G

Source: Gilead Sciences via Google Maps

If you're sick, you expect your doctor to prescribe the appropriate treatment -- and if that treatment is a revolutionary medicine like Gilead's (NASDAQ:GILD) Harvoni, you expect that your insurer will pay for it. But that isn't happening in all cases.

Instead, fearing that a flood of new patient prescriptions will result in crippling costs, some healthcare payers are balking at approving the use of Harvoni in all but the most advanced cases of hepatitis C. And it's not just for-profit insurers that are holding back treatment. Worry that Harvoni may swamp budgets also appears to have State Medicaid programs rationing access to it.

Massive market
When Gilead won approval for its $1,000 per pill hepatitis C drug Sovaldi last winter, some heralded the event as the dawn of a new generation of sky-high medicine prices.

Historically, the most expensive drugs treated the rarest of conditions. Drugs like Mallinckrodt's (NYSE:MNK) Acthar for nephrotic syndrome, Alexion's (NASDAQ:ALXN) Soliris for paroxysmal nocturnal hemoglobinuria, and BioMarin's (NASDAQ:BMRN) Naglazyme break the bank, with prices ranging from $205,681 per year to $536,629 per year. Drugmakers argued -- and many agreed -- that the patient population for the indications they treat is so small that the drugs may not have been developed if not for their high price tags.

But Gilead's Sovaldi and Harvoni don't treat a small patient population. They treat hepatitis C, a disease that afflicts 3 million Americans and more than 150 million people globally. Since the patient population is huge, many were stunned by Gilead's decision to price Sovaldi at $1,000 per pill, or about $84,000 for a 12-week course of treatment.

Sovaldi's price dwarfed the $50,000 cost of Vertex Pharmaceutical's (NASDAQ:VRTX) prior hepatitis C drug, Invicek, and the $20,000 cost for the peginterferon and ribavirin combination, and sparked a massive backlash by patient advocates, health insurance companies, and state Medicaid offices.

While that backlash failed in its attempt to force Gilead to slash prices, few can blame those who stood up and shouted "no fair". After all, if every American with hepatitis C was treated with Sovaldi, the cost to health payers would eclipse $250 billion (yes, billion), and treating everyone on the planet with hepatitis C would cost a truly staggering $14.28 trillion (yes, trillion). To put those numbers in perspective, the U.S. spent about $381 billion on prescribed medicine last year.

G

Source: Gilead Sciences

Not getting easier
No one expected Gilead to cut prices for Harvoni, so it wasn't shocking when Gilead set Harvoni's price at $94,500 for a 12-week treatment course.

The company justifies Harvoni's price by reminding payers that Harvoni costs just about what payers were forking over for the treatment regimen of Sovaldi plus ribavirin, a prior generation drug that still needed to be taken alongside Sovaldi. Gilead has been quick to point out that the cost of liver transplant in advanced hepatitis C cases is far higher than Harvoni's price, too.

Gilead also points to the price "discount" patients may receive with Harvoni if they're eligible for an eight week treatment course. Roughly 40% of hepatitis C patients may qualify for that shorter regimen, which carries a cost of about $63,000.

However, payers may not rejoice at that prospect given that the cost is still a far cry higher than that of prior generation treatments, and that even if every hepatitis C patient in America were able to take Harvoni for eight weeks, it would still cost health care payers a breathtaking $189 billion.

As a result, it's little wonder that state Medicaid programs are scrambling to figure out how to limit Harvoni's use and smooth out the potential impact of Harvoni on budgets. Following Sovaldi's launch, 35 state Medicaid programs chose to restrict Sovaldi's use to just those with liver failure, and it's likely a similar number of states will adopt that approach to Harvoni, too.

Healthcare payers are also restricting Harvoni's from use in patients with drug or alcohol addiction, limiting what types of doctors can prescribe it, and limiting Sovaldi and Harvoni's use to "once-in-a-lifetime".

Some states are also picking and choosing treatment plans based on each patient's variation of the disease. For example, Harvoni is definitively a better drug than Sovaldi in genotype 1 patients, so Washington state will allow those with that genotype to receive it. But patients with other genotypes, in which Harvoni's advantage may be more debatable, may be forced to take other drugs instead.

Does it really even matter?
In the end, limiting access to Harvoni may not matter to Gilead investors. Despite restricting Sovaldi's use, Sovaldi's sales still eclipsed $8 billion during its first nine full months on the market.

Importantly, that $8 billion plus in revenue came from treating just 117,000 patients. According to the World Health Organization, there are between 350,000 and 500,000 deaths annually from liver disease caused by hepatitis C. So even if just half that number were prescribed Harvoni's shorter eight week treatment course, Gilead would still bring in sales of at least $9.4 billion every year.

 

Todd Campbell owns shares of Gilead Sciences. The Motley Fool recommends BioMarin Pharmaceutical, Gilead Sciences, and Vertex Pharmaceuticals. The Motley Fool owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.