A Bad-Actor, Not A Pharmaceutical Innovator, Causes Outrage Over Drug Prices

A profiteer masquerading as a pharmaceutical company executive has set the Internet afire with his 5,000% price increase for a rare but important drug used by AIDS and some cancer patients.

Martin Shkreli, a 32-year-old former hedge fund manager, cornered the market on Daraprim, a drug used to treat a life-threatening parasitic infection. His start-up company, Turing Pharmaceuticals, bought rights to this old but effective generic drug and used his temporary monopoly power to dramatically jack up prices.

Shkreli is by no stretch of the imagination a pharmaceutical innovator, yet The Washington Postused the news to implicitly indict the industry in a front-page article, “Pricey pill is rare case of transparency in health care.”

“Shkreli’s actions were shocking for a simple reason: It was an unusual moment of complete transparency in health care, where motives, prices and how the system works are rarely ever talked about so nakedly,” Post reporter Carolyn V. Johnson wrote.  “Shkreli’s company, Turing Pharmaceuticals, raised the price of Daraprim from $18 to $750 per pill because he could.”

The article implies that these actions are a windowinto the pricing practices of other pharmaceutical companies.  Nothing could be further from the truth.

Established pharmaceutical companies invest billions of dollars in research over more than a decade to bring a single new drug to market.  Companies must recoup their investment if they are to continue to invest in research for new treatments and cures.

Comparing Turing Pharmaceuticals to established pharmaceutical companies does not have legs. Turing did not invest in creating this drug. It bought rights to a drug approved 62 years ago and which has sold for as little as $1 a pill by previous licensers.  Recouping years of investment in research was not Shkreli’s agenda.

Still, even someone as arrogant as Shkreli responds to public outrage over his outrageous price hike for Daraprim. After the public outcry, Shkreli said he would lower the price by a yet-undisclosed amount.  It is hard to see any justification for anything remotely close to the $750 price. He was taking advantage of a temporary monopoly on this drug to, in turn, take advantage of patients with cancer and AIDS. How much worse does it get?

What Shkreli needs is not only public pressure but genuine competition.

There is plenty of evidence that competition lowers prices while still keeping incentives for continued innovation in place. Experience with pricing of Gilead Hepatitis C drug, Sovaldi, is instructive.  Gilead introduced its breakthrough drug Sovaldi – a cure for Hepatitis C – in late 2013, at $1,000 a pill, or $84,000 for a full course of treatment.  There was a public outcry then, even though this was a new drug that is actually a cure for Hep C that had required years of research and hundreds of millions of dollars in investment to develop and bring to market.

Soon after Sovaldi was launched, another firm, AbbVie Inc., got approval for a competing treatment, and the company has battled Gilead for market share by offering discounts to insurers and other group payers.  Gilead recently disclosed that its discounts will average 46% this year.   Competition works.

Shkreli said he can only make a “small profit” with the $750 per-pill price, but if so, he clearly far overpaid for the drug or intended all along to use his temporary monopoly to price gouge.  Odd that he would tell The New York Times, “This isn’t the greedy drug company trying to gouge patients, it is us trying to stay in business.”

Perhaps Shkreli thought he could fly under the radar because the drug does have a small patient population.  In 2011, 12,700 prescriptions were written for Daraprim, but as prices increased incrementally, the number fell to 8,821 in 2014.

The drug is part of the pharmaceutical “cocktail” taken by AIDS patients.  Turing’s price increase means hundreds of thousands of dollars a year in added costs for these patients just for this one drug.

Hillary Clinton and others are calling for greater government involvement in pricing structures. Her solutions would only make the problem worse.  With strict rules and regulations that any drugmaker must comply with for traditional entry to a market, there currently are no competitors for Daraprim with its relatively small patient population.  Margins for generics are often so low that there is little incentive for others to get into the market.

Clinton and others are pointing to this example as evidence of the need for further government intervention in the pharmaceutical market. But her short-sighted political solution of slapping various forms of price controls on the industry would backfire and cause other dislocations in both pricing and future research.

As a short-term remedy, the Food and Drug Administration could solicit applications to expedite entry of a generic competitor for Daraprim, and in the meantime, HHS could allow emergency sourcing of the drug from Canada or a European country that makes it, according to former FDA associate commissioner Peter Pitts.

What we need is more, not less competition, to make sure that drugs are priced by markets, not by the whim of a hedge fund manager.

Posted on Forbes, September 24, 2015.