E "Economist" In Me Says This Is A Threat To Gilead

New York Attorney General Eric Schneiderman recently launched an investigation into 16 health insurance companies’ coverage of HCV and their restrictions. I concluded that [i] by offering more access to high-priced HCV drugs, insurers might incur higher benefit pay outs and [ii] insurers could potentially form coalitions to negotiate steeper discounts from Gilead GILD and AbbVie ABBV.

SA author Jonathan Weber has a totally different thesis. I address his arguments below.

Mr. Weber Believes Less Restrictions Lead To Higher Volume, Higher Profits For Gilead

Let’s look at what would happen if insurers were forced to expand coverage and are able to negotiate lower per unit prices due to higher volume rebates. Gilead grossed $12.5 billion from its US HCV franchise in 2015, curing 225,000 patients (for a per patient cost of $55,000). Its gross margin is 88 percent, which means the proportional cost per patient is $6,600, whereas the profit contribution per patient is $48,400.

When Gilead’s patient count in the US grew 50 percent, whilst prices per patient dropped 20 percent, this would mean revenues of $44,000 per patient and a profit contribution of $37,400 per patient. Its total profit contribution would grow from $10.9 billion to $12.6 billion ($37,400 per patient times 338,000 patients). Additional $1.7 billion in profit contribution would lead to net income growth of $1.4 billion …

My Response:

I totally get Mr. Weber’s argument that expanding coverage could drive profits in spite of lower prices. Actually, I made that same argument a year ago:

To limit their exposure to the cost of Sovaldi, insurance companies had only purchased the drug for patients with advanced liver disease. Abbvie’s discounted HCV regimen made it more affordable to offer the treatment to all HCV patients; this also implied there was pent up demand that was not being satisfied due to Gilead’s unwillingness to lower its prices. … Though the 46% gross to net has initially lowered Gilead’s revenue, it may have expanded the universe of patients the company can treat.