A Fair Price for Drugs?

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There are about three million Americans and about 170 million people around the world infected with Hepatitis C. In the recent past, the cost of treatment could be up to $300,000 in extreme cases. A new drug, Sovaldi, would reduce that cost to about $84,000. On the face of it, that seems like a great deal. However, the company manufacturing the drug has generated some outrage. The reason is simple: the company, Gilead, plans to charge $1,000 per pill.

While $1,000 for a pill might seem exorbitant, Gilead has made the reasonable point that they have the right to recover the cost of developing the medicine. This is certainly correct—the expense of developing a product can be legitimately passed on to the customers.

In the case of Sovalidi, Gilead “developed” it by buying the company that developed it for $11 billion. While this is a certainly a large sum of money, if 150,000 people are treated at the asking price of $1,000 per pill, the company will have recovered what it spent to buy the company that developed it. This is a not uncommon practice in areas with high initial development costs. For example, new technology initially comes at a premium price and then the price drops as a company recovers its development costs.

When asked if Gilead would reduce the cost once it recovered its money, the vice president of the company said, “”That’s very unlikely that we would do that. I appreciate the thought.” One way to justify this is by contending that the cost of producing the pill warrants keeping the price high. After all, the cost of production is clearly a legitimate factor in calculating a fair price for a product.

However, the drug is most likely fairly cheap to produce. According to Andrew Hill, who is in the Department of Pharmacology and Therapeutics at the University of Liverpool, the cost per treatment would be $150-250 per person. If this is correct, the company would be making truly massive profits off a drug that is rather cheap to produce. On the face of it, such a mark-up would seem to be unfair.

It might be contended that the free-market will sort this out. However, there are two major concerns here. The first is that Gilead’s ownership of the drug rather limits the competitive force of the market. Until another company produces a competing drug, Gilead has an effective monopoly. Competing companies would need to spend considerable sums to develop a competing drug and they would have to avoid infringing on the ownership rights of Gilead. Whether this is seen as wrong or not depends on how one looks at the matter. On the one hand, there is the view that a company has the right to its government enforced monopoly and can use this to charge any amount it deems fit until competition forces it to reduce prices. On the other hand, there is the view that it is wrong for a company to use the coercive power of the state (the state ensures that the drug cannot be copied and sold by others) to exploit the very citizens that the state is supposed to protect from exploitation. The second is that the treatment is not a luxury item for the patients but a necessity—without it they risk severe illness and death. As such, the customers are coerced by their condition and this is being exploited by Gilead. If Gilead were selling $84,000 watches or cars, people could elect to buy them or not—so Gilead would need to make the product match the price. In the case of medicine, Gilead can set its price and give people a choice between buying and dying.

Interestingly, Gilead does plan to offer lower prices in countries such as India, Pakistan, Egypt and China. While the price is not set, the estimate is that “It’ll be from the high hundreds to low thousands for these types of markets.” This rather obviously indicates that Gilead could sell the pills for less in the United States. This lower cost could be seen in at least two ways. One is that Gilead is being nice by offering people in these other countries a price break. Another is that Gilead knows that it will simply not be able to sell the pills for $1,000 each in such countries and are settling for taking what they can get. That is, some profit is better than none.

If Gilead is giving patients in these countries a real break—that is, selling the product with a very narrow profit margin, then the company would seem to be acting in a laudable way by providing an important treatment while only making large profits. However, given the estimated cost of providing the treatment ($150-250) the company would be making very large profits by selling the treatments for the high hundreds to low thousands. The company would also be making what might be regarded as obscene profits in countries like the United States where the pills would sell for $1,000 each.

Given that Gilead would recover its costs quickly and the actual cost of providing treatment is relatively low, what remains to be determined is what would warrant charging such a high price for a essential treatment.

Alton presents a standard reason for this:  “Those who are bold and go out and innovate like this and take the risk — there needs to be more of a reward on that. Otherwise, it would be very difficult for people to make that investment.”

Alton’s basic point is reasonable. Developing new medicines is a risky business since most drugs never actually make it to being a sellable product. As such, this increases what companies must spend to actually develop a product they can sell.

One point of concern is the degree of risk that Gilead took when it bought the company that developed the drug. If that company took risks and developed the drug, then that company certainly earned the right to recover the cost of the risks it took. However, it is not clear that Gilead was bold, innovative and risk taking by buying that company.

Another point of concern is determining the cost and value of risk. That is, sorting out how risk taking legitimately contributes to a higher price. Oversimplifying things a bit, it would seem fair to consider the cost of legitimate attempts to develop drugs that failed as part of the legitimate operating expenses of a company and thus these can justly passed on to the consumer. However, as noted above, Gilead will recover the cost of buying the developer of the drug quickly and hence will lose the justification that it must charge a high price in compensation for its risk. Even if it is granted that risk taking warrants charging high prices, this should not warrant the high prices when the cost of the risk has been recovered. At that point a new justification would be needed for the high price. In the case of the medicine, the cost of providing the treatment would not warrant the high price. Also as noted above, the market is effectively not free since the state ensures that Gilead has a monopoly on the medicine it bought and the patients are coerced by their illness. If the patients tried to produce the medicine on their own by copying the pills, the state would send police to arrest them and they would face severe legal action.

It could be replied that $84,000 is a bargain compared to the current cost and this justifies the high price. To use an analogy, if one surgeon charges $300,000 to do a procedure and I will provide the same results for $84,000 then that seems like a good deal. However, if it only costs me $250 to treat the person, that would hardly seem to be a fair price. It would be a better price—but better is not the same as fair.

I freely admit that I have not settled the matter of what is a fair price. However, it does seem clear that $1,000 per pill is not a fair price.

 

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