The Financial Page of the New Yorker recently featured a new hepititis-C drug developed by Gilead. The new drug can cure 90% of patients in three to six months.
“There’s just one catch: a single dose of the drug costs a thousand dollars, which means that a full, twelve-week course of treatment comes to more than eighty grand.”
The article also states that that hep-C patients have an average annual income of just twenty-three thousand dollars - a disturbing discrepancy. What I like most about the article is how it concisely explains the economics that bridge this gap, and the pricing power pharmaceutical manufacturers have:
Investors love drug companies in part because they often have tremendous pricing power. Drugs designed to fight rare diseases routinely cost two or three hundred thousand dollars; cancer drugs often cost a hundred grand. And, whereas product prices in most industries drop over time, pharmaceuticals actually get more expensive. The price of the anti-leukemia drug Gleevec, for instance, has tripled since 2001. And, across the board, drug prices rise much faster than inflation. The reason for this is that prices for brand-name, patented drugs aren’t really set in a free market. The people taking the drugs aren’t paying most of the cost, which makes them less price-sensitive, and the bargaining power of those who do foot the bill is limited. Insurers have to cover drugs that work well; the economists Darius Lakdawalla and Wesley Yin recently found that even big insurers had “virtually zero” ability to drive a hard bargain when it comes to drugs with no real equivalents. And the biggest buyer in the drug market—the federal government—is prohibited from bargaining for lower prices for Medicare, and from refusing to pay for drugs on the basis of cost. In short, if you invent a drug that doctors think is necessary, you have enormous leeway to charge what you will.
For the full article follow the LINK or click on the image of the magazine to the right.