May 14, 2019 / 7:22 PM / 3 months ago

Breakingviews - Three reasons a wonder drug can cost $5 mln

Pharmaceutical tablets and capsules in foil strips are arranged on a table in this picture illustration taken in Ljubljana September 18, 2013. REUTERS/Srdjan Zivulovic

NEW YORK (Reuters Breakingviews) - Novartis’s gene therapy for spinal muscular atrophy could set a record at up to $5 million per patient. Zolgensma appears astonishingly effective against a rare, inherited disease, sufferers of which rarely live beyond four. Even so, the high price is likely to fuel the debate about whether any drug should cost that much. Sometimes, the answer is yes.

Health economists often measure a therapy’s value by putting a value of an individual living one year of good health. Countries, and increasingly insurers, use this approach. Novartis Chief Executive Vas Narasimhan said last month that Zolgensma, which is a one-time treatment, was cost-effective at up to a $5 million price tag, based on the assumption that a year of hospital-free healthy existence is worth $500,000. Society already pays high prices for cancer medications that provide a lower bang for their buck.

Bolstering the Swiss drugmaker’s case is the fact that companies need to earn a return on their investment, and if they don’t get it, they might not invest in future. Novartis paid $8.7 billion for AveXis, the developer of Zolgensma, in 2018. Most drugs fail to reach market, and for those that do it can take years before the company knows whether the price it settled on will cover its costs, which in this case include manufacturing a complex modified virus. The number of potential patients is small – perhaps one in 10,000.

The problem is that drugmakers also have an incentive to charge high prices just because the market can bear them. Americans account for about 40% of drug spending worldwide, helped by limited competition, unregulated prices, numerous middlemen and the government’s limited ability to negotiate. Patent-protected cancer drugs in the United States cost, on average, triple what they do in other nations. One sign of a failing market is when drugs boast not just high prices, but huge variation between similarly-wealthy countries.

In pricing terms Novartis has all three factors in its favor. Meanwhile, a rival drug to Zolgensma exists but must be administered every few months and appears less effective. The art for Novartis will be to maximize revenue while minimizing public outcry. Sure, it could set the price at $5 million – but settling for, say, half that would be healthier all around.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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