Will More Regulation Create Cheaper Drugs?

By Joseph Allen
October 20, 2015

drug-price-rollercoasterThe 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.

[Joe-Allen]

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.”

[Joe-Allen]

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.”

Gottleib explains:

… 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.

The Author

Joseph Allen

Joseph Allen is a Featured Contributor on IPWatchdog.com, and a 30-year veteran of national efforts to foster public/private sector commercialization partnerships, and author of numerous articles on technology management for national publications.

Joe served as a Professional Staff Member on the U.S. Senate Judiciary Committee with former Senator Birch Bayh (D-IN), and was instrumental in working behind the scenes to ensure passage of the historic Bayh-Dole Act. He is our resident Bayh-Dole expert, and will write frequently about Bayh-Dole and issues surrounding the commercialization of university research.

In 2008, Joe founded Allen & Associates, through which he offers consulting services assisting clients in technology transfer issues, including developing effective communication strategies with national policy makers.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 12 Comments comments.

  1. Anon2 October 20, 2015 2:13 pm

    Excellent article.

    …..

    Although “need” and “welfare” justify revisiting and reforming government regulatory structures which in fact inhibit healthy competition, they do not justify the initiation of force and the use of State controls to dictate markets through price control. Businesses and businessmen may make bad decisions but if the market is free, prices for products will attain their objective (which is neither subjective nor intrinsic) value as demanded by those who want them and supplied by those who can produce them.

  2. Phillip L. Zweig October 20, 2015 3:17 pm

    This entire discussion misses the big picture. Unprecedented artificial shortages of generic prescription drugs are the reason for their skyrocketing prices. In turn, the shortages are caused by the anticompetitive contracting and pricing practices, kickbacks, and self-dealing of giant hospital group purchasing organizations (GPOs). These buying cartels control the purchasing of an estimated $300 billion in drugs, devices and supplies annually for 5,000 hospitals. They operate according to a “pay-to-play” scheme in which they award exclusive contracts in return for outlandish “administrative” and other fees. This arrangement has decimated competition in the entire generic prescription drug industry and unleashed global shortages. For a primer, read our 9/3/13 New York Times op-ed, “How a Cabal Keeps Generics Scarce.” It’s posted on our website, http://www.physiciansagainstdrugshortages.com, along with voluminous documentation on GPO abuses.

  3. Gene Quinn October 20, 2015 5:41 pm

    Phillip-

    Despite what you say in your comment, this article does not miss any bigger picture. Instead it seems you would have preferred to have read an entirely different article. That Joe wrote an article asking a legitimate question about whether more regulation will bring down drug prices you seem to have wanted to read something on a different subject. That hardly makes Joe’s article bad, or one that misses the big picture.

    As far as your claim that there is no competition in the generic drug market, the facts simply prove that statement to be incorrect. In fact, there is vigorous competition in the generic marketplace for many drugs. The drugs where there is little competition relate to patient pools where there is not a lot of money to be made and not the result of some vast conspiracy.

    -Gene

  4. EG October 21, 2015 8:11 am

    “As Howard Dean pointed out, other countries benefit because we shoulder the enormous risk and expense of most new drug development.”

    Hey Joe,

    Absolutely correct. Unfortunately, the U.S. government, either through its trade representative or otherwise, does nothing to point out this issue to it’s so-called “trade partners.” The cost controls and compulsory licensing of patented drug technology by the ROW just fuels this inequity. Someone has to pay for this R&D as, like money, it “doesn’t grow on trees,” and so far it’s being paid only be U.S. consumers. The drug and IP aspects of the pending Trans-Pacific Trade Agreement are just another example of the ROW wanting to get the benefits of this drug technology, but expecting the U.S. to foot more than it’s fair share of the bill for it.

  5. Anon2 October 21, 2015 9:20 am

    EG @ 4 agreed

    “ROW wanting to get the benefits of this drug technology, but expecting the U.S. to foot more than it’s fair share of the bill for it.”

    Translation: They want to “get something without paying” for it… a concept currently well accepted by “progressives” specifically of the modern world… and known to thieves generally throughout all of history.

    Luckily for the ROW the “taking” is performed by its victims on their behalf and re-spun as something “progressive”… an “agreement” of “Nations” for the benefit of the “world”, it is almost inconsequential that it is forced upon individual citizens and organizations of the US who never would have agreed to such terms.

    In the long run these schemes and the principles underlying them cannot succeed. All we can hope for is that they are stopped before it is too late.

  6. Scott Elmer October 21, 2015 11:21 am

    Great article! Regarding the disproportionate price Americans pay for new innovative drugs, I have a simple idea to consider as a conversation starter. What about a law that prohibits pharma companies from charging Americans any more for a new drug than they charge any other developed nation? The idea is to make the new drug prices in America the floor instead of the ceiling that they are now.

  7. EG October 21, 2015 12:53 pm

    Anon@5,

    Quite correct. After being some of the best diplomatic negotiators in the early years of the USA (e.g., witness how the diplomats for the Madison administration out negotiated the British in the War of 1812, including avowing losing British-occupied Maine), we are now becoming one of the worst, the pending Trans-Pacific Trade Agreement being the most recent example of where the Obama administration willingly and gleefully agrees to biologic data exclusivity utterly at odds with the existing U.S. biosimilars statute.

  8. Phillip L. Zweig October 22, 2015 1:41 pm

    Gene,
    Sadly, the resolution of this issue has long been hampered by so-called “experts” who have theories and opinions but few, if any, facts. I would urge you to stick to subjects that you apparently know something about, like IP law. Your comment tells me you don’t have a clue about the causes and remedies for the shortages and skyrocketing prices of generic prescription drugs.

  9. Gene Quinn October 22, 2015 3:01 pm

    Phillip-

    I’m truly sorry that you don’t think I know what I’m talking about, but that is a YOU problem, not a ME issue.

    This article and all of Joe’s other articles provide numerous citations to back up the facts relied upon. I do the same thing in my own writing, so it is curious that you would suggest that we don’t provide facts. What is apparent, however, is that your latest comment provides absolutely no factual support, which means it boils down to you saying that people should listen to us and instead should presumably listen to you.

    The problem you have is that your earlier comment is laughably false. You say that there is no competition in the generic market for drugs, which is simply not true. Indeed, today there is far more generic competition than there has been at any time over the past generation. Over the past several years the Supreme Court has said that reverse payments can be an antitrust violation, and the introduction of inter partes review at the USPTO has lead to numerous challenges by generics against brand name drug patents. So now a reverse payment can open people up to antitrust scrutiny and IPRs are being used to kill drug patents, which would then instantly open the market for any and all generic competition. Indeed, IPRs will be far more effective at getting generics to market than Hatch-Waxman ever was. Indeed, we see second, third, fourth ANDA filers challenging patents in IPR. So when you proclaim there is no competition that is simply wrong and suggest you are unfamiliar with what is really happening in the industry, particularly current trends.

    If you want to talk about skyrocketing prices why not discuss the real problem rather than rely on a conspiracy theory? The real problem is that many other countries have price controls on drugs, which means that U.S. consumers and insurance companies are paying for the research and development of drugs. The U.S. is effectively paying for the drugs that benefit people around the world. That is the real problem.

    So why don’t you come down off your high horse. If you want to have a discussion we can have the discussion. But when you base your argument on something that is fundamentally incorrect don’t be surprised when I or someone else here points that out.

    -Gene

  10. Anon2 October 22, 2015 3:05 pm

    Zweig @7

    You comment raises the following questions:

    What is your definition of a “shortage” in this market? or in any market for that matter…

    What is your definition of a “skyrocketing price” in this or any market?

    Without too much analysis I would tend to think a rational definition for a “shortage” occurring in a market when consumers are willing and able to pay for a product at a price which producers are willing to sell it for, but for which the total demand exceeds the capacity of the producers to produce and sell it. This situation does not last long as the producers can and should adjust prices of the product so that the demand matches what they are able to supply.

    Also without too much analysis I think it would be hard to define any rational definition for “skyrocketing prices”, unless there is some measure of market condition’s fluctuation over time which sets a kind of standard benchmark… say anything over x% per day… perhaps similar to the term “hyper-inflation” it merely reflects a sharp deviation from normal free market conditions.

    Skyrocketing prices also are self-correcting. Once the maximum profit that a producer can obtain is reached, based on what consumers are willing to pay, any further increases in price would start to erode the profit of the producer through lower sales.

    Now if you are talking about a State dictated economy in which the market is managed and the producers and consumers are not free to sell and buy goods voluntarily but only according to so called “guidance” from the all powerful State… i.e. in an unfree economy and hence in an unfree society… well then you could define “shortage” and “skyrocketing prices” in any arbitrary way you like… as long as it is endorsed by the State.

  11. CR October 25, 2015 3:02 pm

    Great article.
    The Medicare Modernization Act of 2003 created Medicare Part D, the prescription drug plan. Therein, the government is not authorized to negotiate with the drug companies for med prices. Such a provision is downright un-American, and is another example of poorly thought out statutory red tape. Worse, it hastens Medicare’s insolvency while enabling the drug companies to sell their products at much reduced prices overseas.

    The US healthcare industry, whether we’re talking drugs, hospital care, or insurance, is the darkest, most mafia-like industry there is, thriving due to an environment where costs and payments are hidden; and there is no shortage of red tape that is part and parcel to maintaining this.

  12. Nate Browne November 18, 2015 8:45 pm

    Phillip Zweig’s comment @2 is right on the money.

    FiercePharma has a short article that explains some of what is happening in the States now. I’ll include the link below, but if it doesn’t work, the article is called “Shortages, soaring generic injectable drug prices leave hospitals scrambling” (by Eric Palmer; November 18, 2015).

    http://www.fiercepharma.com/story/shortages-soaring-generic-injectable-drug-prices-leave-hospitals-scrambling/2015-11-18?utm_medium=nl&utm_source=internal