Would Government Buyouts of Pharma Companies Really Be A Good Way To Lower Drug Prices?
Originally published 2/17/2017
Here’s a novel way to lower health care costs: make the US government a purveyor of drugs. In a recent article in Forbes, Peter Bach and Mark Trusheim suggested that the US government could reduce drug costs by buying Gilead and distributing its hepatitis C medicines at a greatly discounted price. The idea, on the face of it, is an interesting one to consider. In their scenario, the government buys Gilead for a 30 percent premium on its current stock price, spending $156 billion. The government would then sell off the R&D operations as well as a strong franchise of HIV drugs, reducing the “net cost” down to $77 billion. Other financial adjustments reduce the price further, lowering the cost to treat each patient down to $15,733 from what they claim is the current cost of $42,000. This represents a pretty nice cost savings when spread out over a patient population of 3.2 million people (including about one out of every three people in prison). Gilead’s hepatitis drugs certainly rank at or near the very top of innovative medicines coming out of biopharma in the last 25 years. However, the Forbes article did not delve into some of the far-reaching ramifications of what government buyouts might mean to other players. Let’s take a deeper look below the surface to see what such a buyout might portend.
Effects on Competitors
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What would be the consequences of this governmental interference in the marketplace? What would happen to Gilead’s competitors? Consider the case of companies, including Abbvie, Bristol Myers Squibb, Merck, and Janssen, that market very similar drugs. Other players are still running clinical trials, but have not yet launched their own hepatitis C drugs. How would these companies compete with the government’s now bargain-priced medicine, which presumably can be sold with little or no profit margin? The short answer would be that they can’t. Without some marked (and significant) clinical advantage (safety, efficacy, or convenience), it would be very difficult for these companies to recoup their investment costs. The lost profits would curtail their other R&D efforts, or cut back on their mergers and acquisitions. The missing revenues might even transform them from being acquirers of other companies into becoming targets of acquisition. Furthermore, the scenario proposed by Bach and Trusheim would have the government sell off Gilead’s non-hepatitis C assets as a stand-alone company. Without the revenue brought in by the hepatitis C drugs, R&D would need to be scaled back at this new company, ongoing projects would be terminated, and jobs would undoubtedly be cut. Most large drug companies, including Gilead, operate as multi-national companies and sell their drugs (either directly or through partners) around the world. Changing up the pricing in the US could disrupt these international markets as well.
Effects on the Overall Drug Development Market
Let’s assume that government buyout of pharma companies becomes a known and possible risk. Investors who are sure that they are backing first-to-market companies won’t mind the buy-out threat. If the company is successful, they’ll be getting a good return on their money in the buyout. Under this scenario, however, many wouldn’t risk investing in a company if they weren’t confident that they were going to be first across the finish line. Companies that were lagging behind might scale back or abandon their R&D efforts entirely. Without follow-on drugs, there’d be no competitive pressure on the first-to-market company to ever lower their prices if the government, in fact, didn’t buy them. This would surely result in higher prices for consumers. This topic, to be sure, is a complex one; competition in the drug industry doesn’t always seem to lead to lower pricing. Exhibit A: the lawsuits recently filed alleging collusion and price fixing in the insulin and generic drug markets.
What would happen if there are some unknown side effect of the treatment that doesn’t manifest itself for a number of years? This certainly happens; both Fen-Phen (Redux) and rofecoxib (Vioxx) were withdrawn from the market due to serious cardiac problems. A recent report showed there have been hundreds of cases of liver failure (and even larger numbers of severe liver injury) associated with the new hepatitis C medicines (not just Gilead’s drug). The government would then be on the hook for taking care of the injured patients and defending themselves against numerous lawsuits unless they could show that Gilead hid evidence of this scenario. Taxpayers would then be on the hook to foot the bill. This may not be a likely occurrence, but it’s an outcome that would need to be factored into pricing calculations.
Other Market Disruptions
If the government now started treating massive numbers of patients infected with hepatitis C, the net result some years down the line would be a decline in patients with acute liver failure and needing a liver transplant. This would certainly cut into the earnings of liver transplant surgeons. It would also greatly reduce interest in developing vaccines against hepatitis C. Large numbers of patients living longer will be a greater drain on Medicare and Social Security funds going forward. It’s not a reason to withhold treatment, but it does need to be factored in to the equations.
Would This Buy-Out Scenario Be Limited to Curative Drugs?
One of the key reasons that the government might want to buy out Gilead is that their hepatitis C drug is curative. A massive government program to provide this drug to everyone (including prisoners and the poor) could come close to eliminating this disease from the US population. Drugs that actually cure diseases are rare; most medicines work to ameliorate diseases or their symptoms. This “hepatitis C” buyout scenario is operating within a very small corner of the pharma space: expensive drugs that are will actually cure a particular disease. Pharma, in general, has not been very successful at coming up with curative treatments. There are two primary reasons for this. One, biology being what it is, the prospects are simply damn hard. The other, of course, is that there is much more money to be made from treatments for chronic diseases, such as rheumatoid arthritis and high blood pressure. These economic forces have played a large role in reducing the number of companies that work in both the vaccine and antibiotic markets. Why market a drug once when you can sell it for a lifetime? The economics of one-time treatment curative drugs are extremely complex. Witness the ongoing debate over fair pricing for gene therapy treatments as well as CAR-T treatments for cancer. These drugs are going to be uber-expensive, even under a “pay for value” pricing model that the industry is starting to explore.
Can Government Economists Accurately Predict Drug Demand?
Gilead has struggled recently to grow sales for its hepatitis C drugs as competing medicines steal market share. Buying out drug companies would put the government in the position of accurately predicting future drug sales. This is a skill that most Wall Street wizards have yet to master (their future sales predictions are often comically off base), so it’s hard to see how government economists would do better. Look at Vertex’s hepatitis C drug Incivek. At one time it set a record for the fastest drug launch ever, with blockbuster sales over $1 billion per year. Three years later, it was pulled from the market because of plummeting sales even before Gilead’s hepatitis C drug Sovaldi hit the market. Forecasting drug sales is hugely problematic art. Dendreon’s prostate cancer drug Provenge was predicted to be a huge moneymaker (with peak sales between $2-3 billion per year), but after a few years of terrible sales the company was forced into bankruptcy.
Should the Government Be In The Drug Business At All?
The government as a drug purveyor is not a role that is clearly defined in the US Constitution. Historically, the government has worked with drug manufacturers to get their drugs to patients in times of crisis, not competed with them. Examples of this include the production of antibiotics in the US during WWII and the drive to vaccinate children against polio in the 1950s. In each of these cases, however, the government joined in to speed the introduction of the drugs, not to effect pricing. Operating as a non-profit entity, and with enormous economies of scale, the government would be in a strong position to compete against other drug companies, at least on price. This would be anathema to most Republicans and Libertarians. They already strongly oppose the “single payer” option for a national health care system that is seen in most of the developed world, preferring to leave the invisible hand of the free market to regulate drug pricing. While that has clearly worked out well from an industry perspective, angry patients who simply can’t afford their medications might strongly support a buyout scenario. As presented I don’t think the idea of government buyouts has much merit, but my opinion might change as we struggle towards developing an improved health care system. Easy solutions are hard to come by. Republicans have despised the Affordable Care Act for six years, but have yet to put forth any details of a viable replacement plan. Magic may need to be invoked to repeal the ACA without taking the health insurance away from 20 million Americans. An obvious solution to lowering health care costs is one that none of the major players (insurers, pharmacy benefit managers, hospitals, drug makers, doctors, etc.) want to sign up for: putting less money in each of their pockets. As the late activist Aaron Swartz once put it, “large corporations, of course, are blinded by greed. The laws under which they operate require it - their shareholders would revolt at anything less.”
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