By Greg Ip
Not long ago, drug companies had a bull's-eye on their ticker
symbols. Sky-high prices for lifesaving drugs and the opioid crisis
had made them the country's least-liked industry. Democratic
presidential candidates were one-upping each other with promises to
rein in prices, while President Trump mulled similar plans.
Covid-19 has given drug companies a shot at redemption. They are
pouring resources into therapies and vaccines, with the entire
economy's fate resting on their success.
When Moderna Inc. reported positive early results on its vaccine
on Monday, the Dow Jones Industrial Average leapt nearly 4%.
Positive results from Gilead Sciences' antiviral therapy remdesivir
had similar effects three weeks earlier.
Drug companies know the world is watching. "We are likely to
face significant public attention and scrutiny about any future
business models and pricing decisions with respect to remdesivir,"
Gilead noted in a securities filing. It promised to give away its
first production run and allow poor countries to make generics.
Johnson & Johnson said it would sell its vaccine, now in
trials, on a not-for-profit basis. Moderna's chief executive has
said "we don't want to maximize profit" on its vaccine.
This may be an astute investment in good will, but not a
sustainable business model: In the long run the companies have to
charge prices commensurate with the cost of developing drugs,
including those that fail. The big question is whether Covid-19
proves to the public and politicians the merits of the current
pricing system, which lets drug companies charge whatever the
market will bear.
"There are a lot of people in biotech really trying to solve
this problem because it's the right thing to do," said Craig
Garthwaite, a health economist at Northwestern University who
disagrees with forcing drug companies to lower prices. "But I don't
want to put all my eggs in the altruism basket. We want every
company that can possibly address this problem to think that both
morally and financially, the best thing to do is to tackle the
The lure of profits may not be the primary reason drug companies
are racing to find coronavirus treatments. But it does explain why
they have the capital, know-how and technology to deploy in the
fight against the coronavirus.
Empirical studies show that revenue expectations help drive drug
innovation. Because the U.S. pays so much more than other countries
for the same drugs, it accounts for 70% of biopharmaceutical
profits among developed economies, according to the White House
Council of Economic Advisers. The U.S. also accounts for 44% of
medical research and development and 60% of high-value
life-sciences patents, according to a 2015 study.
Gilead is regularly assailed for the high price of its hepatitis
C drugs, Sovaldi and Harvoni. But the prospect of similarly high
returns is central to the pursuit of virtually all drugs by private
companies. Gilead first worked on remdesivir as a treatment for
hepatitis C and then for the Ebola virus.
Moderna has yet to bring a drug or vaccine to market since it
was founded in 2010, but it has raised $5 billion from partners and
investors betting its technology, which uses the body's own cells
to manufacture special molecules, will lead to a lucrative
That the ability to sell at high prices has helped prepare the
U.S. drug industry to take on Covid-19 doesn't prove they were
necessary. Many organizations that aren't driven by profits and
share prices are also racing for a cure, such as the University of
Oxford, whose vaccine candidate is well advanced. Infectious
diseases often draw limited private investment because they do most
of their harm in poor countries, and pandemics are unpredictable.
Government funding is key to vaccine production and research. The
National Institutes for Health helped design Moderna's vaccine.
Moderna, Johnson & Johnson, Sanofi SA and AstraZeneca PLC are
receiving federal money to support vaccine development.
While there is broad agreement that the private market incents
innovation, "the real question is whether everything that comes out
is worth the price we end up paying for it," said Patricia Danzon,
a professor of health-care management at the University of
Pennsylvania's Wharton School who has studied drug pricing.
She noted, for example, that hydroxychloroquine, an old and
cheap generic malaria drug, has drawn considerable interest in
Better, she said, for governments and insurers to negotiate
prices based on how cost effective they are. The Institute for
Clinical Economic Review, which has led the way in recommending
drug prices based on effectiveness, says remdesivir's value is as
low as $10 for a 10-day course, based on its manufacturing cost, or
as high as $4,500 based on its contribution to quality and length
But Peter Kolchinsky, a virologist and managing partner of RA
Capital Management, which invests in life science companies, said
such studies don't capture a drug's lifetime contribution. For
example, Roche Holding AG's Actemra, developed for rheumatoid
arthritis, is being tested to treat "cytokine storm," a dangerous
overreaction of the immune system, in Covid-19 patients. "No one
said we should incentivize that drug because it could be useful in
case Covid-19 strikes. No one saw that," Mr. Kolchinsky said.
Should hydroxychloroquine prove effective against Covid-19, it
would be a huge benefit never factored into cost-effectiveness
Mr. Kolchinsky describes the current pricing system as an
insurance policy. Much as civilian demand for automobiles paid for
factories that could be converted to producing tanks and bombers in
wartime, he said, "America's willingness to pay for branded drugs
of all kinds created this vibrant industry, fueled it and
encouraged it to develop new tools, and made us so well equipped
when the unexpected struck."
Write to Greg Ip at email@example.com
(END) Dow Jones Newswires
May 21, 2020 13:49 ET (17:49 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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