Before this fall, Daraprim wasn’t anything close to a household name, but this anti-parasitic drug is nothing new. The treatment for toxoplasmosis infections has been on the market since 1953 and is no longer protected by patents. It’s no blockbuster — the single-celled parasite that causes toxoplasmosis is quite common, but relatively harmless except in patients with other health problems like HIV — but for decades, it was one of the hundreds of cheap, anonymous drugs that kept the health care system running smoothly. A few years ago, the price of the drug rose from about $1 per tablet to $13.50. Then, in August, a startup called Turing Pharmaceuticals bought the drug and raised the price more than 50 times to $750 a tablet. After a report in the New York Times brought the increase to light, the resulting anger was swift and fierce. Politicians, journalists, and outraged social-media users heaped scorn on the CEO of Turing, former hedge fund manager Martin Shkreli, whose callous comments and attacks on critics on Twitter only fueled the outrage. In the aftermath, Shkreli has been called “Big Pharma’s Biggest A–hole,” among other things. Hillary Clinton tweeted about the situation, then turned it into a video. Bernie Sanders returned Shkreli’s campaign donation. Earlier this week, the Senate’s Special Committee on Aging opened an investigation. But while Martin Shkreli might be a singularly unsympathetic figure, Turing Pharmaceuticals is just a symptom of a broader problem: the way we develop, manufacture, and sell drugs in the United States is broken, and it’s costing us billions.
Developing new drugs is complex. It typically takes 10 years for a candidate to go through the development and approval processes, and only a tiny fraction of potential candidates make it to market. One study estimates the cost of developing just one new prescription drug is at $2.6 billion. The physical manufacturing of drugs, by comparison, is usually quite cheap. As a result, the general theory of drug development has been this: Private pharmaceutical companies pay to fund the development of promising drugs, run clinical trials, and shepherd them through the FDA approval process. In return, their patents give them a limited period of exclusivity in the market, when they can charge relatively high prices to recoup initial development costs. After some number of years, the patents expire, and other drug companies can build cheaply introduce their own “generic” versions of the drug, driving costs down through competition. Without the ability to charge high prices for new drugs, the theory goes, companies would be unwilling to fund new drug development. The time-limited exclusivity model encourages R&D while keeping prices low in the long run.
That’s the theory, at least. In practice, generic competition is often hard to come by. It’s much easier for a generic manufacturer to get approval to manufacture an existing drug than it is to develop one from scratch, but it’s neither free nor instantaneous. Pharmaceutical companies have come up with increasingly aggressive strategies to stave off generic competition. In recent years, even when large, successful blockbusters have lost their patents, they have sometimes managed to stave off serious generic competition for months. For cheap, low-selling staples like Daraprim, offering a generic competitor just isn’t worth the cost. That’s where Turing Pharmaceuticals came in. Daraprim wasn’t protected by patents, but at the same time, no one was offering a generic version, so there was nothing to stop Shkreli from purchasing the drug and jacking up the price. Eventually, a generic manufacturer might step in, but it would take months or years for them to gain approval and set up production. Moreover, a new generic manufacturer would lower the price somewhat, but they would have no incentive to bring it back anywhere near the cost of manufacturing. What Turing Pharmaceuticals did likely isn’t illegal, but rather a smart way to take advantage of the lack of competition in the drug market.
Daraprim might be a particularly egregious case, but the strategy is hardly new. Companies like Valeant Pharmaceuticals have built a multibillion-dollar industry out of acquiring existing drugs and raising the prices, while spending no money on research and development. In some cases, companies have gotten more than a little help from the government. Many drugs predate the FDA’s founding; though established as safe and effective by decades of use, they typically haven’t gone through formal clinical trials or drug approval processes. In 2006, the FDA created the Unapproved Drugs Initiative, encouraging companies to perform clinical trials for old drugs and rewarding them with market exclusivity. Several drug companies spent relatively small amounts of money to run a trial and raised prices by huge margins afterwards. For example, colchicine, a drug derived from a plant that was known to the ancient Greeks, has been used to treat gout since the 1800s. In 2009, a small pharmaceutical company was granted exclusive rights to the drug, and consequently raised prices for $0.09 a pill to $4.85, costing patients and insurers millions of dollars a year.
The US pharmaceutical development system, like the health care industry more broadly, has been constructed with the veneer of a free market. The government gives drug companies limited exclusivity over new products to encourage research and development and sometimes provides incentives to direct companies’ activities, but it does not regulate drug prices, and relies on a competitive market to keep costs down. The problem is that the very structure of the health care system prevents it from acting even remotely like a competitive free market. High barriers to entry allow manufacturers to charge exorbitant prices. Doctors, who are responsible for deciding what drugs to prescribe to patients, aren’t directly exposed to their prices. Patients have limited ability to shop around and don’t see the true costs of drugs, the brunt of which are borne by insurers. All of these factors combine to create a profoundly distorted market. The system allows pharmaceutical industry to make enormous profits — almost $90 billion for the largest 10 companies in 2013 — as health care spending continues to rise.
However, it doesn’t have to be this way. The United States spends more on pharmaceuticals than any other OECD country, with spending per capita 35 percent higher than Canada and 260 percent more than Denmark. Some of the fixes are incredibly easy. In 2003, Congress enacted Medicare Part D, which extended Medicare coverage to prescription drugs. Unlike other government agencies, the enormous program is not permitted to negotiate the prices it pays for drugs. As a result, Medicare Part D pays much higher prices than Medicaid and the Veterans Health Administration, which do negotiate. Allowing Medicare to negotiate could save taxpayers billions every year. Even more, there are numerous other reforms the government could pursue. Limits on price increases could help avoid cases like Daraprim. The government could fund more drug research directly and require companies that receive funding to spend more of their revenue on R&D. The industry argues that high prices are necessary to encourage new innovations. Given high profit margins, and the fact that nine of the ten largest drug companies spent more on marketing than R&D in 2013, that seems unpersuasive.
Martin Shkreli is just one beneficiary of the larger problems with prescription drugs, but he may play a disproportionate role spurring a solution. None of these issues are new, but the absurdity of the case of Daraprim, combined with the callousness of Shkreli’s public response to his critics, has brought about public anger that may have staying power. Presidential candidates on both sides of the aisle have called for reforms, including Hillary Clinton, who introduced a detailed plan in late September, and Marco Rubio, who decried drug companies’ pricing tactics as “pure profiteering” a few weeks ago. If momentum is maintained, change might finally be possible.
Image Credit: “Is this what you ordered, Sunny?” (CC BY-NC-ND 2.0) by aurelio.asiain