Pharmaceuticals – A Cost of Goods Heuristic
Gene and Cell Therapy might seem new but the 1990s saw a first generation of these products enter the clinic and flame out. Being involved with the sector while at RPR Gencell, and coming from the Pharma sector, I had the opportunity to look at the cost of goods associated with gene and cell therapy as applied to the Gencell product portfolio. It was pretty obvious that these new therapies would require a higher price to cover a higher cost of goods. The RPR Gencell clinical portfolio included retroviral and adenoviral gene therapies targeted to cancer and cardiovascular indications. The lead cell therapy product was indicated for renal cell cancer and involved the collection of patient cancer cells, extensive processing in a high tech facility, followed by administration of the activated cells to the patient. The process was expensive both in terms of labor and reagents, especially the cytokines, with little potential for cost savings through automation.
While trying to understand the costs I developed a simple heuristic that conceptualized the cost of goods for these novel therapies as well as the more established small molecules and still novel biologics.
5-50-500-5000
Using a baseline of $5 for the monthly, or course of treatment, cost of goods for a small molecule therapeutic, the corresponding cost of goods for a therapeutic protein or antibody would be about $50, a ten-fold increase. I estimated a comparable gene therapy cost of goods to be $500, and autologous cell therapy $5,000. These cost of goods estimates represented production at scale for higher volume therapeutic indications in the mid 1990s not including amortized cost for capital investments in facilities and process development.
A $5,000 cost for a cell therapy was concerning. In the mid-90s an ‘expensive’ course of therapy would be priced at $10,000. A cost of goods of $5,000 seemed prohibitiive when considering the additional costs of development and commercialization. It was far from Pharma’s preference for cost of goods being 10% or less, preferably much less. While we could imagine a selling price of $20,000 or even a bit more for a breakthrough treatment, this still wouldn’t support development of the cell therapy product. In the end, cost of goods didn’t seal the fate of Gencell’s cell or therapy initiative. Like many other early stage technologies it was a case of the products being too far ahead of the science and supporting technology.
A more current cost of goods heuristic might be 10-100-1,000-10,000, or even 20-200-2,000-20,000. In any case it’s pretty clear that the current pricing of pharmaceuticals, especially cell and gene therapies, has little relation to actual cost of goods. Pricing is seemingly based on perceived value to patients and payors, and keeping shareholders happy. When Big Pharma spends billions to buy companies with gene and cell therapy portfolios that have the potential to treat only thousands of patients it is obvious that someone needs to pay.
Epidiolex – A Pharma Pricing Premium or Not?
With the impending approval of Epidiolex in 2018 of GW Pharmaceutical’s formulation of cannabidiol (CBD) for the treatment of various seizure related indications I wondered if it would be ‘competitive’. By competitive I was not concerned with respect to other prescription pharmaceuticals, but rather over-the-counter (OTC) market CBD. The liberalization of laws related to cannabis in general and hemp derived plant products has produced a flood of CBD products being sold online and in shops, both in cannabis friendly and cannabis restrictive jurisdictions.
An important question that hung over Epidiolex early in 2018 as far as I was concerned was how GW Pharmaceuticals would price the product once it was approved by the FDA. The answer was $32,500 per year for an ‘average’ patient. More specifically, Epidiolex was priced at $1,253 for a 100 ml bottle of 100 mg/ml Epidiolex. Doing a little bit of arithmetic that is expanded upon below this translates into a list price of about $0.12 per milligram of CBD. Doing a little bit more arithmetic, the announced list price of $32,500 per year is consistent with a 72kg patient receiving the recommended average dose of 10mg/kg/day, dosed 5mg/kg twice daily.
Complaints about this pricing were immediate with individuals and organizations suggesting that this was an outrageous price. That response reinforced my sense that patients needing the product for the approved indications would forego Epidiolex in favor of one of the many OTC CBD formulations available without prescription or restriction. Digging a little deeper I found reality is much messier than that. In short, my feeling is that the price for Epidiolex is probably not only competitive but possibly a relative bargain all things considered. How I reached this conclusion is outlined below.
Epidiolex Product Information
The US FDA approved Epidiolex label provides the following information:
Starting Dose: 2.5 mg/kg taken twice daily (5 mg/kg/day)
Maintenance Dose: 5 mg/kg taken twice daily (10 mg/kg/day)
Maintenance Dose: 10 mg/kg taken twice daily (20 mg/kg/day)
Presentation: 100 ml bottles containing 100 mg/ml (10,000 mg or 10 g CBD per bottle)
Formulation: Sesame Oil, Ethanol, Sucralose and Strawberry Flavor.
Other Epidiolex Information
Not presented in the FDA label is the information that Epidiolex contains less than 0.1% delta-9-tetrahydrocannabinol (THC), the ‘intoxicating’ active in cannabis. This level is so low as to have no effective psychoactive impact with the approved product. The Epidiolex FDA approved label states “Animal abuse-related studies show that cannabidiol does not produce cannabinoid-like behavioral responses, including generalization to delta-9-tetrahydrocannabinol (THC) in a drug discrimination study”.
Epidiolex is placed in Schedule V of the Controlled Substances Act.
OTC Cannabidiol Products
There are hundreds, possibly thousands, of different CBD products for sale in the USA without any significant restrictions. The CBD containing products range from vape juices to gummies to tincture to creams, balms and salves to oils, and even CBD tampons. This summary is restricted to CBD oils as they are generally the least expensive and align more closely with the Epidiolex formulation.
There are probably as many retail operations selling CBD oil as there are products. The OTC product information listed in summary below are recommended CBD products from the website CBDHacker.com (2019-06-11). Information and calculations not included in the CBD Hacker page calculations are noted in red.
* – volume required to dose the ‘average’ 72kg patient with a recommended single 5mg/kg dose
** – assumes a 25% discount to list. There is a spread between the list and net prices paid by insurance companies. Net prices on average are in the range of 12-43% less than the list price. Taking a 25% discount for Epidiolex suggests a real-world selling price on the order of $0.09 per milligram. The effective per milligram revenue received by GW Pharmaceuticals is probably even lower when patient assistance and other patient friendly programs are taken into consideration.
There are some obvious takeaways from the table above:
1. None of the products are provided in a concentration comparable to Epidiolex. This may have an impact on patient compliance with the larger volumes required for some products. The many OTC CBD products use a varied collection of flavors and oils.
2. The pricing for Epidiolex falls in the price range of the CDB Hacker recommended products. It is almost three times the price of the least expensive and a less than half the price of the most expensive. Other sites offer even more expensive CBD oils.
3. All of the products listed above have a relatively small THC contamination. CBD derived from hemp naturally has 0.3% or less THC.
CBD Bulk Pricing
The folks at Rhizo Sciences have done a nice job of summarizing bulk CBD pricing, presumably the wholesale price for the further formulation and retail sale. Most of the online OTC products probably are sourced wholesale, formulated, packaged and then sold in retail friendly presentations and amounts. Their pricing suggestions:
1 gram: $30.00/gram ($0.30/mg CBD)
2-9 grams: $25/gram ($0.25/mg CBD)
1 kilogram: $9.00/gram ($0.09/mg CBD)
10-99 kilograms: $8.00/gram ($0.08/mg CBD)
1,000-9,999 kilograms: $7.00/gram ($0.07/mg CBD)
Prices are also higher for CBD that is certified organic or GMP compliant (as Epidiolex certainly is).
Production Costs for CBD
This is a less important issue when it comes to the pricing for Epidiolex but is interesting to understand in terms of the GW Pharmaceuticals margins for Epidiolex.
The cost of producing CBD can vary considerably depending on how it is sourced. This is separate from costs to formulate and package the retail product. There are at least two concentrations of CBD oils available, 80% and 99.7%. There is no hard information on the actual cost of production. It doubtless depends on the conditions of plant material growth, the extraction methods used, overall scale, and whether production is GMP. A press release from Instadose Pharma made mention of a cost of about $2,800 per liter for CBD (99.7%) production being the norm. (It’s not clear if this is $CDN or USD.) This works out to be about $0.03 per milligram. In the same press release they reported on their new business initiative involving production in the Democratic Republic of the Congo that reduces production costs down to $102 per liter, or a ridiculously low $0.001 per milligram.
Building off these figures it is likely that GW Pharmaceuticals has a cost of goods on the order of $0.01 to $0.03 per milligram, or $10,00 to $30,000 per kg of CBD. Their costs would be on the higher end because of the obvious GMP requirements but might be on the lower end if they have dedicated production resources that limits intermediary suppliers. Using a selling price of $0.08 to $0.10 per milligram ($80,000 to $100,000 per kg) the effective Epidiolex cost of goods would range from 10% ($0.10/mg net selling price, $0.01/mg COG) to 37% ($0.08/mg net selling price, $0.03/mg COG). This is well within the range of usual cost of goods for pharmaceutical products and suggests the pricing was determined at least in part by cost of goods considerations.
Reflections
The price for Epidiolex seems reasonable in the context of likely cost of goods, the large investments made to secure FDA approval, and the ongoing costs of maintaining compliance with regulatory requirements. None of the OTC formulations being offered carry these expenses yet are priced similarly.
It is unlikely that GW Pharmaceuticals will see much competitive pressure from the current range of over-the-counter CBD products. Whatever savings there might be in using an OTC CBD product is offset by the inconvenience of larger dosage volumes, possibly inconsistent product sourcing, concern about consistent product quality (GMP), and the lack of insurance coverage.
Epidiolex is approved for the treatment of Lennox-Gastaut and Dravet syndromes. If price is an issue there are a number of medications approved for these indications, including valproic acid, toprimate, and lamotrigine, that are available as reasonably priced generics.
We’ll see how patients, physicians and insurers respond to Epidiolex. First quarter 2019 results for Epidiolex indicate that it is getting a much better uptake than many critics had expected. At least one Wall Street brokerage is suggesting Epidiolex sales may exceed $1 billion by 2021.
Key Links/References
Canada’s Largest Cannabis Producer Brings Down CBD Oil Costs by 96.34%
The High Cost Of CBD: Why Is CBD Expensive?
Epidiolex – FDA Approved Label
June 9, 2019
Dry Pharma at Pharmanumbers
Dry Pharma was the name of a Newco a couple of colleagues and I started planning for a decade ago. The name was a bit of a play of words, we were looking into possible treatments for Hyperhidrosis. That lasted for a few months. We worked out some product design concepts, identified treatment strategies and even early clinical data, but bit by bit we were pulled separately into other opportunities. As part of the start up process we registered the domain drypharma.com. I asked for and was given the domain, and have kept it alive for the past decade. Now seems a good time to put the ‘domain’ to work. There are not many, if any, companies that would want to be saddled with a name like this.
Dry Pharma is not a start up but rather the home for some of my ‘dry’ numbers focused observations on the biopharmaceutical business. I hope some readers may find the insights useful. And if not, it has given me the medium to work out some thoughts that have nagged at me for too long.