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Pricing in the Pharmaceutical Industry

Drug pricing in the United States has been a political hot topic in recent years.  On July 24, 2020, President Trump signed four executive orders on lowering drug prices.  This multifaceted issue has numerous stakeholders with far reaching financial impacts. The backdrop of the current global pandemic creates additional complications for pharmaceutical companies seeking to bring COVID-19 treatments and vaccines to market, as these companies could be judged harshly if pricing of their products is not seen as reasonable by the public.

The pharmaceutical industry in the United States is structured to provide companies and investors economic incentives to engage in product development in exchange for fruitful returns throughout product launch.  In recent years, drug pricing in the United States has been heavily scrutinized, with many arguing that companies are abusing regulated monopolistic periods and marketing drugs at unjustified prices.

An analysis published in 2018 by the America’s Health Insurance Plans (AHIP) association stated that on average, approximately 700 drugs had increased their price by 10 percent or more annually during the past five years.  In 2019, the Senate Finance Committee held a congressional hearing with seven pharmaceutical executives to discuss increases to drug pricing, and H.R.3, a bill known as the Lower Drug Costs Now Act, is awaiting Senate review after being passed by the House of Representatives in late 2019.

The COVID-19 pandemic has pharmaceutical companies under a microscope due to the world-wide demand for drugs to treat the disease. The non-partisan organization, Institute for Clinical and Economic Review (ICER), known as an independent watchdog on drug pricing, is closely following the pricing developments for COVID-19 treatments and vaccines.

On May 1, 2020, Gilead’s remdesivir received an emergency approval from the United States Food and Drug Administration for hospitalized patients with severe COVID-19 symptoms.  Acknowledging the speculation regarding the potential pricing of remdesivir, Gilead published an open letter from its Chairman and CEO.  The letter announced that in the United States, remdesivir would be listed at $3,120 for a 5-day treatment and discounted to $2,340 for certain government programs.  Gilead also stated that by the end of 2020, it expected its investment in remdesivir to exceed $1 billion and that it felt the price set for remdesivir was well below its value.

In response to Gilead’s announcement, ICER stated that Gilead’s price was largely in line with its analysis of a reasonable price, given certain assumptions.  However, some felt the pricing was too high given the pandemic and noting that Gilead received funding from the government for the development of remdesivir.

Outside of the United States, Gilead entered into non-exclusive licensing agreements with nine companies to manufacture and distribute remdesivir at a lower cost for developing countries and countries with substantial healthcare obstacles.  Each licensee is able to set the price for its generic remdesivir product and the licenses are royalty-free until the World Health Organization ends the Public Health Emergency of International Concern or another drug is approved for the treatment or prevention of COVID-19.

The current pricing approach in the U.S. relating to COVID-19 treatments and vaccines continues to provide opportunities for companies and investors to engage in further product development.  As a result, companies may be able to set higher prices in the U.S. and lower prices in developing countries.  However, as seen with Gilead’s remdesivir, the pricing decisions made by pharmaceutical companies marketing COVID-19 treatments will be analyzed and scrutinized extensively.