Prescription Drugs

Drug Price Gouging?

Prices are set based on what the market will bear



The price of Daraprim, a 62-year old drug used to treat the parasite infection toxoplasmosis, skyrocketed earlier this month, rising from $13.50 to $750 per pill—an increase of 5,000 percent. Martin Shkreli, the head of the drug's new marketer Turing Pharmaceuticals, has been widely excoriated as a heartless profiteer preying on sick people. Similarly steep recent price increases in other medications have also been decried and investigated recently by congressional committees. For example, URL Pharma turned the ancient anti-gout drug colchicine into Colcrys, boosting the price from pennies per pill to $5 each; the price of Mallinckrodt's Ofirmev pain injections are up 250 percent; and Horizon Pharma's Vimovo pain tablets now cost 600 percent more.

Are these price hikes indicative of an overall trend? Not according to the Express Scripts Prescription Price Index. The pharmacy benefits manager, which keeps track of the prices of both branded drugs and generic drugs, reports that since 2008 "the prices for the most commonly used generic medications decreased to $37.13 (in 2008 dollars), and prices for the most commonly used brand medications increased to $227.39 (in 2008 dollars)."


Overall, the company notes that since 2008, "the average price of brand drugs has almost doubled, while the average price of generic drugs has been cut roughly in half."

As in other markets, more competitors generally mean lower prices. The Federal Trade Commission reports that prices drop about 20 percent when first generic manufacturer enters the market for a branded drug whose patent has expired. As more generic competitors enter, the price falls to as low as 20 percent of the original branded drug price. The Food and Drug Administration (FDA) points out that nearly 8 in 10 prescriptions filled in the United States are for generic drugs. Using data from the IMS Health Institute, the Generic Pharmaceutical Association calculates that the cost savings in 2013 from using generics was $239 billion and that generic products saved the U.S. health system nearly $1.5 trillion between 2004 and 2013.

So what is going with Daraprim?

Daraprim was discovered in 1953, and its patent expired in in the 1970s. The pharmaceutical giant GlaxoSmithKline (GSK) sold it until 2010, when the company divested itself of the U.S. rights to this small market drug to CorePharma, a subsidiary of Tower Holdings. (Basically, this means GSK transferred its FDA license to market the drug in the United States. The company continues to make and sell the pill in other countries.) In October 2014, Impax Laboratories bought Tower, acquiring the marketing rights to Daraprim in the process. In August of this year, Impax sold the rights to Turing. The drug is prescribed to only a few thousand patients per year, so no other manufacturer has had the incentive to develop a competitive pill. If they had wanted to manufacture their own version, they first would have to conduct comparative clinical trials to convince the FDA that their compounds are identical to Daraprim.

Shkreli devised a plan to exploit the situation. First, he apparently talked Impax into starving the wholesale market of the drug, so that when Turing completed its purchase of the rights there were no extra pills floating around. Next, he set up an exclusive distribution network as a way of preventing potential competitors from obtaining enough Daraprim to conduct those trials for the FDA. With potential competitors blocked, his monopoly did what monopolies do: set its prices to maximize profits.

Following a fierce backlash—Democratic presidential candidate Hillary Clinton declared that "Price gouging like this in the specialty drug market is outrageous"—Shkreli has backed down, saying that Turing will lower the price of Daraprim. But he still plans to hang on to his monopoly. 

What about the other drugs seeing sharp price increases? In colchicine's case, it's one of about a thousand medications that were grandfathered in before the FDA got the power to approve drugs' efficacy and safety in 1962. The agency wants to have the efficacy, safety, and dosing of these earlier medicines tested in clinical trials, so companies that conduct such trials can (if the agency approves their formulation) get three years of exclusivity to market the drugs. Thus did colchicine, used for centuries to treat gout, become Colcrys, a product with a government-enforced monopoly. The good news is that a generic version of colchicine became available this year. 

Orfimev and Vimovo are still patent-protected monopolies. In theory, patents are awarded as incentives to get pharmaceutical companies to invest billions to find and market new medications. (The Tufts University Center for the Study of Drug Development estimates that it costs $2.5 billion to get a new drug from petri dish to patient bedsides now.) The manufacturers of Orfimev and Vimovo sold the drugs' marketing rights to other companies, which decided that the medicines were undervalued.

Other factors also play a role in steeply rising prices for some generic pharmaceuticals, including industry consolidation and increasing regulatory burdens. There is a strong relationship between a drug's market size and the number of companies that decide to make it. The fewer prescriptions that are likely to be filled, the fewer competitors will emerge. A 2013 study by the Federal Trade Commission found that "drugs that eventually attract at least five competitors face a steep decline in prices." So if, say, there are only two manufacturers of a rarely prescribed drug, it's easy for them to form a cartel. There is also little incentive for another company to challenge their monopoly by seeking to enter such a small market. 

In addition, the FDA has increased its scrutiny of generic pharmaceutical manufacturing processes. One result, as Scott Gottlieb of the American Enterprise Institute has noted, is that "higher manufacturing costs, and the tighter scrutiny applied to new manufacturing facilities, have increased the entry costs for new generic drugs and generic drug makers." Furthermore, the higher costs make drug production unprofitable for some generic drugmakers that then choose to stop producing marginal products.

There is also a growing backlog of new applications seeking FDA approval for generic drugs. Average review time for an application is now over three years. So even if another company decided to enter the Daraprim market, Turing could probably count on at least a three-year competition-free period in which to sell the drug at a high price.

Reputation matters, and customers can still complain, call out, and shame companies they believe are exploiting them. That's what happened in the case of Daraprim: The media firestorm pushed Turing to lower its price. But the best long-term solution to the situation is to enhance competition. The FDA should immediately adopt an explicit policy in which applications by companies seeking to compete with generic monopolies such as Daraprim are fast-tracked over the backlogged queue.

While Daraprim and a few other monopolized medications make headlines and prompt congressional hearings, they are outliers. The good news is that competition continues to lower prices for most generic drugs and benefit patients.

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  1. There is also a growing backlog of new applications seeking FDA approval for generic drugs. Average review time for an application is now over three years.



    1. Increase that budget NOW!

    2. I like how the linked article says stuff about how the FDA needs to remove barriers to entry. Chief among those barriers, of course, is the FDA.

    3. Market faaaaaaaaiilure!

  2. Corporate greed! Market failure! Down with capitalism!

  3. While Daraprim and a few other monopolized medications make headlines and prompt congressional hearings, they are outliers. The good news is that competition continues to lower prices for most generic drugs and benefit patients.

    And the bad news is that people who hear about this story come anyway with the conclusion that even more government regulations and oversight is needed to prevent this from happening.

    I marvel at the people who think that the pharmaceutical is free and unfettered.

    1. “I marvel at the people who think that the pharmaceutical is free and unfettered.”

      It’s pretty amazing/depressing, isn’t it? I’m going to school for health information management, and clearly, the people who are characterizing the healthcare system in general (even before Obamacare) as “free market” are pathetically ignorant.

  4. The Elion Musk school of capitalism: Find regs to game and make a bundle!

    1. One of the best ways to counter that would be to take a lesson from Henry George. Government-granted patents/monopolies can come with a higher cost and a different collections structure. Essentially tax the economic rent at a much higher rate – for as long as the government-granted monopoly lasts.

      Of course that group will cry foul and resist. But in doing so will have to admit that they are uniquely benefiting from govt while trying to spread the costs around. In their case, those are NOT involuntary compelled taxes. Merely the cost of getting a govt-granted monopoly.

      1. Those higher taxes, in turn, will be paid by the consumer through even higher prices. Everyone loses! (Except the government)

        1. No it likely won’t. Those higher taxes WILL be paid by the capital provider who has that monopoly – down to the point where capital provider is only earning a competitive rate of profit rather than a monopoly profit. They will only be able to pass taxes on to their employees (lower pay) or consumers (higher prices) depending on the elasticity of either labor (other jobs available) or consumer demand (other uses of consumer money).

          Even in a case like property taxes – with high inelasticity of demand – gotta live somewhere and can’t substitute a nice pair of shoes for housing – it is very difficult for a landlord to pass on property taxes to tenants.

          1. “…consumer demand (other uses of consumer money).”

            Medication doesn’t work like that. Its not very comparable to real estate (people can move). If you need the meds for your health, you’ll generally spend the money.

            If you have brain cancer, you don’t say “well the medication that will save my life is too expensive, so instead I’ll buy a new TV”.

            1. If those consumers are uniquely benefiting from a product that couldn’t be created without a government-granted monopoly; then why are you worried about them being willing to pay higher prices for that product? That’s not an involuntary tax. Rather – avoiding paying that tax is simply a way of forcing others to pay for the government that uniquely benefits you.

              The substitution effect for pharmas would most likely be – is this branded monopoly drug really much better than that old generic drug? And even medicine has a very long history of wait a bit and it might go away – take two aspirin and call me in the morning.

              If the issue is the general overhyping of medical care – do this or you’ll die – that is a much bigger broader issue. There is a lot of information asymmetry in health care and it really is hard for health care to truly be a free market with that much asymmetry – whether government is involved or not.

              1. there is no product which couldn’t be created without a government granted monopoly, but this an exceptionally ridiculous view to take in regards to drug production where the majority of the costs are government imposed. Without the regulations there would be no need for the monopolies .

                1. If there are excess costs because of the approval process; then by definition those aren’t part of any monopoly profits.

                  Clinical trials and FDA approval process itself is not some alien regulation that has nothing to do with an actual free market. Every free market requires some sort of anti-fraud mechanism. That can take a lot of different forms (and i seriously doubt the current form is anything but a mess), but the modern libertarian notion that fraud simply can’t exist for long in a free market is fucking insane. Of course it can. And before the FDA approval process came about, such frauds in the ‘pharma’ arena were called ‘snake oil’ and ‘patent medicine’. Here’s an actual muckraker writing about the industry – in 1905 – before the FDA existed (and 20+ years before pharmaceuticals were really covered) – google The Great American Fraud by Samuel Hopkins Adam

                  The free market did not create some self-policing or anti-harm system here. That doesn’t damn free markets at all. But when modern libertarians prattle on about a ‘Free Market Cures All’ – well that does sound like a snake oil salesman trying to undermine actual free markets.

          2. Depends upon the supply of available rental housing relative to the demand for such housing. Government through zoning, building codes, minimum square footage rules, decreases the possible amount of rental housing relative to the demand for the same. This in turn increases the amount of rent that landlords can charge for such housing.

            1. Sure. But there isn’t some one-for-one mechanism where property taxes are transmitted to tenants. It depends entirely on the broader market for rental housing. Its much easier to raise rents when you put in a new refrigerator or redo the bathroom than it is when you re-roof or get a property tax bill. Some things end up being paid by the owner not the tenant.

  5. This briefly came up while out for drinks with friends last night. I had no idea what it was about so I didn’t comment, but I strongly suspected patents/FDA regs were the underlying culprit. You simply can’t get away with a 5000% price increase in a competitive market.

    This Shkreli guy does sound like a weasel, though.

    1. I remember observing that sometimes defending free enterprise feels like a being a defense lawyer whose innocent client keeps shouting “I’m glad the bastard’s dead!” in court. As free as he may be to set prices or whatever other factors are involved, the guy came off as such a smug douchebag that he may as well have been actively trolling for the Dems. Around this time next year, it will come up again.

    2. “This briefly came up while out for drinks with friends last night. I had no idea what it was about so I didn’t comment, but I strongly suspected patents/FDA regs were the underlying culprit.”

      That seems to be very common when I’m at family functions (my family is pretty far left except for me). They’ll rant about some corporate misconduct or price fixing and talk about how it’s the fault of capitalism and how Liz Warren will fix it all when she’s president. I tend to be a bit behind on the news so I won’t say anything, but the whole time, I’ll be thinking to myself, “there’s probably some regulation that causes that”. Lo and behold, when I go home and look it up, that’s exactly the case.

      1. I’ve started to try to speak up more. It’s not in my personality because I don’t feel confident talking about a subject unless I think I actually understand it in pretty good detail. And I think I tend to underestimate my knowledge, certainly relative to my peers. I also haven’t mastered the “debating” tactic of dismissing everything someone else says out of hand, so I think I tend to come off as too deferential.

        But last night I also told an anecdote about my trip to China. We went to the Forbidden City, and there were these signs with English translations. They signs were brown and at the bottom was embossed “This sign provided by the American Express Company” (paraphrasing…don’t remember exactly). But most of the signs had this part crudely painted over with brown paint to try and make it less obvious.

        I remarked that it made me happy to see a sign at perhaps the most significant cultural landmark of an ostensibly communist country paid for by an American corporation and finished with something like “Nice win for capitalism.” I got a couple weird looks. Just wait until I get the “Hayek is My Homeboy” tshirt that I recently ordered.

        1. I found a picture!

          I just can’t describe how amused I am by this. The best part is the lame attempt to cover it up, rather than just pay for new signs or something.

          1. Where’d you get that t-shirt? I might like one of those

      2. Start betting them that the government caused it. You will make money and shut them up.

  6. I had the displeasure of being the lone voice of dissent in a vigorous circlejerk about this earlier in the week, which was humming along to the tune of “the corporations sit there in their corporation buildings being all corporationy making money” until I tried to bring up the FDA putting up gargantuan barriers to entry.

    I specifically fucking remembered one of them mentioning that she had liked Dallas Buyer’s Club too, and I attempted to bring that up as a parallel, but, nope, even though they were in the wrong there, without these angels in the form of kings giving their noble technocratic guidance we’d have people selling rat poison as medicine to kids for a profit.

  7. Ron, you didn’t tell the whole story behind Daraprim; namely that Shkreli claimed the reason for the price increase was so that they could develop a new and more effective drug for toxoplasmosis to replace Daraprim, and also that Turing would be giving Daraprim away for free to people who couldn’t afford it and at a discount for those on Medicaid, etc.

    I’m not sure this justifies the insane markup or not, nor do I completely buy the whole “we will give it away for free for low income folks” but there is a completely different angle to examine in this story besides the ridiculous regulations that encourage monopolies. Drug manufacturers invest billions in getting a drug to market and then we in the US end up subsidizing the drug companies investments by buying the drug at full price. The rest of the world ends up getting the drug later at generic prices, and they never have to subsidize anything. This is a point rarely discussed when everyone screams about drug company profits.

  8. On a related note, the odd thing to me is all the people who decry the prices of pharmaceuticals (or surgery, or any health care at all) because “it’s wrong to profit off health care” or something similar. When I read that, I always think, “So saving someone’s life is only worth $15 or $20 or so?” I mean, why wouldn’t we pay a lot to have lives saved? I could actually understand it better if the anti-capitalists complained about the salaries of athletes or actors – they’re getting paid big bucks to play ball or pretend to be someone else. And yet it always seems to be people who are actually doing something productive who are the subject of the Two Minutes’ Hate.

    1. They want it to be done “for free”. Or, really, they want “rich” people (however they define it) to pay for “poor” people (however they define it). And they’re OK with doctors and nurses making a “decent” living, but they don’t want CEOs and other execs profiting from it.

      All of which is to say that it isn’t a very well thought out position or sentiment. It’s understandable on an emotional level (wouldn’t it be great if we all just helped each other?!) but in my experience it doesn’t get much beyond “We’re a rich country so we should be able to afford it”.

      1. “It’s understandable on an emotional level”

        Yep. That’s the key issue. Almost everyone argues with their emotions, and everyone thinks their an expert on every topic. When I don’t know much about something (even if I have my suspicions), I keep my mouth shut until I do some research… sadly most other people don’t.

      2. “Or, really, they want “rich” people (however they define it)”
        People who make more than about 10% more than them.

        People who make less than 10% more than them.
        ” to pay for “poor” people (however they define it). “

      3. “Or, really, they want “rich” people (however they define it)”
        People who make more than about 10% more than them.

        People who make less than 10% more than them.
        ” to pay for “poor” people (however they define it). “

    2. We shouldn’t have to pay “a lot” because “a lot” is not a competitive price set in a competitive market. “A lot” is an administered price set for a product which cannot be in said competitive market because the basic requirements are not and cannot be met. In such a situation the owner is able to exploit its access to public resources for pure rent extraction. It produces nothing yet gains profit solely from its privileged position.

      In a situation where a market cannot exist the correct response is a flexible price control policy which simulates the missing market mechanisms, adjusting the price to what it would fetch when competing with equivalent products.

  9. The central problem, as noted by Alax Tabarock over at Marginal Revolution, is the requirement that generic drugs pass comparative clinical trials in order to gain FDA approval.
    This is absurd, since the trials are being performed on what is a chemically identical substance to something that has ALREADY been FDA approved. If it’s chemically identical, you shouldn’t need to perform new trials!

    Now, it’s true that manufacturing process changes can cause impurities, but you can have a quality control process to verify that the drug is, in fact, chemically identical to the one that’s already approved. That should be all that is required. The FDA should just be doing spot checks to make sure the generic version is in fact what it claims to be, and in the labeled dosage.

    1. They don’t have to do full clinical trials, only pharmacokinetic studies to show the drugs are absorbed by the patients the same as the predicate (already-licensed) drug.

      1. Of course that requires samples of the predicate drug to compare to, and sometimes the testers need to resort to subterfuge to obtain those samples.

  10. The agency wants to have the efficacy, safety, and dosing of these earlier medicines tested in clinical trials, so companies that conduct such trials can (if the agency approves their formulation) get three years of exclusivity to market the drugs. Thus did colchicine, used for centuries to treat gout, become Colcrys, a product with a government-enforced monopoly. The good news is that a generic version of colchicine became available this year.

    I have taken Colchrys for gout.
    The relief is complete and nearly immediate, the stuff works wonders.

    From Wiki-

    On July 30, 2009 the FDA approved colchicine as a monotherapy for the treatment of three different indications (familial Mediterranean fever, acute gout flares, and for the prophylaxis of gout flares[21]), and gave URL Pharma a three-year marketing exclusivity agreement[22] in exchange for URL Pharma doing 17 new studies and investing $100 million into the product, of which $45 million went to the FDA for the application fee. URL Pharma raised the price from $0.09 per tablet to $4.85, and the FDA removed the older unapproved colchicine from the market in October 2010, both in oral and intravenous forms, but gave pharmacies the opportunity to buy up the older unapproved colchicine.[23] Colchicine in combination with probenecid has been FDA approved prior to 1982.[22]

    Bastard FDA.

    1. Of course colichicine, USP remains as an “official drug”, but without any licensed labeling as a (non-official) “drug” with indications for use. So it can still be sold, just not for therapeutic or even diagnostic purposes, as long as it meets the USP standard for purity & identity. So if you can get it (it’d have to be in powdered form, not dosage units), you can legally use it as a drug on humans or animals. A pharmacist could even compound it into dosage units. It’s just that the supplier’s not allowed to know that’s being done.

  11. The unfettered market abhors a monopoly, but government loves exploiting monopolies. Where monopolies do not exist, government finds it necessary to enable them.

  12. If the FDA allowed anyone to sell generics with a simple quality control check, then anyone who wanted to could immediately jump into the market to supply Daraprim. It’s only because FDA regulations are so onerous that they’ve created what is effectively a government-protected monopoly.

  13. When I read this story on another thread, I thought: “Hmm…sounds like quite a profit opportunity. I wonder why someone else didn’t come along and offer to manufacture and sell the drug for $650, and then someone else says they’ll sell it for $400, etc. until the price drops to a point that consumers are willing and able to–oh, right, the FedGov is making this possible.”

    The government really dies ruin everything, doesn’t it?

    1. The government really dies

      If only.

  14. That “market” that has third party regulated insurance companies, medicare part D, and FDA regulation?

    There isn’t a market force or price signal in that black hole.

    1. Oh there is. It just can’t escape the regulatory event horizon.

  15. Third party payment, subsidized directly (Medicare etc.) or indirectly (non-taxable employer-provided insurance), directly leading to an opaque pricing market, is another major contributing factor directly issuing from government policy.

  16. Congress could easily remove the block that disallows Medicare from negotiating drug prices. This has worked very well in countries like Germany and Canada, where Viagra, for example, costs 1/5 of what we pay here, even with HMO coverage, or basic Cancer drugs that cost 1/10 of what they pay in Canada (as exposed years ago by Bernie sanders). Failing that, they could also simply remove the block and allow Americans to buy their drugs from foreign countries. They do neither. In essence, the US taxpayer not only supports the drug companies’ research and development, but funds the bulk of their profits.

    “IMS Health, estimated total worldwide sales for prescription drugs to be about $400 billion in 2002. About half were in the United States.”

    “At an average cost of $1,500 a year for each drug, someone without supplementary insurance who takes six different prescription drugs?and this is not rare?would have to spend $9,000 out of pocket. Not many among the old and frail have such deep pockets.”

    The obvious conclusion is that the donations to our representatives in congress, both directly and through PACs, is a very good return on their investment.

  17. The headline read: Drug Price Gouging? The answer is obvious, ABSOLUTELY, especially in this case. As to where the blame lies, with rug makers to a large extent, though don’t stop looking there, for the following is a key factor. Various government programs can and do “haggle” with drug makers over product pricing. Medicare, courtesy of our “congress critters” is barred from negotiating prices. Ask yourselves why. Better yet, ask your congress members, and keep asking until you get real answers, or is the answer all to obvious, Drug Industry Lobbying.

    1. “Better yet, ask your congress members, and keep asking until you get real answers, or is the answer all to obvious, Drug Industry Lobbying.”

      Yeah, those lobbyists have the guns to enforce their choices, too, right?
      Uh, fail.
      If the government didn’t have the power to require the tests, they could lobby until they were blue in the face and it wouldn’t have any effect.

      1. If all the suppliers of colchicine had refused to apply for this “new old drug” status with FDA, colchicine pills would’ve remained grandfathered & competitive forever. Similarly with other pre-1962 or even pre-1938 drugs.

  18. Drug prices have been on the rise since 2009 when seniors in the Medicare Donut Hole were charged half price for name brand drugs under ObamaCare and a deal made with Big Pharma. Every year since name brand and generics have been going up in price. Blood glucose test strips, small bits of chemically treated cardboard retail at $1.40 to $1.70 each. Medicare pays the pharmacy around $30 per 100. Compare the retail prices of drugs to the price Medicare pays and you see a huge markup at the retail level for non Medicare purchasers.

  19. The FDA kills more people than it helps. It’s what the government does.

  20. One way to increase competition would be to allow importation of equivalent drugs approved in the EU, perhaps with a tariff if necessary to offset the loss of fair value due to price controls in Europe. EU regulations for generic drugs are substantially equivalent to those in the US, perhaps even stricter in many cases.

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