Examining the Gilead deal

In September[1], U.S. pharmaceutical company, Gilead Sciences Inc.[2] entered into a licence agreement with seven Indian pharmaceutical companies (the licensees), allowing them to manufacture their own, lower cost, generic versions of Sovaldi, the Hepatitis C (HCV) drug patented by Gilead. The Indian companies on this unique initiative are CIPLA, Ranbaxy, Cadila Healthcare, Hetero Labs, Mylan Laboratories, Sequent Scientific and Stride Arcolab.

The deal has been widely heralded as a success[3] since it has brought about collaboration between a U.S. pharmaceutical giant and Indian generic drug producers to manufacture and distribute a high-cost drug at an affordable price for citizens of a developing country. This is done at a time when Indian generic drug and U.S. branded drug companies have been in a battle over pharmaceutical patents.

But there’s a catch. While the benefit of the agreement for HCV patients in low-income countries is obvious, what has been less discussed is the possibility that such a deal may eventually help Gilead establish a global monopoly on the supply of HCV medications.

Some background on the issue. Sovaldi, first developed by Pharmasset Inc. and now marketed by Gilead, is the brand name of an HCV drug that claims a higher cure rate for HCV patients than rivals, and in a shorter treatment time span. Sovaldi is priced at $1,000 per pill[4] in the U.S., taking the total 12-week treatment cost to $84,000[5].

As per the license agreement with the Indian companies, Gilead allows those licensees to manufacture and market their own versions of the drug under their own brand names.[6] The licensees are also given the freedom to price their product as they wish as long as Gilead is paid a royalty of 7% of the total net sales of the product.[7] Gilead also plans on competing with the licensees by selling Sovaldi in India, pricing it at a significantly lower $300 per bottle (a month’s supply), taking the total 12-week treatment cost to $900[8].

The price is only 1% of the original price, indicating a clear humanitarian benefit for patients. However, over the long term, from the public policy perspective, three other aspects of the agreement should be studied before deals like Gilead’s become accepted as the norm.

1. 1. The appropriateness of the countries selected in this agreement;
2. 2. The impact of restricting exports to countries not included in the agreement;
3. 3. The rationale of the pricing of Sovaldi.

As per the agreement, the Indian licensees can sell their manufactured[9] drugs in 91 “low-income” countries[10], identified by Gilead, including India. The problem with this list is that it does not include the countries with the largest problem of HCV in the world such as China, Russia, Brazil[11] and the Philippines, making the selection criteria limited and less profitable (See table below)[12].

 

Table 1

	Excluded Countries with the Largest HCV Population	Number of People with HCV (in million)	Percentage of Population with HCV
1	China	29	2.2%
2	Russia	5.8	4.1%
3	USA	5.4	1.8%
4	Japan	3.06	2.4%
5	Brazil	2.6	1.4%
6	Philippines	1.9	2.2%
7	Italy	1.9	3.2%

Source: Lavanchy, Gateway House.

First, Country appropriateness: The U.S. is not on the list but would have benefitted from lower prices had the licensees been allowed to sell there, even though the government subsidises patients through Medicare.[13] On the other hand, Pharmaceutical Benefit Managers (PBMs) in the U.S. (that generally contract to buy certain pharmaceutical drugs at discounted rates) are coercing pharmaceutical companies to actively compete by agreeing to contractually discounted prices with PBMs. This is possible because of the economies of scale of PBMs, granting them greater bargaining power. The competition in HCV medication can be glimpsed through Express Scripts (the largest U.S. PBM) opting for AbbVie’s Viekira Pak as their exclusive option for Genotype 1 patients[14] and excluding Sovaldi from their National Preferred Formulary,[15] whereas Sovaldi (and Gilead’s Harvoni) was made the exclusive prescribed drug for CVS, another large PBM.

Second, the issue of export restrictions on Indian companies—Indian licensees cannot export their generic versions to countries not included in the list of 91 countries drawn up by Gilead[16], effectively shutting them out of large prospective markets (as in Table 1). This helps Gilead sell its own product without competition in those markets, establishing a monopoly on the HCV medication market.

This restriction is more rigid than usual. Under normal circumstances, for any drug, licensees are restricted from selling to another country only if a patent is pending with the patent authority (in the host country of the licensee or the destination country of export).[17] With Sovaldi, the Indian licensees will need to wait even beyond the decision of the Indian and third-country’s patent authority, until every appeal through the judicial system of India and the importing country[18] have been exhausted by the original applicant i.e. Gilead. For instance, the Novartis patent application process in India took eight long years to be approved. In the case of the seven countries in the table above, the Indian licensees may have to wait just as long. A pre-grant opposition to Gilead’s Indian patent application is already in the Patent Office by the Indian Pharmaceutical Alliance (IPA), Natco Pharma and IMAK.[19]

Table 2^[20]

 

Country	Patent Status with Patent Authority	Implication if Indian Supreme Court Rejects Patent and Patent Status in Exporting Country Remains Status Quo
China	Patent Pending since 2008[21]	Cannot export until the Chinese authorities conclusively reject the patent and every judicial appeal is exhausted.
Russia	Granted	Cannot export since the Russian patent has been granted.
USA	Granted	Cannot export since the USA patent has been granted.
Brazil	Patent Pending since 2008	Cannot export until the Brazil authorities conclusively reject the patent and every judicial appeal is exhausted.
Philippines	Patent Pending	Cannot export until the Philippine authorities conclusively reject the patent and every judicial appeal is exhausted.
Italy	A Patent is Pending (since the European Patent is pending)	Cannot export until the EU authorities conclusively reject the patent and every judicial appeal is exhausted.

Source: Thomson Reuters

Furthermore, the pharmaceutical industry is a fast-paced industry with constant developments. Eight years is a long time, when the generic versions can become obsolete, as newer and more effective drugs will have been developed. Gilead’s own product, Harvoni, another slightly more effective HCV drug, was already being prescribed for at a faster rate than Sovaldi, one month after its launch.[22]

Last is the issue of pricing. This is usually used in favor of the deal, highlighting Gilead’s low-cost treatment, from $84,000 to $900, almost 99% lower. Gilead generally follows a tiered-pricing system.[23] However, $84,000 could also be an inflated starting price and may not reflect the low costs incurred to develop the product. Pharmaceutical companies worldwide usually cite high R&D costs as a justification for high product prices, to ensure they recover their costs. Gilead, however, did not develop Sovaldi itself but inherited it through its acquisition of U.S. based Pharmasset in 2011.[24]

The figures in the table below illustrate this point.

Table 3: Acquisition Price of Pharmasset and Total Expenditure on R&D by Pharmasset on Sovaldi v Total Income Earned by Sovaldi in First Three  Quarters

Total Acquisition Price of Pharmasset in 2011= $11 billion[25]

Total Pharmasset R&D Spend on Sovaldi 2009-11 (period during which Sovaldi was developed)= $62.4 million[26]

Total Earned by Gilead on Sovaldi in Three Quarters (Jan– Sep 2014)= $8.55 billion

Total Earned by only Sovaldi is already 66% of the entire acquisition price of Pharmaset

Gilead is also selling Sovaldi at a higher cost than Pharmasset had planned. In a 2011 SEC filing, Pharmasset reported that it planned to sell a 12-week course of Sovaldi for $36,000[27] (as opposed to Gilead’s $84,000) in the US.[28] The $48,000 difference in Gilead’s price, therefore, remains puzzling. Meanwhile, The United States Committee on Finance has recently commenced an investigation into Gilead’s pricing of Sovaldi.[29]

These three factors show how Gilead may end up creating a disguised monopoly on HCV medication.

The Alternative to a monopoly of course is competition in the pharmaceutical industry, which can ensure better pricing and volumes for meeting the demand, including in the US where this now appears overpriced.[30]

Competition from Indian generic players in HIV medication resulted in a price drop of 99%[31] worldwide. Thanks to Indian Pharma and its generics, prices of many drugs in the U.S., generally perceived as anti-generic drugs, have dropped dramatically. Former U.S. President George Bush initiated the PEPFAR (Presidential Emergency Plan for AIDS Relief) to increase access to HIV medication, by providing generic medicines. Had generic drugs been contractually barred, Gilead-style, from entering the U.S., such widespread access would not have been possible.

The Gilead deal is certainly a progressive step for a U.S. Pharmaceutical company wanting to do business in India. The company can now truly make history by taking its initiative to its natural conclusion: putting a time limit on the country-wide export restrictions, and allowing those infected by diseases to benefit from affordable medication.

Kunal Nathwani was an intern at Gateway House. Kunal graduated from University College, London (UCL) with an LL.B. He then completed his Legal Practice Course (LPC) from BPP and is currently working at the London office of international law firm, Simmons & Simmons.

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