Martin “Pharma Bro” Shkreli’s testimony – or lack thereof – at a House Oversight Committee hearing (or lack thereof) justifiably angered many people. The infamous former hedge fund CEO turned pharma executive raised the price of a generic anti-parasitic drug – Daraprim – by 5,000 percent last year simply because he could. Overnight, he became the embodiment of a pharmaceutical industry routinely accused of putting profit-seeking before patient health.
“There are many important differences between the "Pharma Nerds" developing innovative life-saving drugs – including Gilead Sciences’ Sovaldi – and the "Pharma Bros" exploiting loopholes to profit from generics like Daraprim.”
But policymakers shouldn’t jump to conclusions, let alone legislation. There are many important differences between the “Pharma Nerds” developing innovative life-saving drugs – including Gilead Sciences’ Sovaldi – and the “Pharma Bros” exploiting loopholes to profit from generics like Daraprim. And addressing patient access challenges for one requires very different solutions than the other. First and foremost, it requires understanding why we make a distinction between generics and branded medicines in the first place.
Daraprim: how to make an orphan drug without a dollar in R&D.
Daraprim should be inexpensive. It’s an old drug, without any significant manufacturing challenges.
But it’s expensive by design. After Turing acquired Daraprim from Impax Laboratories, it implemented a “controlled distribution system,” whereby the drug would only be available through Walgreens’ Specialty Pharmacy. Restricted distribution is typically limited to drugs with serious safety concerns, but in this case it appears to have been at least partly motivated by Turing’s desire to make it more difficult for other generic manufacturers to obtain samples they could use to develop a competing product.
And that’s a key point: with an FDA license and tightly controlled supply, Turing raised the price overnight from $13.50 to $750 per pill. Presto, instant orphan drug.
Contrast this with other high priced branded drugs. Arguably, the biggest backlash went against Gilead Sciences’ Sovaldi and Harvoni, essentially cures for hepatitis C (HCV). The two drugs list price is $84,000 and $94,500 respectively for 12-weeks of therapy – over $1,000 a pill. To date, only a fraction (about 2%) of U.S. HCV patients have been treated. Many poor patients, in prisons or covered by Medicaid, have to wait until they have liver damage to access the medicines.
Gilead has even drawn the ire of Massachusetts’ Attorney General Maura Healy, who has accused the company of unfair trade practices.
What’s the difference between daraprim and Sovaldi? To the naked eye, not much.
In reality, quite a bit.
Sometimes, short term monopolies are good for markets and society
Patents encourage innovation in sectors where the upfront (or fixed) costs of developing a product are very high. Monopoly patents are designed to ensure that innovators that they can recoup these costs and earn a healthy profit before generic competitors enter the market. Without appropriate incentives to compensate for the cost of capital, investors and companies would look for faster, and more predictable, products to invest in. When patents expire, generic manufacturers enter and sell the drug without having to go through time-consuming and costly clinical trials by establishing “bioequivalence” to the U.S. FDA.
Monopoly patents – with all the implied pricing power – are necessary for producing innovative drugs.
But generic drugs are not “innovative,” although they are critical in maintaining a healthy and competitive pharmaceutical market. Part of that benefit is financial, and part of it is that limited patent times encourage innovator companies search out more effective drugs rather than simply sitting on revenues from old ones. Daraprim is a generic, and generics shouldn’t – with some very narrow exceptions – benefit from the same monopoly protections that innovator drugs do.
Generics should recoup a fair price, and be able price for investment in new or updated manufacturing facilities, but they don’t need the same incentive that nominally high prices generate. Not only do higher prices allow innovators to recoup their investments, they also send a signal to future investors that society is willing to pay for new valuable therapies. Sovaldi should cost more than Daraprim, much more, if you want someone to develop cures for HCV.
The only reason that Daraprim can command such a high price today is because of a small market that likely can’t support many manufacturers, the lengthy time required for FDA to review and approve new generics (although those times are falling), and the closed distribution system implemented by Turing.
Since the situations in each case are vastly different, the approach to addressing each one must be different, too.
Targeted cures for different problems.
Using Daraprim as a poster child for universal price controls is a very poor approach. Targeted solutions for high priced generics could include fast tracking applications from other high quality markets (reciprocity for generics approved in some European countries is one approach). Clearing the FDA’s backlog of generic applications faster – perhaps through a priority review system, as happens with branded medicines – is another approach.
When innovative drugs offer clear health benefits, like Sovaldi, we should consider ways to spread high upfront costs over longer terms. We should treat innovative medicines as a form of social investment. Bond offerings or other credit market tools would allow payers and individuals to purchase medicines that come with high price tags, but also large long term benefits. Bundling revenue streams from Medicare and Medicaid, for instance, to buy innovative treatments for Alzheimer’s quickly would make a lot of sense.
As medicines become more targeted, prices are likely to become more responsive to value , as insurers tie payment to the drug’s performance. For drugs with particularly high social benefits or where the market might make recouping costs difficult – vaccines in particular come to mind – prizes or patent buyouts can also be an option that maintains incentives for innovation while allowing prices to be lowered quickly.
Still, patents will continue to work well for most products, and governments should continue to prioritize strong IP to promote medical innovation.
Lowering prices by fiat will just tell investors to take their dollars elsewhere.
This piece originally appeared at Forbes.com's "The Apothecary"
This piece originally appeared in Forbes