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How Do Pharmaceutical Companies Establish Drug Prices?


With all the recent controversy around the cost of prescription drugs, we got to wondering how exactly do companies decide how much they should charge for a drug? So we asked NPR health policy correspondent Alison Kodjak to look into it.

ALISON KODJAK, BYLINE: Companies do lots of analysis to figure out what their new drug should cost. They look at the market and try to estimate the number of patients and how long patients will have to take it. But in the end, setting a price comes down to one thing.

DARIUS LAKDAWALLA: So they're just trying to figure out what people are going to be willing to pay for the drug. I mean, it sounds really simple, but it really is, I think, in many cases that simple.

KODJAK: Darius Lakdawalla is a professor at USC in Los Angeles who studies how drug companies settle on their prices.

LAKDAWALLA: They usually talk to insurance companies. They look at what insurance companies are paying for other similar drugs. They're probably talking to physicians to understand how likely they're going to be to use their drug versus any other alternatives on the marketplace.

KODJAK: That's the logic that went into the $84,000 price tag that Gilead Sciences put on a bottle of Sovaldi, the drug that can cure hepatitis C in most cases. That price drew massive criticism and sparked a months-long Senate investigation last year. Here's Sen. Ron Wyden, a Democrat from Oregon, in a press conference.


RON WYDEN: The company pursued a calculated scheme for pricing and marketing its hepatitis C drug based on one goal - maximizing revenue regardless of the human consequences.

KODJAK: But details from that Senate investigation show that Gilead went through the standard procedure to determine the price. They talked to doctors and insurers and they looked at how much previous treatments cost. Pratap Khedkar is a consultant who helps pharmaceutical companies price their drugs. He says breakthrough drugs can charge a premium.

PRATAP KHEDKAR: So a much better drug comes along that's much more effective and typically the principle is, if you're much better then you can at least go in at a 10 percent or 15 percent price premium.

KODJAK: Sovaldi was a much better drug, and it turns out it wasn't much more expensive than the treatments it replaced. So according to the Senate report, insurers and doctors told the pharmaceutical company Gilead that $84,000 - or about a $1,000 a pill - was reasonable, but that didn't last long. That's because the hepatitis drug is only needed for 12 to 24 weeks, a relatively quick course that's good for patients and can produce big, short-term profits for drug companies. But insurers don't like spending so much money so fast and they're trying to restrict access.

KHEDKAR: That is the paradox that something that is such a big breakthrough which is it cures you relatively instantly as these things go. The benefit accrues so quickly and the insurance company cannot afford to perhaps accrue the payment that quickly.

KODJAK: Khedkar says insurers aren't interested in the total cost of a treatment. They're more interested in the monthly payment.

KHEDKAR: The way the insurance company looks at it is a metric called per member, per month.

KODJAK: That means in an insurer's eyes, expensive treatments are better if they take longer, and that's not always good for patients. So Sovaldi's price tag was logical in relation to its predecessors, but the debate focused instead on the big number. Lakdawalla, of USC.

LAKDAWALLA: Very few people have argued that the drug doesn't produce a lot of value. The optics of pricing became part of the problem because it lent itself the rhetoric, like, this is a thousand dollars a pill and so on and so forth.

KODJAK: Which he says is unfortunate because a quick cure is clearly better for patients. Hypothetically, he says...

LAKDAWALLA: I think it would've been even better if they had sold one pill for $85,000. Imagine if you just took one pill and you're done. Yet think of the headlines if they had done that.

KODJAK: So Gilead landed on a price that was justified by some metrics but didn't pass the public relations test. Now just two years after it was launched, Sovaldi has at least two competitors. The price today - about half of what it was in 2014. Alison Kodjak, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

Alison Fitzgerald Kodjak is a health policy correspondent on NPR's Science Desk.
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