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The AG of Massachusetts Has No Chance Against Gilead

Drug prices too high? Why not just have the state Attorney General’s office set them for you?

That’s what I’m taking away from this story. Maura Healy, AG of Massachusetts, is firing a warning shot at Gilead over the pricing of their HepC drugs. Her office is apparently considering whether Gilead is engaging in an unfair trade practice (text of the letter available here):

As a threshold matter, my office is considering whether Gilead’s pricing strategy with respect to Solvaldi and Harvoni may constitute an unfair trade practice in violation of Massachusetts law. Because Gilead’s drugs offer a cure for a serious and life-threatening disease, pricing the treatment in a manner that effectively allows HCV to continue spreading through vulnerable populations, as opposed to eradicating the disease altogether, results in massive public harm. My civil enforcement attorneys will continue to examine this potential claim for unfair commercial conduct.

You know what else resulted in massive public harm? Not having any decent hepatitis C therapies at all. Just a thought. Perhaps the AG should come after the whole drug industry because we haven’t been able to do anything about Alzheimer’s yet – our failure to cure that one is resulting is massive public harm, too, you know.

That argument aside, is there a case here? On Twitter John Tucker pointed to this case, brought by SEPTA in Philadelphia (along with two other plaintiffs). It alleged “that Gilead’s pricing scheme for the sale of its patented Hepatitis C drugs violates Section 1557(a) of the Patient Protection and Affordable Care Act, constitutes unjust enrichment, breaches the implied duties of good faith and fair dealing, and violates California Business & Professions Code § 17200“, and that would seem to be in the same ballpark as what Healey is proposing.

That suit didn’t get too far. Gilead moved to have it thrown out, and in that PDF linked to above, you can see that the judge agreed with them. I’ll take its arguments in order: The Affordable Care Act argument was that Gilead’s pricing was, in the end, discriminatory, because it charged US patients more, caused health care plans to limit access, was a greater burden on those outside of plans that had negotiated discounts with Gilead, and so on. They also tried to bring racial discrimination into it, since (as the suit states) a disproportionate number of HepC patients are members of minority groups. The court was not buying it, saying, among other things, that “Plaintiff’s theories of discrimination are a hodgepodge of complaints about the unfairness of how pharmaceutical companies adjust pricing to accommodate international markets or bulk purchasers that do not implicate discrimination on the basis of disability. As articulated, none of these theories would support a class action claim.” The court also questioned whether a diagnosis of HepC alone was sufficient to claim disability, noting that the disease does not (until its very late stages) limit life activities in the ways that disability laws specify.

As for the racial discrimination aspect, the court had this to say: “Plaintiffs’ claim fails to state a viable cause of action under the Affordable Care Act on the basis of Title VI. Plaintiffs have not alleged that either of the individual plaintiffs is a member of a protected class on the basis of their race, and plaintiffs have not brought a class action on behalf of racial minorities. See Amend. Compl. at ¶¶ 117-123 (neglecting to mention any allegations of racial discrimination). Plaintiffs have failed to explain how, other than by virtue of their Hepatitis C diagnosis, they “qualify” for Gilead’s patented drugs. . .Plaintiffs have not shown Gilead has any prejudice, spite, or ill will toward racial minorities, nor have they shown that Gilead was deliberately indifferent to any substantial likelihood that its actions would violate a federally protected right. Gilead setting high prices for its drugs — despite knowing that setting high prices would make it difficult for consumers without means or insurance coverage to acquire those drugs — is not the type of failure to act that Title VI reaches. ” So that didn’t get very far, either.

Now we get down to that California code argument: “Gilead argues that plaintiffs’ state law claims are preempted by federal patent law. MTD at 12. Specifically, Gilead argues that plaintiffs are attempting to use state law to regulate or reduce the price of Gilead’s patent-protected drugs Sovaldi and Harvoni. Id. at 12; Def. Reply at 5. Plaintiffs respond that while Gilead can use patent law to exclude others from making an infringing product, it “cannot exploit its patent rights by charging exorbitant prices.” This becomes a question of whether federally granted patent rights or state law take precedence. The court pointed out that in 2005, the District of Columbia tried passing a “Prescription Drug Excessive Pricing Act”, but that this was held by the Federal Circuit to be preempted because the “underlying determination about the proper balance between innovators’ profit and consumer access to medication… is exclusively one for Congress to make“. That precedent along makes the Massachusetts action unlikely to prevail, in my opinion.

This case went similarly: “To the extent that plaintiffs seek to use state law to challenge Gilead’s exercise of its exclusive patent rights to make pricing decisions, plaintiffs’ claims are preempted. Federal patent law contemplates the tradeoffs between exclusivity and access, and plaintiffs cannot use state law to adjust that balance by forcing Gilead to lower its prices or disgorge profits from the sale of its patented drugs.” I do not see how the Massachusetts Attorney General’s Office proposes to get around this; it appears to be exactly the same principle and the same point of law.

So no matter what one might think, one way or the other, about Gilead, about the price of its drugs, and about the state of Massachusetts’ attempts to alter those prices, it would appear that there is no legal basis for the actions that the Attorney General’s office says that they are contemplating. Gilead’s legal advisors are, one would think, well aware of this. For that matter, the Attorney General may be well aware of it, too.

42 comments on “The AG of Massachusetts Has No Chance Against Gilead”

  1. Anon

    Of all the drugs to attack prices for, patented ones are beyond reproach, that’s the whole point of a patent system that confers a limited monopoly on the inventor. Sheesh!

    They should try something else, like allowing Medicare to negotiate prices like in every other country.

  2. DEITER

    This is an area where tech companies are doing a much better job than pharma. Apple is continuously celebrated for ripping us all off.

  3. Anon

    The most disturbing comment is this:

    “Because Gilead’s drugs offer a cure for a serious and life-threatening disease, pricing the treatment in a manner that effectively allows HCV to continue spreading through vulnerable populations, as opposed to eradicating the disease altogether, results in massive public harm.”

    That is nothing less than a blatant attempt to shift the responsibility for solving an important public health issue from the government to the private sector. If you follow the “logic” in that sentence it suggests that providing drugs to mitigate the effects of a chronic disease is not actionable, but if an innovator actually figures out how to cure a disease they become responsible for pricing the new drug low enough that all can afford it, even if government programs such as Medicaid choose not to pay or choose to pay an uncompetitive price; an all too frequent occurrence.

    Has the Massachusetts AG gone completely mad, or is this just artificial class warfare heading into an election year?

    1. Mark Thorson in reply to Anon

      Mad? Not at all. Bringing this case is a perfectly rational action for her. You seem to think being AG means prosecuting people when you have a firm legal basis for bringing an action. That’s always nice to have, of course, but being AG is a political job. If there’s a public outcry against someone, you find a way to bring a case, whether it’s a good one or not. Whether you win or lose at trial, you win in the court of public opinion. You win bigger if you win at trial, but you win either way.

      That’s why Shkreli was so stupid for flaunting his abuse of the system. That created massive bad publicity for himself, so now he’s being prosecuted for something or other. Maybe the case against him is sound or maybe not, but he pulled it in by his flamboyant bad behavior.

  4. anon

    The argument that (possibly) excessive pricing on a cure for hepatitis C is the same as not having a cure for Alzheimer’s seems like a false equivalence. Gilead has made a drug for hepatitis C; talking about what we have yet to accomplish is not a sound comparison. Perhaps looking at Jonas Salk’s example with polio would be a better comparison.

  5. Rule (of 5) Breaker

    Mass AG running for another office? Re-election? Same political garbage as the “cancer moonshot” nonsense. Let’s feed the scientifically uneducated public some political trash talk to make them think we are fighting for them against the evil pharma empire. I wish I could say I was surprised. Fools often talk the loudest.

  6. anon the II

    As a minor Apple shareholder, who is taking a shellacking as we speak, I wish there were more people like DEITER.

    Apple has created a situation where he will die or at least suffer liver failure, if he doesn’t get the latest iPhone.

  7. Iulian

    If it were legal to re-import drugs in the US the problem would take care of itself 🙂

    1. Dale in reply to Iulian

      You write “If it were legal to re-import drugs in the US the problem would take care of itself”. But at least in this case, it wouldn’t. Gilead is going to set its policy to more or less maximize profit. Currently, the price in each country does not affect the profits in any other country, so a country which requires “sell it cheaply or not at all” causes Gilead to sell it cheaply there, since any price in that country above manufacturing cost is profit. But if selling the drug cheaply in country X means that you can’t sell it expensively in the U.S., Gilead’s optimal choice is to not sell it in country X.

      In the end, this leads to the well-known fact that drug development is funded entirely by U.S. health spending and roughly all other countries only have to pay manufacturing costs.

  8. hypnos

    Besides the legal discussions, I’m not sure whether the AG does not have an argument here that might resonate in a significant part of the general population. If they would sell their drug at (say) 30-50 percent of it’s current price, they would still earn a lot of money – certainly enough to get a decent return on the original investment.

    This will become a much more critical discussion in the future. We have been talking about personalized medicine for many years. Today, we have figured the science and are actually able to do it – and now, we will find out that we will not be able to afford it. If we have to earn back the R&D investments with fewer and fewer patients, the prices have to go up to a point where nobody is willing to pay anymore.

    1. ccdy in reply to hypnos

      In Q3 15, Gilead made US$8.2bn in revenue, with a net income of US$4.6bn. If you halved their revenue (i.e. cut it by US$4.1bn), their net income would drop to US$0.5bn. You will notice that this is quite a significant hit, and will likely not go down well with investors, or anyone involved, really.

      1. hypnos in reply to ccdy

        True. Nevertheless: 1. It’s still a profit. 2. Earning ten cents per dollar is considered attractive in many other industries. 3. A reduction in price might be partially compensated by higher prescription numbers. I’m well aware that no company will make this step without external force.

        1. ab in reply to hypnos

          1. It is unreasonable to suggest that a company, which just created a product that massively and positively impacts human health, should be forced to barely scrape by.
          2. “Many other industries” are not structured anything like the pharmaceutical industry.
          3. Define “partial.”

          1. Ted Lemon in reply to ab

            The only reason the company can make any profit at all is because of a government-enforced monopoly that they have been granted. The idea that the value of this monopoly can be limited is no more or less unreasonable than the idea that such monopolies should be granted in the first place.

      2. Ted Lemon in reply to ccdy

        I think your economic analysis is somewhat lacking. If a good is offered for sale at $x, and there is no competing alternative, then everyone who needs (n) it and can pay $x will pay $x, so the total profit will be n * x. If you drop the price to x/2, and twice as many people who need it can now afford it, then your profit will still be n*x. If you drop the price to x/5000, and 5000 times as many people who need it can now afford it, then you /still/ make n*x.

        Of course, Gilead doesn’t think that’s the situation, for one of two reasons. The first reason is that they understand that if every infection is cured, they will no longer have anyone who needs the drug and will pay any price for it. I think this is what the AG is arguing, and I think it’s a valid argument to float, although I have no idea whether it’s true.

        The other option is that Gilead thinks that as x drops, n increases, but not by the same factor. So if you halve x, you might only see 1.9 time the number of customers. n * x > n * 1.9 * x * 0.5. So Gilead would still make a substantial profit, but not _as_ substantial a profit.

        It’s worth noting that the only reason Gilead has as large a customer base as they do is that insurance companies are not free to refuse to pay for necessary care, as the MA department of corrections has tried to do. This and similar situations have substantial implications for health care costs. Patents turn out to be a pretty crappy way to fund drug R&D.

  9. watcher

    In the constant complaint that drug prices have gotten too high by the uninsured or government wanna-bee’s trying to make names for themselves, this is not the way to change the current system. To me, the only way to control drug prices across the board would be to implement some type of national price control under a national health plan as done in Europe. But in doing this, as a nation trying to continue to find ways to treat still very terrible diseases and disorders not conquered, we better recognize the repercussions of such a change. The ramifications with such a system will be more disliked and unseemly as the current one.

    1. Ted Lemon in reply to watcher

      People seemed to like Jonas Salk just fine, despite the fact that his research was funded by grants, not by patents.

  10. Mucco

    I think people are balking at the high ticket price: $84,000 for 12 weeks treatment, whereas we know that the benefits last a lot longer then 12 weeks. Given this, I’m not sure why Gilead didn’t spread this price over a longer period to soften the blow. say ~$17k per year for 5 years. Then it wouldn’t stand out and a lot of this negative PR would not exist.
    Incidentally, the price in the UK is about $50k for 12 weeks. Ref: NICE press release

    1. Kyle Serikawa in reply to Mucco

      Well, for one thing there’s the time value of money. If we assume Gilead can get a 5% rate of return on it’s money (which is almost certainly a low estimate) then every year they wait for an installment payment, they’re essentially already offering a discount. There’s also the question of collection. What if, as we have seen for some of the coops that have been part of the ACA, the payer goes out of business or declares bankruptcy in the interim? Pricing in these risks to a delayed payment plan would probably mean Gilead would end up having to charge, let’s say, $20K per year for five years. Maybe more. So then the optics are still bad.

      Not to say a financing plan isn’t possible. But it might not change the overall perception in any case.

      1. drug mule in reply to Kyle Serikawa

        Are you suggesting people be cured more slowly?

  11. Emjeff

    Methinks someone is thinking about running for governor of MA on a platform of “standing up against the big pharmaceutical companies”. The suit will go nowhere, but it will likely play well with the voters in the People’s Republic of Massachusetts…

    1. ab in reply to Emjeff

      It is worth recognizing that the Commonwealth contains the largest concentration of pharma companies in the world. Alienating the entire industry may not play to her advantage if she is seeking elected office.

  12. anon

    So, just because there was a similar case before and it was dropped, we should never question anyone, any company?

    I wish there were many more similar cases. Even if all of them turn out to be fruitless, the public awareness eventually lead to some sort of price regulation.

    1. Derek Lowe in reply to anon

      It wasn’t dropped – it was specifically thrown out of court because the legal arguments behind it were invalid. It seems clear under US law that if you’re trying to explicitly regulate drug prices, or change the ability of a patent holder to set the price for their invention, that you’re going to have to do at the Federal level, through acts of Congress. Nothing less will serve.

    2. FarmaBiz in reply to anon

      The first price regulation that is needed is to set all Pharma complainers to a lifetime of minimum wage. Your brilliance must be available to all at a “good price.” Congrats and welcome to the brilliant world of B team government workers setting prices.

  13. Placebo

    The AG should sue the many surgeons (e.g., cardiovascular and neurosurgeons) and other specialized physicians for charging so much to perform their very specialized procedures.

    For example, the first portion of the blog could be rewritten …
    “Maura Healy, AG of Massachusetts, is firing a warning shot at PHYSICIAN X over the pricing of their SKILLS. Her office is apparently considering whether PHYSICIAN X is engaging in an unfair trade practice.”

  14. J Conlin

    Kudos to Maura Healey for her principled stance to the sociopathic greed at Gilead. There is sound reason that this company’s p/e is about 6. Their pricing blunder is insuring that regulation talk will eventually become real action. This pricing decision is a crime against humanity. Like Martin Shkrelli they are painting a bullseye on their backs. What a shame to have turned an advancement in science into a disgrace that tars an entire industry.

  15. tangent

    If any suit gets as far as discovery, I expect it will dredge up some really ugly-sounding PowerPoint slide decks. Any company making this pricing decision — whatever you think about the decision itself — will have had some discussions that sound ugly now.

  16. Grim Reaper

    Healey is a classic Mass political hack wrapped in a new clothes. She will run for higher office and she will fool the not only the common folk, but the protosocialist crawling around the state. She will lose this tilt however.

  17. Vader

    “Perhaps the AG should come after the whole drug industry because we haven’t been able to do anything about Alzheimer’s yet – our failure to cure that one is resulting is massive public harm, too, you know.”

    This seems to be how the law works in Italy already.

    Please don’t give the AG any more ideas.

  18. MoMo

    Why did they just target Gilead? Didn’t Martin give enough donations to the Democratic Party like other companies with insanely priced and life saving drugs have?

    Gilead should just stop selling the drug in Massachusetts. That would teach them.

  19. jconlin

    The dirty secret that is that Gilead has a vested interest In NOT allowing an eradication of hepc. This is why they are guaranteeing so few people have access. A point that Maura Healey has pointed out. It seems to me that given their somewhat feeble claim on the underlying intellectual property that underpins Sofsbuvir and Harvoni ( patents have been denied in many countries) they should tread more carefully. At very least they have miscalculated the outrage.

  20. MoMo

    Jconlin- Your tin-foil hat is leaking! The only thing Gilead miscalculated was the enormous profits they are getting.

    Not to tell the AG her business, but she should go after Massachusetts unions and vacation scams costing T-riders and taxpayers 10’s of millions.

    1. jconlin in reply to MoMo

      To MoMo…… typical intellectually dishonest deflection……Vacation scams?? really? My point is that if the analysts consider cure rates in terms of the lifespan of the drug’s profitability then surely Gilead has done the same.. Disclosure of such an analysis could become a ” pinto gas tank moment ” for them……… Gilead’s continuing stock price (weakness ( P/E,,@ 5 today) is the verdict of a rational market betting that this whole scam is going to compel regulation, (even reliable republicans are jumping ship in the face of public outrage……Even Texas has refused to buy their hepc drugs )

      1. FarmaBiz in reply to jconlin

        The P/E is low because GILD is essentially a virology one trick pony. They have done an excellent job of continuing to come up with AIDS combos, but that cannot go on indefinitely as the combos come off patent faster than a potential new seed drug (the new patented drug combined with good generics that becomes a patented combo). As for Hep C, they are going back to the play book of regular combo versions, but with people getting cured, they will mine this out (run the well dry, whatever resource recovery business model you want to use as well as the inevitable patent expiries – small molecules making generics quick and financially deadly). Without a good next franchise, investors see problems and are giving it the low P/E. Nothing to do with the daft AG. Just trying to shake down a business like any good Boston politician. Oh, and Texas could care less about Medicaid; they would rather get rid of it let alone buy for it.

        1. jconlin in reply to FarmaBiz

          To FarmaBiz I lived in Houston for 20+ years so I know a little about Texas politics.. Yes Gilead is at risk from a fragile pipeline, but their largest risk comes from their own business practices. They have pushed the pricing envelope to a point that they have become an existential threat to the people they purport to serve. Monopoly comes with obligations. Since they simply bought sofosbuvir thru Pharmassett after most of the basic research was done by the V.A., their claims of innovation are absurd. I am amazed at Pharma investors like yourself who enthusiastically champion the ripoff of Americans while remaining silent on other countries who actually act in the best interest of their own people.. At the rate that hepc sufferers are being cured in this country ( just above the rate of new infections) hepc will never be eradicated. It is my contention that Gilead’s pricing decisions were calculated to prevent any possible eradication of the disease.. This is sociopathic behavior and will reap the whirlwind

          1. MoMo in reply to jconlin

            Sociopathic behavior? That’s actually a compliment in this business!

            But I said the same thing about those witch trials so popular once in Massachusetts- Fells Acres.

          2. FarmaBiz in reply to jconlin

            Another reason for the low P/E is that GILD buys its drugs with comparatively little R&D – essentially a Private Equity firm. On Wall Street that gets you a low, Financial Services type P/E. Higher P/Es go to high R&D companies – wow, Wall Street favoring longer term R&D.

            The problem I have with this whole situation is that the companies I am a fractional owner of do not get the ROIC based on the value of the products they develop. Value based on the reduction in health care costs. Taking sofosbuvir as our example, GILD offers a one time charge of $48k (taking rebates, etc. into account). The annual cost to the health care system for an untreated HCV patient is about $48k (C. Everett Koop Institute). They mention a 40 year duration, but let’s go with 10 year lifespan. The health care system is getting an extreme better financial outcome; it is not price gouging by Big BioPharma, but value gouging by public/private payers. Where does the saved money go? Clearly the government has no interest in funneling it back to cover more people.

            As for the VA going drug discovery, Dr. Schinazi is the Frances Winship Walters Professor of Pediatrics and Director of the Laboratory of Biochemical Pharmacology at Emory University as well as working at the Atlanta VA and the co-founder of Pharmasset. There is an Executive Order stating that IP developed by government employees with government resources is the property of the government. Since they haven’t sued for theft of IP, I take it they had no material involvement. The meme that government labs create most drugs is a myth. The taxes (dividend, capital gains, corporate) + a portion of R&D budgets are enough to cover the NIH/CDC and more budgets. Big BioPharma owners effectively fund all R&D, it just gets funneled differently.

          3. me in reply to jconlin

            “At the rate that hepc sufferers are being cured in this country ( just above the rate of new infections) hepc will never be eradicated.”

            Yes, it is a conspiracy because they only treat patients who get Hep C!

            This harks back to another argument that pricing at x/2 should sell 2n units: that model pre-supposes that the drug is like a can of soda: an unlimited market.

            the cost of the drug is based on the cost of treatment of Hep C without it – and it is MUCH cheaper to get the treatment than to have a liver transplant and take the immune suppressants and have regular visits to specialists etc…

            For years people complained that drug companies don’t discover cures. Now one is discovered and it’s also a conspiracy…….

          4. Willow in reply to jconlin

            Sociopathic behavior? That is utter nonsense. Your railing hatred of GILD has clouded your brain. GILD negotiates price and is in line with every other HCV drug provider, but they are superior to every one of them. You obviously are completely ignorant of the expanded approval for Harvoni for more genotypes and for effective treatment in those with severe cirrhosis & even liver transplantation; or the new HCV formulation that works across all genotypes without the need to test; the HIV drug regimen now approved that knocks the socks off anything on the market; the HIV cure, (get that, cure?) they are developing; not to mention the rest of their pipeline. Think this R&D comes cheap? Without GILD, a cure for HCV would have been highly unlikely; and, if that were the case, I doubt the other drug companies would have been able to leach off and analyze GILD’s Sovaldi to develop their own drugs. And I would be sitting here with 40 years of HCV, but I’m not because GILD’s drug cured me. Put that in your kettle and cook it.

  21. kj

    Limiting windfall profits will save a lot of money but not stifle investment because VC is risk-adverse. ~99.9% or so of phase-I molecules don’t make windfall profits (~90% don’t make profit at all). The 0.1% is a lot of tax/insurance/etc money but is “off the radar” of most VC’s, see: http://fortune.com/2011/10/20/venture-capitalists-become-risk-averse/

  22. jconlin

    to MoMo, I hope you’re long on GILD because all the insiders cashed in big time this past summer and somebody needs to be left holding the bag….( check insider trades report.. all sales no buying) Hummmmm?? I lived in Houston when Enron blew up, saw the whole thing, heard the same “greed is good” rap from employees as their portfolios went from millions to zero………… VRX is next……….. So why not invest is real companies with real futures …. The market is speaking loud and clear on GILD …..DUMP THIS LOSER

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