Anatomy of a drug price valuation
There has been a firestorm of criticism surrounding Gilead’s decision to price Hep-C miracle drug Sovaldi (sofosbuvi) at $1000 per pill. But what is the right way to balance the myriad considerations that go into pricing a drug? The high-cost cystic fibrosis (CF) drug Kalydeco makes for an interesting case study -- especially when juxtaposed against Sovaldi.
Simply put, when a drug works and there is no comparable alternative, chances are it will be relatively expensive, whereas a me-too drug that launches into a crowded therapeutic field will be subject to downward pricing pressure. This a basic economic reality of supply and demand, and most experts agree it is a fair paradigm that boosts businesses and props up innovative companies that invest time and money into developing lifesaving therapies.
Kalydeco (ivacaftar), an oral, twice-daily medication developed by Vertex Pharmaceuticals, falls into the former camp of drugs with few comparable peers. It was approved in January 2012 as the first-ever treatment to target the underlying genetic mutations that afflict CF patients. But it comes with a daunting price tag: $307,000 per year for the average individual. That’s nearly four times the cost of Sovaldi -- even though Kalydeco can be taken by just a tiny fraction of the population that can benefit from the Hep-C drug.
CF treatment: A rough regimen
CF is a genetic lung disease that generally kills patients in their 30s or 40s at the latest. There have been groundbreaking advancements in CF therapies over the last several decades -- but until now, there has not been a treatment option that truly tackles the disease at its roots.
According to the CF Foundation, 70,000 people in the world have CF, including 30,000 in the US. Treatment goals include preventing and controlling lung infections, preventing intestinal blockages and removing mucus from the lungs.
That last part is a particularly labor-intensive process known as chest physical therapy, or CPT, which involves physically forcing mucus out of the airways by lightly clapping and tapping on the chest and back. This cumbersome practice has to be repeated three to four times per day, every day.
Other CF therapies include antibiotics, steroids, bronchodilators, anti-inflammatory drugs and oxygen therapy, which, in addition to drugs such as dornase alfa, break down mucus secretions in the airway. All told, CF patients may have to take as many as 12 medications per day on top of CPT.
For the relatively few patients who can actually be treated with Kalydeco, the drug makes a huge difference. It dramatically improves breathing and reduces infections. But Kalydeco only works for patients with one of nine cystic fibrosis transmembrane conductase inhibitor (CF-TR) mutations. So only about 4% -- or roughly 2400 people in the US -- are eligible for treatment with the drug.
However, most insurers are still willing to pay for Kalydeco because of its unique therapeutic potential. And for those without health insurance, Vertex has a patient-support program that handles most, if not all, of the expenses associated with Kalydeco treatment.
Crunching the numbers
So why has the cost of Sovaldi -- $1000 per pill with an overall annual price tag of $84,000 -- generated so much renewed pushback on drug-pricing trends when far pricier drugs such as Kalydeco have been on the market for years? One likely reason is differences in the treatment populations’ sizes. There are over three million patients with hepatitis C (HPV-C), and if they were all treated with Sovaldi, the cost would exceed $300 billion.
The mathematical differences between the total costs of treating patients eligible for Kalydeco versus patients with HPV-C who could benefit from Sovaldi are vast -- and so are the implications for private insurers and government health care programs.
In the case of Kalydeco, Vertex partially calculated value by considering disease severity, effectiveness, safety and the estimated magnitude of the drug’s benefit. The company has also invested $6.5 billion -- in addition to $100 million from the CF Foundation -- in R&D for cystic fibrosis. But despite years of research, Vertex only has two approved drugs, with another CF drug close to completion.
That investment factor also influences drug prices. So it should not be surprising that Vertex, a company that focuses on major diseases afflicting smaller patient pools, rolls overall R&D costs into the price of flagship products such as Kalydeco.
For CF patients who have experienced the transformative benefit of Kalydeco -- not to mention their families -- $300,000 may not be that unreasonable a prospect. As FDA Commissioner Dr. Margaret Hamburg put it, Kalydeco is “an excellent example of the promise of personalized medicine.”
Going forward, drug value will continue to be based on the same basic key determinants -- efficacy, safety, relative uniqueness and magnitude of benefit. Without assessing these factors, as well as the total size of the treatment population, it is impossible to say how much is too much for a life-saving therapy.