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 coronavirus."

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 breakthrough.

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 treating Covid-19.

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 of life.

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 research.

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 greg.ip@wsj.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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