Source: Forbes
Perhaps it is just unfortunate coincidence, but Hillary Clinton’s proposal to impose federal controls on prescription drug prices was perfectly timed to ride the public outrage over a hedge-fund manager turned pharmaceutical executive, Martin Shkreli, who raised the price of a decades-old drug drug from $13.50 per pill to $750.
Mrs. Clinton lumps all nominally expensive prescription drugs into the same category of so-called “specialty drugs.” However there is a world of difference between Mr. Shkreli’s Daraprim and specialty drugs like Sovaldi and Harvoni. The latter are newly invented medicines that required many years and huge amounts of capital investment to achieve therapeutic advances for patients suffering Hepatitis C that radically increase their quality of life. They comprise intellectual property protected by patents, which allow the drug makers to compete without fear that their innovations will be copied immediately by manufacturers who made no comparable investment in R&D.
Daraprim is a 62-year old medicine that combats the toxoplasmosis parasite, and has no patent protection. A dramatic price increase should immediately attract competitors to whittle down the price. And yet it does not. Indeed, Mr. Shrekli has made it clear he does not expect competitors to respond. In an interview on CNBC last week, Mr. Shkreli claimed that he would use the revenue earned from Daraprim’s higher price to fund research and development on a new drug that would be better than Daraprim. That would be a remarkable achievement. It would also be very surprising.
Until 2010, Daraprim was manufactured by GlaxoSmithKline , a company with a record of innovation reaching back into the 19th century. While the market for pharmaceutical R&D may not be very efficient, it would be remarkable for GSK to have not made any incremental improvements to this drug for over six decades, if such innovation were scientifically or economically feasible.
Drugs in development get traded between pharmaceutical companies all the time; and there is a case to be made that smaller, more entrepreneurial drug makers can innovate faster than the global giants. However, such companies raise capital and get on with their R&D. Until Hillary Clinton launched her price-control proposal, that capital market was working very well.
So, Mr. Shkreli has become the poster child for pharmaceutical greed, although the pharmaceutical industry has renounced him. Both trade associations, PhRMA and BIO, have stated that Mr. Shkreli is not one of them. Indeed, his a business model is one which mainstream drug makers have rejected. GSK itself could have jacked up the price as high as Mr. Shkreli has. Despite many politicians and the media lumping all pharmaceutical executives together, incidents like this tend to happen only after a brand-name company has sold the older, patent-expired drug. The firm most closely identified with this practice is Canada’s Valeant.
Nevertheless, defenders of the pharmaceutical industry suggest the established drug makers must get this situation under control if they are to retain credibility. Forbes contributor John LaMattina makes worthy suggestions. Divesting drug makers – in this case, GSK – could impose a contractual limit on buyers’ price hikes. Alternatively, the established drug makers could just not spin off the older drugs.
However, we must also understand why these momentous price hikes are happening now, and not a decade or more ago. In a new policy report, Devon Herrick of the National Center for Policy Analysis (NCPA) explains that the Food and Drug Administration has slowed down the rate of approval of generic drugs – drugs which the FDA determines are bioequivalent to brand-name medicines. Mr. Herrick concludes that the FDA currently has a backlog of about 4,000 applications. In 2010 the median approval time for new generic drugs was 27 months. For a very small market like that which Daraprim addresses, generic competitors have to be able to enter very quickly if patients are to benefit from lower prices. They cannot wait over two years.
Limiting excessive price hikes by operators exploiting this regulatory morass will not be achieved by more political oversight of drug makers, but by reducing the barriers preventing new competitors entering the market.
Investors’ Note: GlaxoSmithKline (NYSE: GSK) and Valeant Pharmaceuticals (NYSE: VRX) are drug makers associated with practices discussed in this column.
John R. Graham is a Senior Fellow at the National Center for Policy Analysis and Co-Organizer of the Health Technology Forum: DC. His research is collected at JRG Health Sector Analysis.