Gilead should be allowed 'real pricing' for remdesivir—and a sizable profit, analyst says

Gilead
SVB Leerink analyst Geoffrey Porges argues Gilead Sciences' remdesivir deserves a price that allows for a significant profit margin, given its clinical benefit in COVID-19. (Gilead)

Perhaps no other biopharma company has a tougher decision to make right now than Gilead Sciences does on the pricing of COVID-19 drug remdesivir amid a public health crisis. It’s not exaggerating to say the entire pharmaceutical industry’s reputation hinges on the company’s next moves.

Now, one Wall Street analyst is voicing his support for Gilead, arguing the Big Biotech shouldn’t be pressured to price remdesivir too low or be penalized for making a sizable profit along the way.

“If you are going to war, or preparing for war in a capitalist country, you have to let business make money out of the process or business won’t work,” SVB Leerink’s Geoffrey Porges wrote in a Wednesday note to investors, quoting former U.S. Secretary of War Henry Stimson during World War II.

The COVID-19 pandemic is indeed a war against a pathogen, as the disease had infected over 7.4 million and claimed more than 417,000 lives globally as of Thursday morning.

Underestimated by cost-effectiveness analysis

What kind of a sticker price for remdesivir is acceptable? Around $5,000 per course, in Porges’ view. That was roughly the same as the $4,460 that drug cost watchdog the Institute for Clinical and Economic Review (ICER) came up with recently for the drug to be deemed cost-effective.

That price was reached on very stringent pharmacoeconomic standards, Porges noted. It’s based on the criterion of $50,000 per quality-adjusted life-year gained, rather than the more commonly applied $100,000/QALY or $150,000/QALY thresholds.

What’s more, the ICER analysis dismissed R&D and capital investment costs, arguing Gilead already got its money back by selling megablockbuster hepatitis C drugs. During a recent conference call with investors, Gilead CFO Andrew Dickinson said the “potential range” of investment in ramping up remdesivir development and manufacturing could reach $1 billion in 2020 alone.

RELATED: Can the price be right? With the world watching, Gilead faces a no-win decision on remdesivir

ICER also based its calculation on an outside study that estimates the manufacturing cost of the drug is $10 per 10-day course, though Dickinson recently told Porges the actual number is “an order of magnitude greater than” that. Consumer advocacy group Public Citizen is calling for a manufacturing cost recovery price of $1 per day.

In addition, ICER used hospital medical costs of hospitalization for non-COVID pneumonia, “which likely underestimates the cost of care for COVID pneumonia, with likely longer hospital stays, greater complexity, highly infectious nature and isolation requirements,” Porges said.

He noted that those medical costs also don’t account for other secondary economic effects such as loss of productivity, though he acknowledged that adding those factors in would push up the drug’s price and create a “massive burden” on society. Instead, “[p]ricing at a proportion of medical costs saved would be a terrific deal for payers and consumers,” he said.

A recent study in Health Affairs by researchers at the City University of New York found the median cost of a hospitalized COVID-19 patient during admission was $14,366. Another report, by America’s Health Insurance Plans, estimates that the hospital cost per non-ICU patient is about $11,000, and the cost could exceed $30,000 for each person admitted into intensive care.

RELATED: Detailed COVID-19 data for Gilead's remdesivir are finally here, confirming its benefits and limitations

For context, remdesivir has shown it can cut the duration of hospital stays by 30% compared with placebo. Shaving 30% off an average cost of $15,000 means a $5,000-per-course price for remdesivir is fair, regardless of potential benefit on post-hospital costs and other individual benefits, Porges argues.

Negative impacts from distorted pricing

The technical analysis aside, Gilead should be allowed to make money off remdesivir from a societal perspective, according to Porges.  

Compared with the $5.5 billion Gilead spent last year in R&D and external deals, the $1 billion investment in remdesivir represents a large proportion of its capital allocation. For 2019, Gilead reported operating cash flow of $9.1 billion. After paying investors dividends and upgrading its physical assets, only $2.4 billion was left for any unplanned portfolio development.

“Were it not for this investment in remdesivir, Gilead could perhaps be investing more capital into developing their oncology franchise, or in expanding other aspects of their antiviral or hepatology franchises,” Porges said.

Granted, Gilead has a social obligation to develop remdesivir to help fight a deadly disease, but it shouldn’t be punished for doing that when it could potentially enjoy better profitability elsewhere, he figures. High pricing pressure and “absence of the expectation of any profit” could discourage further investment in COVID-19, Porges said.

RELATED: Gilead to start selling remdesivir in coming weeks, expects 'multi-year commercial opportunity'

Anti-infectives and non-COVID vaccines are already attracting increasingly less interest, as cash is being allocated to high-return oncology and rare diseases. Taking away the profits such investments could reap is, as Porges put it, “exactly the wrong signal to send to industry participants if we are trying to encourage the development of such medicines and the expansion of the industrial capacity to amount rapid responses to events such as COVID-19.”

Large companies such as Gilead may be able to absorb the cost of a zero-profit program, and some have suggested the rewards for the development of COVID treatments will be non-financial but rather reputational. However, Porges finds such goodwill difficult to value and hard to count on. Even if it materialized, it could lead to a slippery slope where regulatory and commercial favoritism is given to the company.

What’s more, biopharma companies shouldn’t be singled out in response to COVID-19, Porges contends. Admittedly, scrutiny on the pharma industry comes from years of distrust—Gilead itself was lambasted for high pricing on hepatitis C drugs Sovaldi and Harvoni. But the same expectations of zero profit aren’t being applied to developers of diagnostic kits, to manufacturers of protective gears, or to grocery stores that are supplying necessary household supplies during lockdown.

Some large drugmakers have come out to say that they will provide COVID medicines or vaccines at zero profit. As Porges sees it, these statements were made in the heat of the crisis “obviously done to capture public and political favor.” Such behaviors, namely announcing pricing before a product’s profile is understood, “distorts” both the internal incentives and other investors’ motivation to continue to finance the area.

All things considered, pricing for COVID-19 products “should reflect some proportion of the value they will create,” Porges said. Even that approach will still be a “special situation” for a pandemic. For remdesivir, the $50,000/QALY ICER used to reach the $4,460 price is already a tighter standard utilized for a public health emergency.

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