Big Pharma Needs a Covid-19 Vaccine to Redeem Its Reeling Reputation
(Bloomberg Businessweek) -- What a place the U.S. must have been in the 1950s—when a middle-class life didn’t require a college education, and manufacturing jobs were plentiful, and chief executive officers made modest salaries. Oh, and when the scientist who developed the first working polio vaccine refused to profit from it.
“Who owns the patent on this vaccine?” the CBS newsman Edward R. Murrow asked Jonas Salk in April 1955. “Well, the people do,” Salk replied, sounding a little surprised by the question. “There is no patent. Could you patent the sun?”
This famous anecdote is usually invoked to illustrate how the pharmaceutical industry has changed. It’s not that the pharma business of the 1950s didn’t want to make a profit, but its unrelenting focus on profit maximization hadn’t yet set in. There were no direct-to-consumer ads. Marketing budgets didn’t dwarf those for research and development. The likes of Eli Lilly & Co. (which manufactured insulin) and Bristol-Myers Corp. (as it was then called), a trailblazer in antibiotics, were widely admired. There really was a sense that pharmaceutical companies worked for the common good.
Not anymore. Major pharmaceutical companies are viewed by many consumers as greedy and heartless, caring more about their stock price than the people who need their drugs. They take old drugs like insulin, which cost $21 per vial two decades ago, and run the price up to $321. They bring new drugs to market with price tags that can exceed $100,000. The relentless rise of drug prices—they rose 60% from 2007 to 2018, according to a University of Pittsburgh study—is top of mind when consumers characterize the pharmaceutical industry. Last fall, in Gallup’s annual poll asking people to rank 25 industries from best to worst, the pharmaceutical industry came in dead last. Even the federal government was ranked above the pharma business.
Then came Covid-19.
“This is what these companies are built for,” says Brad Loncar, CEO of Loncar Investments. “If they’re not throwing everything they’ve got at this, then why are they a pharmaceutical company?”
Loncar, a longtime biotech investor, says he’s convinced the companies are “doing it for the right reason”—that is, they’ve tossed aside the profit motive as they race to find a way to stop a virus that threatens all of humanity. But there’s another agenda, too. The companies are hoping that if they succeed, the public will view them in a better light. “This pandemic is the first time in a long time that you’re seeing this industry’s best foot forward,” Loncar says. “Companies want to make the most of this and gain a little bit of redemption.”
Industry executives admit as much. At a recent investment conference, John Young, Pfizer Inc.’s chief business officer, said if the industry was successful in developing a vaccine, he was hopeful that “the perception of our industry will reflect the efforts we’ve made.” On a conference call in late April, Gilead Sciences CEO Daniel O’Day, after noting the industry has “spared no expense” in fighting the pandemic, added, “I certainly think this will help the industry’s reputation.”
It certainly will in the short term. The question is: Will that reputational bump last beyond Covid-19? Or will the pharmaceutical industry fritter away its enhanced reputation? That depends on whether changes occurring now signal a fundamental shift in the culture of the industry. And on that front, the signs aren’t hopeful.
There’s much to admire about the way the industry has attacked the pandemic. Companies have mobilized to an almost unheard-of degree. With the assent of the Food and Drug Administration, they’re compressing work that might normally take years into months. There’s been an astonishing level of cooperation among companies. As a result, there’s a legitimate chance that a vaccine—indeed, several vaccines—will be developed by yearend.
Still, the question uppermost in the mind of pharma’s critics is: How will Covid-19 drugs and vaccines be priced? The first company to put a price tag on its pandemic drug, in late June, was Gilead Sciences, with remdesivir. The drug was originally developed to treat victims of the Ebola virus, but its efficacy didn’t meet the FDA’s requirements, so it was never used.
When the coronavirus arrived, Gilead Sciences dusted off remdesivir and began supplying it to hospitals for free on a “compassionate use” basis—meaning that even though randomized trials hadn’t been conducted, it could be given to patients on an emergency basis. Within a matter of months, several trials were undertaken, which showed that remdesivir lowered a Covid-19 patient’s hospital stay by an average of four days. The government gave Gilead Sciences permission to begin marketing the drug as a Covid-19 treatment. Which meant Gilead had to establish a price.
This wasn’t the first time the company had faced a high-profile pricing decision. In 2013, after developing Sovaldi, the first drug to cure hepatitis C, Gilead set the price for a three-month course of treatment at $84,000. The blowback was intense. John Rother, head of the National Coalition on Health Care, an advocacy group, called the price “completely unreasonable” and “unsustainable.” The Senate Finance Committee concluded after an investigation that Gilead “knew these prices would put treatment out of reach of millions and cause extraordinary problems of Medicare and Medicaid but the company still went ahead.”
Gilead didn’t budge. Its argument was that, by curing hep C, Sovaldi was saving the health-care system tens of millions of dollars that would have been spent on treatments for hep C patients. In the industry, this is called “value-based pricing.” No matter how much a drug costs, the reasoning goes, if one can show that it saves the system money, then it’s worth it.
In the days before Gilead made its decision about remdesivir, a well-respected Wall Street analyst, Geoffrey Porges of SVB Leerink, wrote that he expected a price of around $5,000 per course of treatment. That became Wall Street’s expectation. Meanwhile, Public Citizen, a public-interest group, wrote that remdesivir shouldn’t cost any more than $1 a day, an amount, it said, that would give the company a “reasonable profit” while taking into account the role the government played in paying for clinical trials.
The pricing scheme the company finally unveiled in late June wasn’t $5,000—but it wasn’t $1 a day, either. Gilead said it would charge $2,340 for a full treatment of six vials in most of the developed world. In the U.S. it would be $3,120. In the developing world, Gilead would license it to generic companies who would sell it for far less.
How did the company justify its pricing decision? In an open letter, CEO O’Day wrote that reducing hospitalization for Covid-19 patients by four days would save at least $12,000. “We have decided,” he wrote, “to price remdesivir well below that value.”
Still, that’s a form of value-based pricing in that it’s based not on what the drug cost to develop, but on how much it’s estimated to save the health-care system. In a recent earnings call, the company also said the drug is likely to add $2.8 billion in revenue in the second half of 2020.
Although Gilead views the price for remdesivir as far below what it could have charged, critics weren’t exactly jumping for joy. “This is entirely predictable,” Peter Bach, director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center, told Stat, an online health news service. “They take the highest number anybody has floated, they cut down a bit from there, and they say now they’re the good guys.”
Meanwhile, a handful of companies, including AstraZeneca Plc and Johnson & Johnson, have vowed not to profit should they succeed in developing a vaccine. AstraZeneca CEO Pascal Soriot has been particularly vocal on this point.
“We felt there [is] a time in life when companies need to step up and make a contribution,” he said on his company’s most recent earnings call. “This is the kind of time in history when … humankind is really threatened as a whole.” A vaccine is estimated to cost about $4 to manufacture and distribute; if he’s true to his word, that’s what AztraZeneca, which is working on the vaccine with Oxford University, would charge.
Early on, Pfizer also made it sound as if it, too, were unconcerned about profiting from a vaccine. Young, the company’s chief business officer, said at that biotech conference that Pfizer dove into vaccine research with no thought given to return on investment. “We realized this is not a time to think about … a typical ROI,” he said. All that mattered in the moment, he added, was developing “a safe and effective vaccine.”
In late July, however, Pfizer signed a deal to deliver 100 million doses to the U.S. government for $1.95 billion. That set an effective price of $19.50 per dose. (Pfizer assumes people will need two doses, bringing the cost of treatment to $39.) Like Gilead, Pfizer wants consumers to believe that this is a rock-bottom price; a spokesperson told Bloomberg News that it was “30% less than what others charge for a seasonal flu vaccine.”
And no doubt it is. But it will still generate some $12 billion in revenue in the U.S. alone for the company, according to Bloomberg Intelligence analyst Sam Fazeli. When I asked Fazeli whether he thought it was a fair price, he said in an email: “You have to balance the $12 billion cost of getting the U.S. potentially back to something that resembles normal versus the trillion dollar economic hit. I think it’s a price worth paying.”
But, he added, “No country has to buy it. They can all go to AstraZeneca and risk not getting enough doses.”
It’s likely that if Pfizer develops a vaccine that works, few consumers will care that it costs $39 a treatment. The same is true of Moderna Inc., which is hoping to charge $50 a treatment for its vaccine. There will be a giant scramble by all the players with workable vaccines to get them into the hands of health-care providers who can deliver them to the rest of us.
But what happens once the immediate emergency is over? It seems likely Covid-19 vaccines will be required annually, just like flu shots. Will companies still deliver them at cost? Unlikely. Pfizer has already given Wall Street its answer. During its earnings call, the head of Pfizer Biopharmaceuticals, Angela Hwang, said that once the vaccine becomes a seasonal event, the company would move to—you guessed it—a more value-based pricing approach. Meaning higher prices.
In the end, it’s hard to envision a post-pandemic pharmaceutical industry that’s much different from the one we have now. Yes, it’s acting differently right now because any hint of profiteering would be a public-relations disaster. Even so, according to the advocacy group Patients for Affordable Drugs, pharma companies have raised the price of 245 drugs since the pandemic began. That’s what Wall Street demands.
Pharmaceutical companies will change only if the larger society changes: when workers are paid more and top executives less. When companies stop dancing to Wall Street’s tune. When a scientist can give away a patent—as Jonas Salk did so many years ago—and not be considered a fool.
Don’t hold your breath.
©2020 Bloomberg L.P.