As many of our readers may have heard by now, Martin Shkreli, ex-hedge fund manager and current founder and CEO of Turing Pharmaceuticals is currently in the eye of a torrid storm of anger after he increased the price of Daraprim overnight from $13.50 per pill to $750 per pill. This 5500% increase came within 2 months of acquiring the rights to the drug from Impax laboratories. Daraprim is a treatment for toxoplasmosis, which affects people whose immune systems have been weakened by chemotherapy, AIDS or even pregnancy. Shkreli, (who incidentally could fit the profile of a fictitious supervillain with his humble beginnings, sharp academics, quick rise to power, and ruthlessness towards a sensitive patient population), faced a huge public outcry following which it appears that Turing Pharma will now roll back the price of the drug to $13.50 in a few weeks.
This isn’t the first time prices have suddenly risen without justification nor even the first time that Martin Shkreli has been involved in a multi 1000% increase in prices over a recently acquired drug – but it certainly is the first time since the HIV AIDS crisis in the early 2000s that pharmaceutical drug pricing has caught the public attention in this big a manner. Shkreli hasn’t done anything illegal nor has he even done anything extremely unusual for the pharmaceutical industry – he’s simply pushed for something on a larger scale. In this world where corporate greed and lack of ethics has been normalized and almost invisibilized, his only real ‘fault’ seems to be that he has absolutely terrible PR skills! (see trivia box below for an example).
Quite unintentionally though, Shkreli in just a couple of days, has pushed public attention to the crucial area of drug pricing at a scale that academics and access-to-medicine activists haven’t been able to do even after years of trying! Through the course of the post, I hope to show that the anger and frustration towards Shkreli ‘the person’ is actually quite misplaced. While he personally certainly may come across as ruthlessly greedy, it would be bizarre to have our pharmaceutical industry dependent on philanthropy and goodwill/trust, rather than have robust, working systems that work irrespective of greed or philanthropy – and yet that’s exactly what we seem to have done! I’m hoping one outcome of this controversy is that more discussion and debate around how he was able to price-gouge shifts attention to this system which is allowing him these ‘freedoms’. Indeed, this may already be happening as Tracy Staton points out in her piece titled “Thanks, Turing. Your 5000% price hike puts pharma in the election hot seat.“
Post acquisition price rises aren’t uncommon at all though. As pharma analyst/blogger Derek Lowe describes in “Science” here, this isn’t even the first time that this same drug has had a dramatic price increase. Daraprim used to be sold at just $1 by GlaxoSmithKline, before Core Pharma bought US marketing rights for the drug. By the time the rights went to Impax labs, the price had reached $13.50. Lowe also describes another example in this piece where Valeant Pharmaceuticals bought rights to two life-saving heart drugs (Nitropress and Isuprel) and raised their prices by 525% and 212% on the very same day, despite not having invested in lab work, human testing and new manufacturing processes. Last year, Retrophin (where Shkreli incidentally was then CEO) acquired the rights to an old drug, Thiola, a treatment for a rare kidney disorder and raised its price by 2000%. Horizon Pharma hiked up the price of their pain medicine Vimovo by almost 600% immediately after acquiring it from AstraZeneca. These are some of the examples I came across on a quick google search and I’m sure there are plenty more.
So what are the various ways in which companies can get monopolistic pricing powers? Keep in mind as a starting condition that the healthcare has fairly inelastic demand. This means that when a patient needs a treatment, she needs the treatment, period. On top of this, it is the doctor (and in countries where insurance companies are prevalent, the insurance companies, and sometimes even the state) who decides what medicine the patient should take. Given the inelastic-ish demand of healthcare needs, pharma companies have one less cause of worry (i.e., demand) and relatively more power in monopolistic situations. It’s interesting to note here that generic pharmaceutical companies, oft hailed as saviours of patient interests, seem to be as likely as originator companies to be exercising these monopoly powers when they can.
- Patents and ever-greening of Patents: This is fairly obvious and needs no explaining. However, patents weren’t the cause for most of the above mentioned examples.
- Natural monopolies: This occurs when it doesn’t make business sense for competitors to overcome barriers to entry to compete. In the Daraprim case at least, this seems to have contributed. When the drug was priced at only $13.50 with a smallish patient population size, the margins available to competitors to break into the market and compete with this 60 year old drug would be very small or possibly even negative. These can also be fostered by ‘closed-distribution’ models that lay down very strict conditions as to who can access their medicine, thus making it harder for their competitors to even get access to the drug to test / reverse engineer.
- Other exclusivity regimes: In US, the Food and Drug Administration (FDA) allow drugs that have been made and sold from prior to 1938, and 1962 to be exempt from filing ANDAs and testing for efficacy respectively, so long as they had been sold from before those dates, and continue to be sold with the same composition and labelling. These are referred to as ‘grandfathered’ drugs. Crucially though, if even one company decides to run the drug through clinical trials, they get marketing exclusivity rights over the drug, thus free to price these old drugs at any price they want. An interesting example where this came into play is when Catalyst Pharma decided to run clinical trials on a grandfathered rare disease drug that Jacobus Pharma was giving out for free! Fortunately, Jacobus, seeing this, decided they didn’t want Catalyst Pharma to greedily profit off their patients, so they also started running clinical trials on it, to get to the FDA first!
Justification for prices?
Pharmaceutical companies have always given one (or both) of two reasons as their cause for raising prices – High R&D costs, and duty to shareholders to maximise revenues – both of which are fair reasons … if one discounts the context in which this question is arising.
On the first point, it’s ridiculous that pharmaceutical companies can simply claim high R&D costs while also refusing to disclose any drug development costs. Pharmaceutical companies simply refuse to disclose drug development costs. Estimates on drug development costs have varied between $300 million to $3 billion, with the higher side usually based on industry fed numbers. And for all their claims of drug development, the primary business model seems to be for smaller companies to develop the drug and bigger companies then coming and buying them out. A recent study by Yale [“An overview of FDA-approved new molecular entities: 1827-2013” by Kinch, Haynesworth, Kinch, Hoyer] shows that only a handful of companies own most of the “New Molecular Entities’ (NMEs) approved by the FDA, as well as that the growing number of NMEs controlled by marketing organizations that have little or no internal drug discovery or development activities.
Secondly, this belief that the ‘free-market’ will solve all, and thus share-holder interests should be seen as paramount is another piece of nonsense, as the whole pharmaceutical industry is built on interrupting the ‘free-market’, what with patent rights, required regulations, third party decision makers, and stolen rents from publicly funded research. And even if one were to somehow discount all those factors, there still remains the larger policy question of why exactly we’re letting share holder profits come in the way of basic health needs of people. Let me be charitable and say perhaps there is a valid reason – but then let us we specify and identify what this tradeoff is so we can better balance it out.
Perhaps the way forward lies in better and more nuanced regulation, or in price control mechanisms, or in specific investment incentive mechanisms or in open-source drug discovery or maybe some mix of these or maybe something else altogether – I certainly am not going to try to claim answers here – however, now that due attention has finally been brought to this topic, let’s first start to better recognize and discuss where exactly the problems are.