Yes, Drugs Like Remdesivir Should Be Priced Above Marginal Cost

Stephen Ezell May 27, 2020
May 27, 2020

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On April 29, 2020, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, announced that remdesivir—an antiviral drug originally developed by Gilead Sciences as a possible Ebola treatment—indicated effectiveness as a therapeutic for COVID-19 and would become the standard of care for treating the disease.

Gilead has offered to donate the first 1.5 million doses of remdesivir, enough to meet the needs of 140,000 patients, to the global community. Nonetheless, as a recent Washington Post article explains, debate stirs about the price Gilead should charge for the millions more doses it’s preparing to manufacture. Some advocacy organizations are using this case to push a long-standing, ideologically based position that government, not industry, should develop drugs and that there should be draconian drug price controls. In the case of remdesivir they contend that the U.S. government participated extensively in developing the drug, meaning taxpayers have effectively already paid for it, and that Gilead should therefore charge $1 per dose, roughly equivalent to the drug’s marginal cost of production. But this both mischaracterizes the government’s role in developing remdesivir and fundamentally ignores the economics of drug development and the societal value it creates.

First, remdesivir is a compound that Gilead investigated and developed as one of the thousands it’s researched in its more than 30-year, multi-billion dollar history of investing in the search for antiviral therapies, including for treatments to hepatitis C, Ebola, and coronaviruses like SARS and MERS. Originally targeted at Ebola, for which the United States and other governments were desperately seeking a solution after the deadly 2014 West African outbreak, Gilead collaborated with several government institutions, including the U.S. Army Medical Research Institute for Infectious Diseases (USARMIID) and the Centers for Disease Control and Prevention (CDC), to screen and test remdesivir in their high-security biocontainment labs. Of course, Gilead had to do so; it’s the military, CDC, and the National Institutes of Health, not private-sector companies, that operate key biodefense labs and testing facilities for such extremely infectious diseases. And it was the government that wanted Gilead to participate, since it lacked the ability to develop drugs on its own.

So, while certainly government researchers made important contributions in helping to screen and test remdesivir—as they should in fulfilling their public mission—as even U.S. Army lawyers have said, the government’s contribution did not meet the threshold of co-invention of the drug. That is why, correctly, the U.S. government did not seek to be listed on the patent for the drug. Remdesivir was ultimately shelved as an Ebola therapy (because two competing compounds proved superior), but when COVID-19 hit in early 2020 Gilead marshalled preclinical data to assess the drug’s potential safety and effectiveness against the disease, beginning clinical trials in February 2020. But the key point is that it was Gilead, not the U.S. government, that developed remdesivir.

Critics’ contention that Gilead should charge $1 per dose of remdesivir is even worse. It considers only the marginal production costs of one discrete drug, failing to recognize that pricing needs to factor in not only the years-long research and development (R&D) costs of a given drug, but also the costs of other experimental drugs that didn’t succeed, to lay the groundwork for future innovation. Developing new-to-the world drugs is a complex, expensive, and lengthy process averaging 11.5 to 15 years of research, development, and clinical trials, at costs ranging from $1.7 to $3.2 billion.

Yet the reality across the industry is that only one in as many as 10,000 compounds investigated ever makes it through the full development process to gain FDA approval, and even then only about 1 in 5 marketed medicines ever recoup just their R&D costs. If companies want to avoid losing money every year—something any company could do for only a couple of years before going under—then revenues from successful drugs have to be adequate to pay for the billions of dollars in investment in drugs that never pan out. For instance, in 2019, Gilead suffered a high-profile Phase 3 clinical trial failure when it pulled the plug on selonsertib as a possible treatment for liver disease; in 2016, Gilead’s momelotinib, a treatment for bone marrow disorder myelofibrosis, delivered disappointing Phase 2 clinical trials and was subsequently scrapped; in 2014, Gilead’s gambit to tackle pancreatic cancer (a hideous disease for which there remains no treatment whatsoever) faltered when simtuzumab failed Phase 2 clinical trials. This is not an indictment of Gilead’s technical capabilities: Successful drug development is incredibly hard. Yet critics focus only on the marginal cost of the successful drugs, never factoring in the cost of the failures.

Gilead, despite some high-profile failures, has recorded a number of signature successes, including Truvada, an HIV-prevention drug, and sofosbuvir (marketed as Sovaldi), the world’s first-ever treatment capable of fully curing hepatitis C when introduced in 2013. And though it was skewered at the time for charging what was thought to be too much for Sovaldi, the reality is Gilead represents a perfect case study of a life-sciences innovator leveraging the profits from one generation of innovations to reinvest in the next, perpetuating a virtuous cycle; so a hepatitis C treatment contributes (in knowledge and capital) to a coronavirus treatment, whose success hopefully begets resources that Gilead can redeploy when it tries again to tackle pancreatic cancer, or other similarly pernicious diseases. Put simply, like other life-sciences innovators, Gilead is a company that has one-quarter of its workforce deployed in R&D activities and is dedicated to solving maladies at the forefront of medical science, not to gouging patients in the name of corporate profits. Gilead’s investment in developing and producing the drug to combat COVID-19 is likely to exceed $1 billion in 2020 alone.

Surprisingly, the Institute for Clinical and Economic Review (ICER), an organization that attempts to measure the cost-effectiveness of drugs, decided to use a “cost-plus” approach in valuing remdesivir. That approach considers only the cost of development and production inputs, which would price a transformative, breakthrough medicine the same as the next me-too drug that demonstrates negligible or no benefit over the standard of care—just so long as their input costs are the same. ICER simply failed to incorporate, or calculate, either the critical costs of Gilead’s history of developing successful therapies or its many failed attempts. In using “cost-plus,” ICER ignored the need for investment in future innovation—and provides no reward for innovation—which is exactly how Gilead invented remdesivir in the first place.

Considering that the coronavirus may cost the global economy up to $2.7 trillion, drugs that could cure or provide a vaccine for the disease would certainly be worthy of generating at least $5 billion in revenues (about 5/100ths of 1 percent of the coronavirus’s global economic impact) given the immense societal value they could create (not to mention the personal and economic costs that the coronavirus exacts, including taking people an estimated 10 years before their time, on average). Frankly, global society should be delighted to pay a price like that. Nevertheless, the coronavirus represents an extraordinary case, and companies like Johnson and Johnson, Pfizer, Gilead, and others have repeatedly stated they intend to price coronavirus solutions in a way that maintains affordable global access.

We’re fortunate that the ecosystem America has implemented to support novel biomedical innovation over the past four decades has positioned an innovative industry with the bench depth, knowledge, and resources to spearhead an enormous response against COVID-19, including some 750 clinical trials for therapeutics now ongoing worldwide, with 107 vaccine candidates in preclinical testing and nine already in Phase 1 or 2 clinical trials. In contrast to what critics might assert, now is not the time to undermine either the IP rights or reasonable pricing reimbursement approaches that have underpinned so much successful biomedical innovation, and which will be key to getting through this crisis.