Turing Pharmaceuticals, led by CEO Martin Shkreli, recently acquired Daraprim, a drug that treats a deadly parasitic infection, and promptly raised its price from $13.50 to $750. Shkreli earned himself the reputation of a “pharma bro” through his brash handling of the situation in the media and especially on Twitter, where he called critics of his decision “idiots” and “incoherent messes” and challenged Bernie Sanders to a health care debate. Shkreli’s notoriety has extended public outrage and national coverage for months after the typical 24-hour news cycle, but Turing’s price hike was by no means unique. Rather, it represents a larger trend of pharmaceutical companies increasing the price of generic drugs that have been around for years. For instance, hospitals paid $20 for a bottle of doxycycline, a decades-old antibiotic, in 2013. They now pay $1,849. They pay $196 for pravastatin, which lowers cholesterol, as opposed to the $27 they paid two years ago. And another anti-parasitic drug, albendazole, sold for $5.92 per day in 2010. That figure has risen to $119.58.
Turing and other pharmaceutical companies are able to impose such seemingly ludicrous price hikes for multiple reasons. They can first acquire drugs like Daraprim because patents of these drugs ultimately expire. They can then charge whatever they want for the drugs because federal mandates force insurers to accept FDA-approved drugs, regardless of their costs, so that consumers can have access to all possible treatments. (By contrast, in many European countries, insurance companies have the power to say no. Every year, they reject handfuls of pricey and ineffective drugs. This threat incentivizes pharmaceutical companies to offer lower prices, and as a result, the average prescription drug cost in Europe is 50 percent below what we pay, according to a McKinley study from 2008.) Furthermore, price hikes do not reduce demand for medications, as patients do not have the luxury of turning down life-saving and necessary drugs. Lastly, the market supply of some of these drugs has dwindled. Due to the higher costs of drug manufacturing and a recent trend of pharmaceutical companies buying each other up, there are now fewer companies producing drugs like albendazole. This gives individual companies greater control over market prices. Unfortunately, U.S. antitrust laws only prohibit drug companies from anticompetitive, corrupt practices, like collective price-fixing. If a company acquires a drug legally and achieves a monopoly, the federal government offers little recourse for limiting exorbitant prices.
The reasons just described paint pharmaceutical companies as villains—as cold-hearted profit seekers who take advantage of helpless patients and a generous health care system for producers. However, drug manufacturers do possess a legitimate, constructive basis for constantly seeking higher profits: the rising cost of research and development. In the case of Daraprim, doctors have told Turing that a cheaper, more effective version of the drug is not necessary, so when Shkreli boasted to Twitter that “unlike other companies with this strategy, we do R&D,” few people gave merit to his argument. But Shkreli did not do justice to the value of higher profits to drug manufacturers. These manufacturers must surpass an enormous threshold to develop new medications.
Last year, the Center for the Study of Drug Development (CSDD) at Tufts University found that in 2003, the cost per new approved drug was, in today’s dollars, $1.04 billion. That figure has since risen to $2.6 billion. The CSDD attributed this jump primarily to high failure rates of drug tests, a consequence of increasingly resistant bacteria and an emphasis on more specific chronic and degenerative disorders. Aside from the inevitable need to test more drugs through trial and error, strict FDA policies have resulted in higher safety and efficacy thresholds, larger clinical trial pools, and higher costs of input from the medical sector. Notably, while development costs may be rising, the timeline of developing new drugs since 2003 has actually shortened slightly. Joseph A. Dimasi, the director of economic analysis for the CSDD, explained that “changes in the overall time profile for development and regulatory approval phases had a modest moderating effect on the increase in R&D costs … the time cost share of total cost declined from approximately 50% in previous studies to 45% for this study.”
This may not be a significant decrease in itself, but it suggests pharmaceutical companies feel a pressure to develop drugs at a faster rate. Indeed, once a new drug is finally approved, it possesses a finite window of time in which to prove its market value. The patents on these drugs give pharmaceutical companies only 20 years, a handful of which include the R&D process, to recuperate the overhead costs and failed attempts of making them.
The difficulty of bringing new drugs to the market, coupled with this time pressure, forces pharmaceutical companies to sell new drugs at high prices or raise prices of pre-existing drugs in order to recover the cost of producing them. When companies cannot accomplish this—when the cost of production is too great, or when a new drug is too specific to bring in enough revenue—they can go out of business. And for us, that means one less source of medical advancement and potentially life-saving treatments.
While drug prices can seem unreasonable, we must acknowledge their necessity. It is important to note that Martin Shkreli’s poor behavior was an anomaly, and the publicity of his price hike has unfairly given the entire pharmaceutical industry a bad image. The ability of a small company like Turing to manipulate prices is instead indicative of the fundamental problems of the industry. More than ever, companies are forced to cover large costs with high prices. Laws and regulations in the United States give them the ability to do so, but this presents companies with the opportunity to go too far–to take advantage of consumers, as Turing did. It will be difficult to eradicate high drug prices, but we must ensure pharmaceutical companies cannot exploit helpless consumers. There are options on the table. Like many European countries, we could enable insurers and government programs to withhold drugs from their plans if the efficacy of the drugs does not justify their prices, incentivizing manufacturers to lower prices. Or we could pressure presidential candidates to revise FDA standards. Unfortunately, every option seems like it would require a major overhaul of the health care system. In the meantime, we must hope that Daraprim’s story serves as a cautionary tale for pharmaceutical companies and pushes them to think more scrupulously about raising drug prices in the future.