Betting on hepatitis C: how financial speculation in drug development influences access to medicines

BMJ 2016; 354 doi: (Published 27 July 2016) Cite this as: BMJ 2016;354:i3718
  1. Victor Roy, doctoral researcher,
  2. Lawrence King, professor of sociology and political economy
  1. Department of Sociology, University of Cambridge, Cambridge, UK
  1. Correspondence to: V Roy vr260{at}

Victor Roy and Lawrence King argue that the acquisition strategies of drug companies magnify development costs and leave the public paying twice—for research and high priced medicines

Sofosbuvir based medicines have marked an important breakthrough for patients with hepatitis C infection, offering cure rates of over 90%. The virus is a leading infectious killer globally, disproportionately affecting vulnerable groups such as people who inject drugs or have HIV/AIDS.1 Even after discounts offered from a US list price of about $90 000 (£70 000; €80 000) per three month treatment course, however, the cost of these drugs, manufactured by Gilead Sciences, has challenged government budgets and led to rationing. Sofosbuvir’s pricing has been at the centre of a global debate over the affordability of prevailing systems of drug development, and the US Senate conducted an 18 month investigation into Gilead’s pricing strategy and its consequences for health budgets and patient access.2

One argument for the high prices has been that the curative drugs represent a major advance in value to patients and health systems. They are indeed more cost effective than many expensive medicines that provide only marginal benefit. Yet the company’s ability to charge high prices ultimately relies on monopoly protections via patents, which the industry has long argued are necessary to encourage costly research and development. Critics, however, charge that these costs are exaggerated.3 4 5

We use the case of hepatitis C to highlight another dynamic missing from the debate: the financial model driving large companies and their shareholders. To maximise growth in earnings, large companies like Gilead often enter expensive bidding contests to acquire companies with promising compounds. Subsequent profits are then directed back to shareholders rather than invested in early stage research. This speculative cycle propels the prices of medicines and impedes affordable access for both current and future patients.

Bringing sofosbuvir to market

During the 2000s, a small start-up called Pharmasset emerged from a publicly funded laboratory at Emory University to develop sofosbuvir, the backbone compound behind the new class of curative hepatitis C therapies.6 Raised primarily from venture capital and eventual stock based financing, the company’s total reported research and development spending (2003-11) in US Securities and Exchange filings was $271m for sofosbuvir and other failed compounds.7 8 From this total, Pharmasset reported $62.4m specifically for developing sofosbuvir from preclinical research to phase II trials.6 At this stage, Pharmasset identified a future budget of $125.6m for taking sofosbuvir through phase III trials and FDA approval, bringing the compound’s total past and projected development costs up to $188m.6

Phase II trials of sofosbuvir showed a more promising cure rate than Gilead’s in house prospects.9 In anticipation of an annual $20bn market in coming years, Gilead acquired Pharmasset for $11bn in November 2011 using cash from previous profits and new debt.10 Gilead gained approval for sofosbuvir by December 2013 after completion of four phase III registration studies and with the help of the FDA’s accelerated approval pathway.11

The company has since combined sofosbuvir with a series of in-house protease inhibitors (ledipasvir in Harvoni, for example), aiming to create a single oral regimen that shortens treatment from 12 weeks to under eight weeks for some patients. Though Gilead has not shared the costs of its failed compounds and previous in-house research, the company reported aggregate costs of $880.3m to the US Senate for sofosbuvir based clinical trials from 2012 to 2014.12

Costs of speculative acquisitions

Gilead’s function as an acquisition and regulatory specialist in drug development for hepatitis C reflects a strategic preference shaped by financial concerns. In an April 2015 earnings call, then chief executive John Martin reinforced this approach to Gilead’s investors: “We typically like things where we can have impact on phase III and where we can accelerate those products either into the approval process or into greater indications after the approval process.”13 Gilead’s preference is part of an industry-wide pattern. A 2014 study found that companies deemed to be “winners” earned more than 70% of their sales from products developed by other companies.14

The financial sector drives this dynamic by valuing large companies based less on their profits than on the expectations of short term (quarterly and annual) earnings growth. For companies with faltering in-house pipelines the fastest route to new revenue growth is increasing prices on existing drugs or acquiring compounds that have already proved promising in early stage trials.

In a December 2015 interview with the Financial Times, Gilead’s executive vice president of research and development, Norbert Bischofberger, elaborated the financial implications of the acquisition based strategy: “Philosophically, we prefer to wait for more certainty and pay more money, which is what we did with Pharmasset, rather than getting something cheap with uncertainty.”15 Indeed, the speculative cost of acquiring sofosbuvir rose far above Pharmasset and Gilead’s real expenses in clinical development.

To be sure, large companies operating as investment funds allow for failure and encourage smaller teams of innovators and venture capitalists that are often deemed more effective at pursuing riskier stages of research. However, this acquisition based model presents challenges for drug affordability in two ways. Firstly, the cost of drug development escalates through bidding wars and “racing”—when several large companies pursue similar compounds in the final stages of drug development, often through acquisitions. For example, Gilead competed with several other companies for Pharmasset, bidding up its valuation by nearly 40% in the final weeks before its $11bn acquisition.16 This also rapidly raised the speculative value of other small start-ups with hepatitis C compounds, with Merck and Bristol-Myers Squibb spending $3.85bn and $2.5bn respectively on subsequent acquisitions.17 18 The costs of this late stage arms race for revenues has become part of the industry justification for high prices. Calls for increasing the transparency of industry development costs must fully appreciate this financial dynamic.3 19

Secondly, since companies have patent protected monopolies on new drugs, they can charge high prices to accrue long term profits and make further late stage acquisitions. Data from the US Senate investigation of Gilead revealed that though Pharmasset had initially considered a price of $36 000 for sofosbuvir, Gilead ultimately set $84 000 as its market list price after internal deliberation over multiple factors, including an evaluation of the high prices of previous drugs and how much health systems could bear.12 When asked in the Financial Times interview what the company was going to do with all its money, Bischofberger said, “Well, we have our eye on the external world—we have incredible cash flows and we are looking for opportunities.”15 The resulting cycle of profit accumulation, speculation, and higher prices deepens the problem of affordable access to medicines.

Uses of Gilead’s hepatitis C money

Examining the destination of Gilead’s hepatitis C revenue reveals a second form of speculation that distorts the claimed link between high prices and further innovation. By the first quarter of 2016, Gilead had accumulated over $35bn in global revenue from hepatitis C medicines since their launch in December 2013. This revenue is over triple the cost of the initial acquisition of Pharmasset and nearly 40 times the cost of Gilead and Pharmasset’s combined reported costs for developing sofosbuvir based medicines.20 In 2015, the company’s revenue from hepatitis C drugs exceeded $19bn, equivalent to two thirds of the $30.4bn budget of the US National Institutes of Health for the same year.21 Gilead’s profit margins of 55% in 201521 stand out even in an industry that consistently outperforms its peers. Based on data reported in Forbes’ Fortune 500 list, an annual ranking of the biggest US companies, the pharmaceutical sector has been by far the most profitable of all sectors, with a mean profit margin of 17.44% from 1995 to 2015, compared with an average of 4.34% for all other industries (fig 1).


Fig 1 Fortune 500 average profit margin by sector over time

Beyond stockpiling a portion of this money for future acquisitions—Gilead holds nearly $21bn in cash22 —where have its profits gone? Since the beginning of 2015, the company has announced $27bn in “share buybacks” to be executed over the coming years. Share buybacks, which emerged in the 1980s and peaked in recent years, are a financial manoeuvre whereby a company purchases its own shares to increase the value of the remaining ones.23 24 The financial community now expects companies to reward shareholders with buybacks, especially when a stock price is thought to be undervalued or other allocations of capital such as long term research projects are deemed to be too risky by executives and investors.25

However, this financial strategy reduces investment in early stage research projects crucial for future innovation.26 Over the past decade, for example, Pfizer directed $139bn to shareholders, primarily via buybacks, compared with $82bn for research and development.27 In December 2014, Merck spent $8.4 billion to acquire Cubist Pharmaceuticals, a drug developer specialising in combating meticillin resistant Staphylococcus aureus. The following year Merck announced the closure of Cubist’s early stage research unit, laying off 120 staff. Three weeks later, Merck announced an additional $10bn in share buybacks.28 Gilead may be moving in the same direction. The company’s increases in research and development (from $2.1bn in 2013 to $3bn in 2015) pale in comparison to recent increases in share buybacks (fig 2).21 A strategy of buybacks in the short term could threaten access to future innovations for patients in the long term.


Fig 2 Gilead’s key financial indicators ($bn) do not show a relation between profits and internal research and development investments. Gross profit is total revenue minus costs of goods sold. Announced share buybacks since January 2015 total $27bn. The 2015 figure shows executed buybacks and also includes dividend of $1.9bn

Public-private model out of balance

Some may argue that the trade-offs between innovation and access are the textbook result of private companies competing in free markets to maximise profits.29 Yet governments protect pharmaceutical companies from truly free markets through patents, data exclusivities, and prohibition of drug reimportation.30 Governments also invest in public goods such as basic science, technology development and start-ups, and medicines for vulnerable groups who could not otherwise afford them.31 Though private investors should be rewarded for breakthrough advances, using these publicly granted privileges for access limiting prices and buybacks raises questions about whether the risks and rewards of innovation are being shared appropriately.32

In the case of hepatitis C, publicly funded researchers in the US and Germany during the 1990s developed the subgenomic replicon, a research tool that overcame technical barriers to enable testing of antiviral compounds.33 34 Apath, a university spin-off based in New York, commercialised the replicon with funding from the US National Institutes of Health’s (NIH) small business and innovation research programme.35 The replicon drew increased private investment into hepatitis C drug development, including from Pharmasset.36 37 The laboratory from which Pharmasset emerged relied on funding from the NIH and the US Veterans Administration, and the start-up, like Apath, later received over $2m in NIH small business funding.38 39

Recently, however, an analysis of Gilead’s tax returns indicated that the company had used a common industry practice to avoid nearly $10bn in US taxes by transferring the company’s intellectual property for hepatitis C to an Irish subsidiary.40

Meanwhile, the public is paying twice: for the crucial early investments in research and for high priced medicines. The US Medicare programme for people over 65, for example, spent over $9bn on hepatitis C drugs in 2015, nearly 7% of its prescription drug budget.41 The US Senate report also revealed that Medicaid spent over $1bn in 2014 while treating only 2.4% of its population with hepatitis C.42

These financial pressures have diminished the much touted public health potential of these medicines. Though treating patients in earlier stages (F0-F2 levels of fibrosis in the most common staging system) can reduce risks of disease progression and transmission,43 the high prices have led many public systems across the US and Europe to treat only the sickest patients.44 45 Investors, however, may benefit from such restrictions, demonstrating the consequences of a public-private model perilously out of balance. Michael Yee, a leading hepatitis C analyst for the Canadian investment bank RBC Capital Markets, summed up this possibility in a note to his clients in May 2014: “If payers prioritize or ration patients and limit use to only F3-4—would this be bad because F3-4 is only 30% of the market? Our conversations with investors over the last week is peak revenues might be less near-term but long-term tail is much this is much more if anyone including Medicaid starts to limit to only sicker patients...this wouldn't dramatically worry us and could be better long-term.”46 Yee’s prediction of increased numbers of infected patients may be mitigated only if recent announcements of Gilead’s increased rebates and lifting of restrictions in some health systems become part of a broader public health strategy.47 48

Search for future models

Mechanisms have been proposed to give health systems greater bargaining power to determine price and value.49 Special approaches could be considered for breakthrough treatments for high prevalence and infectious diseases such as hepatitis C—for example, purchasing pools that bring together health systems to increase volume based discounts.50 Another proposal would limit share buybacks to ensure prices and profits are linked to reinvestments rather than short term mandates determined by shareholders.51 52

Over the longer term, new organisational and business models for drug development should be tested and encouraged, especially in areas of public health concern. One group recently documented 81 different models already being tried globally.53 Many of these are based on the principle of “de-linkage,” in which research and development costs are separated from the price of the medicine. Instead, a mix of grants that “push” research forward and major milestone prizes that “pull” promising therapies into wider application stimulate competition between entrepreneurial teams. The prize givers—governments, international funds, or mixes of public and private funders—then license manufacturing rights to produce medicines at a price closer to the cost of production.

A prominent example of this model is the Drugs for Neglected Diseases Initiative, a collaborative, public-private drug research and development network that has developed six therapies in the past decade at a cost of $205m.54 Though small in scale, the neglected diseases model indicates that alternative research and development approaches can be financially and socially efficient, and offers lessons that might be tested in other therapeutic areas. What we ultimately need is innovation in innovation. Ignoring the consequences of prevailing organisations, systems, and financial imperatives in drug development will have costs for both current and future patients.

Key messages

  • Gilead’s $11bn acquisition of sofosbuvir after phase II studies magnified the speculative costs of drug development

  • The resulting $35bn in revenue has been primarily directed to shareholders via share buybacks rather than to further research and development

  • The public pays “twice,” both funding pivotal early research and purchasing the drug at high prices

  • Solutions include giving health systems increased power to negotiate pricing and payment models, limiting share buybacks, and testing other ways to encourage and reward drug development


  • We thank Simon Deakin, Amanda Hoey, Don Light, Martin McKee, Isaac Holeman, and Piotr Ozieranksi, for comments on earlier versions.

  • Contributors and sources: VR is a doctoral researcher investigating the economics of drug development with a focus on hepatitis C. He documented the scientific and corporate history behind hepatitis C research and development, drawing on scientific and medical journals, media reports, Securities and Exchange Commission filings, transcripts of earnings calls, and the US Senate Investigation report on Gilead Sciences. He drafted the manuscript. Luke Hawksbee and Nicholas Pye collected data from SEC filings and Fortune 500 to develop the figures. LK supervised the research and reviewed and revised drafts of the manuscript. VR is the guarantor.

  • Competing interests: We have read and understood BMJ policy on declaration of interests and have no interests to declare.

  • Provenance and peer review: Commissioned; externally peer reviewed.


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