreds of millions to develop and bring to market. It has a 10-year patent life to recoup its costs and make some money for the developers. It’s better than earlier treatments and, according to LaMattina, 20 percent cheaper; it largely negates the need for liver transplants, which cost a few hundred thousand a pop. It also, of course, means longer and healthier lives for people infected with hepatitis C.

Why does this make us so angry?

Because inequality!