The idea of reducing drug prices through more government control is always simmering on the backburner and doesn’t require much to bring it to a full boil. Two recent actions turned up the heat to full blast. While the arguments are predictable, this time a surprising player weighed in and an unexpected explanation surfaced. Did government regulation, not patents as often alleged, allow the price for a drug to be jacked up by restricting competition?
Martin Shkreli, CEO of Turing Pharmaceuticals, is a priceless gift to those seeking increased regulation of the life science industry. Shortly after gaining control of Daraprim, a drug that’s been around since the Eisenhower Administration, Turing raised its price 5000% from $13.50 a pill to $750. See Pharmaceutical greed makes Martin Shkreli public enemy #1.
At the same time Valeant Pharmaceuticals jumped prices 537% and 237% on two established drugs it recently bought. Valeant’s CEO explained that the drugs only account for 10% of company earnings— small comfort to patients of limited means needing the medications.
Public reaction was fierce. Valeant received subpoenas from U.S. Attorney’s Offices in New York and Massachusetts. All eighteen Democratic members of the House Oversight and Government Reform Committee urged Chairman Jason Chaffetz (R-UT) to launch an investigation. Senator Claire McCaskill (D-MO) demanded the company explain the reasoning behind the steep price increase.
When justifying the cost of breakthrough treatments it’s rightly said that companies developing new drugs face overwhelming odds of failure and decades of R&D costing well over $1 billion per drug that must be recovered. The math is even more daunting when treating orphan diseases with small patient populations. But this defense rings hollow when companies skyrocket prices on drugs already developed by others.
Ignoring any distinction between creating drugs and just acquiring them, critics had a golden opportunity to press for price controls over the entire industry.
The push began shortly before the Turing/Valeant controversies erupted. Dr. Ezekiel Emanuel (an architect of Obamacare; brother of former Obama chief of staff and Mayor of Chicago Rahm Emanuel) wrote The Solution to Drug Prices in the New York Times. He proposed going to an “Australian system of price controls” or a Swiss system where “only those drugs that are effective and cost-effective” are on the approved drug list. “We could cap the price based on objective, quantitative measures of value. Private payers would continue to negotiate with drug companies over prices as they do now, but there would be a ceiling to prevent prices from becoming unsustainable.”
A telling rebuttal came from an unexpected source. Former Chairman of the Democratic National Committee and one time presidential candidate Howard Dean replied:
While Dr. Ezekiel J. Emanuel makes a few good points about the perils of expensive drugs and their efficacy, he misses the big picture. The American drug industry is by far the most successful and innovative in the world in addition to being the most expensive because we are the only country that pays the true research and development costs, not only for Americans, but for the rest of the world as well. (emphasis added)
Using the Australian or the Swiss system here would result in Swiss or Australian limits on who gets what. The easy route to talking about drug prices is to bash company profits. Limiting profits may sound attractive but it will also be ineffective. The more honest discussion is about what we as a society are willing to pay to improve or extend life. And the answer is that we are willing to pay a lot, which is why reform is always talked about but never accomplished.
Art Gertel, former president of the American Medical Writers Association, added a sobering note: “To blame the pharmaceutical industry is a red herring. The issue is much greater and more troublesome as we move into an era when we cannot afford to treat everyone for everything.”
Such points were largely lost in the coverage of the Turing/Valaent controversies. The public and political reaction was intense. The New York Times story Drug Goes From $13.50 a Tablet to $750, Overnight cited other examples of old drugs being acquired and subjected to steep price hikes. Martin Shkreli argued: “It really doesn’t make sense to get any criticism for this” as the increase helped keep the company in business and was in line with other drugs treating rare diseases.
Shkreli certainly didn’t charm FierceBiotech:
“It’s a great business decision that also benefits all of our stakeholders,” Shkreli told me on Twitter. “I don’t expect the likes of you to process that.” He then called me a moron, and later bragged about flipping off the media.
So there you have it. The unvarnished truth. It was a business decision. It was about money. And screw you.
As the storm grew, BIO terminated Turing Pharmaceuticals from its membership stating: “The company and its leadership do not reflect the commitment to innovation and values that are at the core of BIO’s reputation and mission…” But the damage had been done.
Donald Trump denounced Shkreli’s decision as “a disgusting thing to do.” The leading Democratic candidates for president called for increased federal oversight of the life science industry. Senator Bernie Sanders (I-VT) wrote Valeant asking for documents and details on its pricing increases and introduced legislation requiring drug companies to disclose their research and manufacturing costs, profits and how much they charge for medicines in other countries. Similar legislation was introduced in Massachusetts including a proposed cap on some drug prices.
The Washington Post reported that Mr. Shkreli contributed to Sander’s presidential campaign “in the hopes that he could get a sit-down with the Senator.” Instead, Sanders donated the money to charity. His spokesman declared: “We are not keeping the money from this poster boy for drug company greed.”
Hillary Clinton ran an ad featuring Shkreli vowing to “deal with skyrocketing out-of-pocket costs and runaway prescription drug prices,” while releasing her policy to do so. Biotech shares fell 20%.
Clinton’s plan prompted an interesting response from Scott Gottleib with the American Enterprise Institute in the Wall Street Journal. “What she fails to comprehend is that the high drug prices she decries aren’t the result of market forces gone wild. Rather, they are the result of bad regulation that has created market failures and shortages.”
… Turing has been attempting to exploit a regulatory failure that is becoming far more prevalent as the Food and Drug Administration knocks older generic medicines out of production and barriers to entry make new generics costlier. Turing bought marketing rights to Daraprim from another company, along with access to a supply of the drug, so it didn’t need to do any weighty regulatory work to market the medicine. It rebranded the pill and raised the price.
Gottleib notes that other companies wanting to compete must file an “Abbreviated New Drug Application” with the FDA. Applications that once cost $1 million are now $20 million or more, limiting generic competition for old drugs like Daraprim. A single application averages 50 months to approve. The FDA has a significant backlog and it often takes four submissions to gain approval. Further complicating the situation is the FDA crackdown on manufacturing processes which doesn’t consider whether closed production facilities can be replaced to meet patient needs.
“The slow approval timelines, combined with closed manufacturing facilities, create temporary drug shortages and monopolies, which can be exploited by shrewd investors.” Gottlieb urges a distinction between “new medicines that are priced at a premium because they represent genuine innovation and risk-taking, and drugs that are priced high simply because investors are manipulating regulatory failures.”
He notes that 40% of drugs approved last year treat “rare or vexing medical problems, including a cure for hepatitis C, the first and only vaccine for meningococcal B, and a radical treatment for metastatic melanoma—a disease that was once a death sentence.” More than two thirds of drugs in development are “first in class” medicines, representing new approaches for fighting diseases, many of which have small patient populations causing drugs to be priced higher. Gottlieb concludes that Obamacare left many Americans poorly covered for any “specialty” drugs they need, requiring patients to pay out of pocket for those not on approved lists.
We often hear of the economic cost of increased regulation, but as Mr. Gottleib shows there can be significant human costs as well. The law of unintended consequences can cause sweeping government actions intended to address one problem to create another.
There are always those eager to exploit loopholes in any regulatory program. Thus, Martin Shkreli can jack up prices for an old drug confident that FDA procedures meant to protect public safety also prevent competitors from entering the market. Kyle Bass exploits inter partes reviews to make a quick killing shorting stocks on companies whose patents he challenges. The response is often calls for more regulation.
Ever increasing regulation benefits established players, which while inconvenienced, can afford to play the game. Start-ups can’t survive in endless oceans of red-tape that increase their costs while restricting market entry. In this particular case, lack of competition allowed the prices for old drugs to be ratcheted up for no apparent reason inflicting real harm on innocent patients. Before rushing to impose more federal control, it might be wise to ask if government regulations inadvertently contribute to the problem.
As Howard Dean pointed out, other countries benefit because we shoulder the enormous risk and expense of most new drug development. Maybe we’ll get lucky and have a rational discussion of this very complex issue even during the presidential election cycle.
But don’t bet on it.