Lynn C. Klotz, Ph.D. Bridging BioScience & BioBusiness

It is highly cost-effective at the $84,000 price, but….

For those infected with hepatitis C virus (HCV), the new drug Sovaldi seems like a godsend. As one part of a triple-drug therapy, it cures over 90% of infections in twelve weeks with few side effects for most HCV genotypes. Older HCV cures require many pills daily, have serious side effects, and cure only 75% of patients. But Sovaldi’s $84,000 price tag threatens to prevent widespread use.

One other new drug, Johnson and Johnson’s Olysio, has recently reached the market, and it too carries a hefty price tag, in this case $66,000. Both Sovaldi and Olysio are combined with the same two other drugs, ribavirin and interferon. There are other new HCV drugs from AbbVie, Bristol-Myers Squibb, and Merck anticipated to reach the market in the not too distant future. The basic pharmacoeconomic analysis and the market and financial analyses here focus on Sovaldi, but much of what is found would apply to other high-priced HCV cures as well.

At the present price, the pharmacoeconomic analysis finds that the life-saving potential of Sovaldi triple therapy is high and highly cost-effective. From a purely financial point of view, however, the savings that a cure would bring do not justify the high triple-therapy cost, a negative cost-benefit that will leave much of the large potential market untapped. A substantial reduction in Sovaldi price should make cost-benefit very attractive, opening up the potential market and substantially increasing dollar sales above those anticipated for the present price.

Pharmacoeconomic Analysis: States Diagram and Results Summary

States diagrams are the usual way of setting up a cost-effective or cost-benefit pharmacoeconomic analysis. The states diagram, modified from a diagram in the literature, for progression of HCV infections is shown in Figure 1. The diagram shows the states or stages of infection (rectangular boxes) starting from Chronic Hepatitis C infection with no or few symptoms and continuing through Death. 

The average probabilities of progressing from one state to another state in a single year are shown as percentages next to the lines with arrows. The average yearly costs in thousands of dollars for each state are shown just below the state names. Probabilities and costs are from a study (Structural frameworks and key model parameters in cost-effectiveness analyses for current and future treatments of chronic hepatitis C) that conveniently summarizes the results of several other literature studies.

Only 4.6% of patients with chronic HCV progress to compensated cirrhosis in a year; the remaining 95.4% do not progress in that year. This raises an immediate question: How many patients die from other causes (mortality by age) before their infection progresses? Clearly, older people may well die before progression. Younger people will likely experience progression in their lifetime.

Cost-effectiveness is defined as cost of a therapy per life-years-saved by the therapy:

Cost-effectiveness = (cost of Sovaldi triple therapy) / (life-years-saved by therapy)

(A primer on cost-effectiveness, cost-benefit, and cost-utility may be found in a previous GEN article.) If most patients die from other causes before their infection progresses far enough to kill them, the therapy will be responsible for very little saving of life. As a rule of thumb, cost-effectiveness lower than $50,000 per life-year-saved is considered an economical healthcare intervention. Thus, the fact that chronic infections progress only slowly into death-causing states, as shown in Figure 1, could mean that Sovaldi triple therapy is not cost-effective. However, the basic pharmacoeconomic analysis here finds that the therapy is highly cost-effective, with cost per life-year-saved below $18,000. (For those who wish to understand details of the analysis, the full analysis spreadsheet is available here and from the author.)

The fact that Sovaldi triple therapy is cost-effective does not mean its economic benefits outweigh its costs. Since the disease progresses slowly and since only a few patients will receive a liver transplant, the most expensive single cost, is the overall cost of all states enough to justify Sovaldi’s high price?

A cost-benefit analysis can address this question:

Cost-benefit = (eliminated cost of HCV from Sovaldi triple therapy cure) – (price of therapy)

Specifically, the “eliminated cost” is the Figure 1 cost of each state, weighted by the percentage of patients in each state in each year, summed over all the years, reduced to NPV using a 3% discount rate, and finally corrected for inflation between 2008 and 2014. This eliminated cost (or savings) is calculated to be $41,100. (Details are in the spreadsheet mentioned above.)

The “price of therapy” is about $95,000, which is the sum of the prices for Sovaldi ($84,000), ribavirin (about $1,000), and interferon (about $10,000). Thus Cost-benefit = $41,100 – $95,000 = -$53,900 is negative. So from a purely financial point-of-view, triple therapy does not save money at the current Sovaldi price. In contrast, from a public-good, saving-lives viewpoint, Sovaldi is a highly valuable drug.

A note of caution: This is a basic pharmacoeconomic analysis. It does not take into account several factors, such as literature variation in transition probabilities between states and considerable variation in costs of various states in different healthcare settings, age of diagnosed patients, mortality by age, and so on. In particular, the greatest single cost is a one-time cost for a liver transplant, $107,000 on average. However, the cost of a liver transplant might be much greater: One physician puts it at $577,000. For this higher $577,000 liver transplant cost, Cost-benefit = -$15,200, is still negative.

A full pharmacoeconomic analysis would include these and other factors. Nevertheless, the basic analysis here is almost certainly correct in its highly cost-effective finding and likely correct in its finding that cost-benefit is negative at the current price of Sovaldi triple therapy.

Figure 1. States diagram for progression of a HCV infection, absent therapy to eliminate the infection.

Recovering Discovery and Development Costs

Gilead Sciences, the marketer, must price Sovaldi to insure that it recoups its discovery and development costs, a priority concern for drug companies. Sovaldi was developed by the company Pharmasset, which had in its pipeline antiviral drugs for HIV, hepatitis B, and Sovaldi for hepatitis C. Gilead purchased Pharmasset for $11.2 billion in 2011. Since Pharmasset has many other assets besides the single drug Sovaldi, the $11.2 billion purchase would be a highly inflated measure of the discovery and development cost for Sovaldi. Here, $1.8 billion is picked as the total cost of drug discovery and development for a single drug, as determined in a 2010 study conducted by Eli Lilly and Company

Sovaldi sales were $3.5 billion in the second quarter of 2014, up from $2.3 billion in the first quarter when it was just launched. Assume 2014 yearly sales for Sovaldi will be at about $14 billion for 2014. Gilead made 30.9% earnings on sales in 2013, typical for large biotech pharmaceutical companies. Thus, the projected earnings in 2014 from Sovaldi are 30.9% x $14 billion = $4.3 billion, which should be more than enough to recover its discovery and development cost in the first year.

Making HCV Infection a Rare Disease

Looking beyond 2014, how should Sovaldi be priced to make practical the goal of largely eliminating HCV infections in developed countries over ten years? 

The current $84,000 price is way too high for financially stressed healthcare systems. Take the United States as an illustration, where there are an estimated 3.2 million persons with HCV infections. If everyone with chronic HCV infections were to be treated at that price, the cost (or potential market) would be 3.2 million x $84,000 = $269 billion. Compare this number to the total prescription drug sales in the U.S. of $208 billion in 2013. Even if the cost were spread out over ten years, curing HCV infections in the U.S. would add 10% each year to our prescription drug bill.

But this is not the best measure of cost, since there are NPV benefits from reduced healthcare costs for curing a patient of HCV. If cost-benefit was highly positive, it would be an easy call to attempt to eliminate HCV infections from the population. But the price of Sovaldi would need to be reduced substantially to take away any arguments it does not have favorable cost-benefit, and to reduce the stress on the healthcare system from attempting to eliminate HCV infections from the population.

For the sake of argument, assume a five-fold reduction in Sovaldi price to $17,000. At first blush, it may seem that we would be asking Gilead to take a five-fold hit in sales. Gilead is a business, and as such has an obligation to its stockholders to maintain or increase its profits. With a dramatic price reduction, however, demand should increase substantially, perhaps more than five-fold.

At Sovaldi’s present price, there is considerable resistance to diagnosing and treating everyone. State Medicaid programs, and likely many private insurers as well, are restricting Sovaldi to patients who have progressed beyond chronic HCV infection into cirrhosis. The State of Illinois has 25 criteria for prior approval and will not pay for patients with a history of drug and alcohol abuse. Since former and current drug users comprise the biggest infected group, not many in Illinois will be eligible for treatment. For now, Texas does not cover Sovaldi or Olysio. A majority of the medical experts in the California Technology Assessment Forum decided both Sovaldi and Olysio should be used only on patients with severe liver complications.

Referring back to Figure 1, if insurers wait until complications develop, only 4.6% of chronic HCV patients per year will be treated, leaving much of the potential market untapped. A Gilead executive noted that many HCV carriers were infected decades ago, so we may be seeing a much greater percentage of disease progression from chronic HCV infection over the next several years. Clearly, more than 4.6% will be treated even at the high Sovaldi price, but even double or triple that number treated still leaves a large untapped potential market. Physicians are arguing correctly that we should cure patients before they become sick, another pressure that would increase reimbursement and sales of Sovaldi.

With the recent introduction of Olysio and anticipated new entrants from AbbVie, Bristol-Myers Squibb, and Merck, there is some chance that marketplace competition alone will reduce prices substantially.

Manufacturing cost is not a factor in pricing Sovaldi. A 400 mg dose of Sovaldi is administered once a day, for 12 or 24 weeks depending on the genotype of the HCV infection. For the longer 24-week therapy course, the total amount of Sovaldi administered is 67.2 grams. Typically, small molecule drugs cost $1 per gram to manufacture, but complicated drugs could cost $10 per gram. Even at $10 per gram, the total cost of drug is only $672 dollars, so manufacturing cost places no limitation on lowering Sovaldi price.

There is nothing to prevent Gilead from lowering the price substantially, and sales may well increase as demand is large in developed and developing nations. An almost hepatitis-free world would be an outstanding contribution to public health.

Lynn C. Klotz, Ph.D. ([email protected]) is co-managing director of Bridging BioScience & BioBusiness, a biotechnology education and strategy consulting company. The material in this article is destined for the Topic Books on Bridging BioScience & BioBusiness' website.

Previous articleA Case for Co-Sourcing
Next articleAbbVie, Infinity to Co-Develop Duvelisib in Up to $805M Deal