Reports that (D-CA) has sent a letter to Gilead's (GILD) CEO asking him to justify the price of Hepatitis C drug Sovaldi has caused a drop in all biotech stocks.
Predictably, it has also ignited a debate about very high drug prices (and high stock prices).
The list price for Sovaldi is $1,000 a day.
I spoke with Ian Somaiya, the biotech analyst at Nomura who covers Gilead. He said the key to understanding this was to compare the cost of Hepatitis C therapy before Sovaldi and after.
He noted that the average price point for a full course of treatment using traditional drugs is $70,000 over a period of 24 to 48 weeks. The cure rate was around 55 percent.
Fast forward to Sovaldi and Sovaldi-based combinations. The price point is $90,000 to $100,000.
But the cure rate is at least 90 percent, and could be closer to 100 percent.
And the course of treatment is only eight to 12 weeks.
The older drug treatment, which uses interferon, causes severe flu-like symptoms, while another drug also used, ribavarin, causes anemia. And you still only have a 55 percent cure rate.
"That is what Representative Waxman needs to consider, the dramatic improvement in cure rates going from 55 percent to 95 percent on average, as well as the avoidance of all the debilitating side effects these other drugs cause," Somaiya said.
But what about that high price? This highlights a very interesting fact about drug pricing: In the U.S., there is no legislation that allows Medicare or Medicaid to negotiate price. The companies set the price and the discussion revolves around the rebates or discounts the company will provide.
You can negotiate price in Europe. European governments do negotiate prices for drugs. In Europe, the prices are 25 to 50 percent less. That is certainly good news for consumers, but there are certain drugs that are not available in Europe because the companies don't want to sell them.
That is a public policy question, but for the moment it seems clear that negotiating higher discounts would be a priority for the U.S. government.
I am sure Gilead will have reams of data to present to Rep. Waxman.
—By CNBC's Bob Pisani