Drug Policy

Congress Has Failed (Yet Again) to Close the Martin Shkreli Loophole

Restricted distribution is a barrier to generic competition.


Martin Shkreli made headlines by jacking up the price of an off-patent drug and then preventing generic competition. The loophole he abused still hasn't been closed. Photo courtesy of CARLO ALLEGRI/REUTERS/Newscom

Prescription drug companies sometimes use a legal loophole called "restricted distribution" to undermine their generic competitors. The CREATES Act, sponsored by a transpartisan group of senators, would have curtailed the practice, but last week Majority Leader Mitch McConnell (R-Ky.) excluded the bill from the budget agreement. As a result, Americans will continue to pay more than they should for certain prescription drugs.

Many Americans are at least vaguely familiar with restricted distribution, thanks to the most infamous pharmaceutical executive to take advantage of it, Martin Shkreli. Shkreli, you may remember, jacked up the price of a drug called Daraprim, which was approved by the Food and Drug Administration in the 1950s and has been used for decades as a treatment for parasites that infect people with compromised immune systems.

The patent for Daraprim expired more than 40 years ago, but it's still the only FDA-approved version of pyrimethamine currently on the market in the U.S., which means it has no generic competitor. (The FDA approved a slightly different formulation of pyrimethamine as a malaria treatment in 1981, but it has since been discontinued.) For a long time, American patients didn't really need a generic version of Daraprim, because it cost around $13.50 per 25 milligram pill and is taken for a short period of time.

For immunocompromised adult patients who have the toxoplasmosis parasite, the FDA recommends taking 50 to 75 milligrams of Daraprim a day for up to three weeks, followed by half that dosage for an additional four to five weeks. So at the high end, an adult course of Daraprim therapy for a U.S. patient used to cost around $1,350 total.

While that might not seem cheap, it was a drop in the bucket compared to the cost after Turing Pharmaceuticals, Shkreli's company, bought the rights to Daraprim and jacked the price up to $750 per pill in 2015. That move increased the cost of one course of treatment to around $75,000.

At that point you might have expected another company to jump in and start offering a generic version of the drug. But Shkreli used a regulatory loophole to keep that from happening.

You see, when a generic manufacturer wants to create a cheap version of a branded drug, it has to buy thousands of doses from the manufacturer in order to run comparison tests. Generic manufacturers use the results of these tests to prove to the FDA that their version is identical to the branded drug that the agency has already approved.

More often than not, the company that holds the marketing and distribution rights to a branded drug will sell those comparison doses to the generic manufacturer without being obstructionist, because that's the trade-off for receiving a 20-year monopoly by way of a drug patent: The branded manufacturer gets to charge whatever they want for years and years without facing competition, and in exchange for that government-backed monopoly, it's supposed to sell equivalency samples to generic companies.

But what if the company is run by an unscrupulous asshole like Martin Shkreli? Then it might opt to put the drug into what's called "restricted distribution," which means no distributor anywhere can sell comparison samples to a generic manufacturer.

The FDA originally created the concept of restricted distribution to limit the availability of drugs that might be dangerous. Methadone, for instance, was first approved in the 1940s as a painkiller. In the 1970s, the FDA restricted its availability because regulators didn't want the opioid used for anything other than the treatment of opioid dependence. Even today, methadone can be dispensed only in highly regulated settings and only for one approved reason.

In 2007, Congress empowered the FDA to create an entire system of safety controls beyond restricted distribution, and the agency now requires the manufacturers of certain substances to develop Risk Evaluation and Mitigation Strategies (REMS) to prevent misuse and abuse of potentially problematic compounds.

The list of approved drugs that the FDA says must have an REMS is here. Daraprim is not on that list. You can't get high off it. It's not habit forming. Yes, the FDA label says it can be carcinogenic after long periods of use, and that it might cause birth defects if used in high doses by pregnant women. These potential effects are serious, but there is no post-market data suggesting that Daraprim is causing more harm than benefit in the intended patient population. Shkreli's company put Daraprim into restricted distribution to boost their profits, not protect patients.

Because of this sort of abuse, a group of senators introduced the CREATES Act last year. This law would have allowed generic companies to sue branded drug companies that abuse restricted distribution. The act would also allow generic companies to participate in the REMS process. Under CREATES, a company that requested comparison samples and was refused for spurious reasons could seek a court order allowing them to buy the samples.

Daraprim is the most shocking example, but an FDA representative testified to Congress in 2016 that more than 100 generic manufacturers have reported restricted distribution abuses to the agency. A company called Celgene has reportedly pulled the same move with two cancer drugs.

CREATES has support from both the right and the left. The Washington Post reports that FreedomWorks and Heritage, two leading conservative organizations, both support the bill, which was co-sponsored not just by Sens. Patrick Leahy (D-Vt.) and Dianne Feinstein (D-Calif.) but by Sens. Mike Lee (R-Utah) and Ted Cruz (R-Texas). Reform of restricted distribution and REMS also has the support of FDA Commissioner Scott Gottlieb, the closest thing the agency has had in ages to a free-market chief. And yet the bill doesn't have a clear path to President Trump's desk. A pharmaceutical lobbyist told the Post that's because CREATES "would be a giveaway to trial lawyers."

Creating a positive legal right for generic companies would likely have some unintended consequences. But there are other ways to close the Shkreli loophole, and Senate Republicans should look at those if they can't sell injunctive relief for generic companies to Big Pharma.

Gerard Anderson at Johns Hopkins University's Center for Hospital Finance and Management suggested in 2017 that companies which hold the distribution rights for branded drugs outside the U.S. be allowed to sell what they manufacture in foreign factories to U.S. consumers. "For example," Anderson testified last year, "GlaxoSmithKline, the original patent holder of the Turing Pharmaceutical drug, daraprim, manufactures the drug in the UK and sells it in the UK for only a few dollars." Congress could allow GlaxoSmithKline to sell Daraprim here, even though it's manufactured outside the U.S. in facilities the FDA hasn't approved.

Anderson also suggested that compounding pharmacies, which actually make prescription drugs rather than simply count them out and bottle them, be allowed to manufacture "off-patent drugs that do not have any competitors," so long as the work was carried out "by reputable compounders approved by the FDA."

There are more options for solving this problem than there are reasons not to. Especially since the biggest reason this loophole exists in the first place is that branded pharmaceutical companies want to preserve their insanely broad intellectual property rights.

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  1. “…branded pharmaceutical companies want to preserve their insanely broad intellectual property rights.”

    And there ye have it folks!!!

    And Congress and the FDA are their partners in crime!

  2. Shkreli is an asshole. Unfortunately he’s also the kind of guy people who are hostile to markets like to point to as an example of why we need the government. They miss the point that it’s government regulation that allows him to keep competitors out of the market.

    1. They miss the point that it’s government regulation that allows him to keep competitors out of the market.

      Yep. And no matter how hard you try you will never be able to convince them of this fact.

    2. It’s also the jackboot of government that allows people to have IP rights and make money off their inventions in the first place.

      Maybe balance, instead of radical all-or-nothingism, is in order.

      1. You know, that comment illustrates so well how you just don’t understand liberty, or libertarianism, despite having it explained to you ad nauseum.

      2. Look, Tony is a Shkreli apologist!

      3. You are the one who constantly complains that the government needs more control to reign in assholes. Assholes the government enables.

        We have a problem caused by government here – full stop. Without government intervention this could have never happened.

        Yet you want to give the government *more* power to ‘fix’ what it fucked up in the first place.

        1. Tony will insist we just don’t have enough of the right people. He’s able to tell you who is right.

  3. Intellectual property rights or intellectual property privileges? It seems to me there’s a utilitarian argument for allowing inventors to be the sole profiteers from new ideas as an incentive to work hard to come up with new ideas but not a good principled argument that it’s somehow wrong to imitate somebody else. Allow patents and copyrights for limited times and make them non-transferable and then tell Shkreli and Disney to fuck off.

    1. An idea I’ve thought of as a potential improvement to the status quo is replacing patents (or at least a good chunk of patent lifespan) with a period where the inventing entity isn’t entitled to exclusive production, but gets a certain percentage of profit (or revenue if you want to avoid the other companies fudging the profit numbers) from any competitors using the invented product.

      1. That’s called licensing.

        1. Yes, but a company with a patent isn’t obligated to do that. What I’m proposing is that any company that can and wants to (at least after a shortened exclusivity period) could produce the product while the company with that holds the patent gets a % determined by law. If the company with the patent wants to license it out during the exclusivity period, they can of course do that as well.

    2. It’s already that way. The article misstates the problem as being one of intellectual property. Rather, the patent has expired, & potential competitors must either:

      (1) go thru the entire new drug appl’n process for their copy stuff as a “new” drug?which would be insane, or

      (2) demonstrate their copy is equivalent in bioavailability to the old drug. But to do that they must obtain a comparison to test vs.

      What’s being abused here is distribution rights, not intellectual property. The old drug is being sold w a covenant vs. resale to anyone who’d use it for testing. The Risk Evalu’n & Mitig’n Strategy is a red herring. FDA did not require one of this drug, & federal agents would not enforce its restricted distrib’n.

  4. Maybe we should just get rid of patents. Is there any evidence that they foster the innovation they are supposed to protect?

    1. Sure, if you cherry pick and huff and puff while closing your eyes to what is unseen.

      The Wright Bros pioneered wind tunnels and controlled flight, but then sat back on their patents and expected the world to come begging. When Glenn Curtis worked around their wing warping patent with hinged ailerons, the squabble lasted so long that the US government bought up the patent so they could get more airplanes for the Great War. Meanwhile the European tinkerers kept on with trial and error and were way ahead within a decade.

      James Watt modified Newcomen’s incredibly primitive steam engine (it cooled the entire damned cylinder to condense the steam into water, then had to heat the entire damned cylinder up again) by adding a valve to let steam out for the downstroke, and got a patent and never had to pay royalties to Newcomen. Then others improved Watt’s design with high pressure (Watt’s were around 5 psi because he didn’t know how to make better metals) but kept getting shut down by Watt’s patent lawyers. Probably delayed railroads by 10 or 20 years.

      There are a zillion such high stakes examples. I doubt the “good” of patents is anywhere near the lost innovations and productivity gains. Sam Colt, Rollin White, and Smith & Wesson are another example of patents holding back progress.

      1. P.S. on Watt and high pressure steam engines. Fulton developed the first steamship in the US because Watt’s patents didn’t apply. He also thumbed his nose at some crony who had a government monopoly on passenger ship traffic up the Hudson and ran him out of business with his faster and reliable scheduled traffic — two government monopolies at once!

    2. I agree, and if there is any evidence, it needs to be relevant to an age where massive computer modeling can be done by anyone in the world. This isn’t the world where publishing the specs for a new type of gearing system brings a lot of licensing business to your door.

      Look at the increase in the number of patents applied for each year. Idea’s are a glut on the market. Time to give it up and start letting companies compete on quality and/or value, not scarcity.

      1. Look at IBM, Apple, and Microsoft for this. Their goal is to file patents nonstop.

        1. At least in IBM’s case, they file patents not to hold them over others, but to prevent others’ holding them over IBM. IBM largely does not pursue license or action against those who use their patents.

    3. In almost all cases, no. Regardless, the measure of the value of the patent regime is not innovation per se: it is consumer benefit.

      Because of the massive expense and timeline of development and the massive value of the invention, drug patents are probably the only class of patents that actually has any argument that the consumer is better off with patents than without patents.

      But in pretty much every other realm it is patently obvious that both innovation and consumer benefit is maximized when people’s ability to innovate and produce is not restricted by claims on prior art. What a shock.

      1. Patently obvious?heh.

        1. I see what you did there, but I promise not to copy it.

    4. Personally, I think its been kind of a wash. Some things might have come about a little earlier than they would have without the incentives provided by patents – a lot of other things have been locked away because the patent-holder couldn’t capitalize on it.

      And then there’s the tons of money and man-hours wasted litigating things like ‘are round corners patentable’?

    5. One of the main justifications for patents when they were first invented was to get rid of secret manufacturing techniques. It used to be extremely common that when somebody invented something new, he would keep the details top-secret to prevent competitors from copying. Normally the secrets would be taught to his heirs at some point, but there were many occasions when a manufacturer would die without anyone ever learning the secrets. The Mediaeval guilds were very big on keeping all their techniques hidden from non-guild members.

      Supposedly, the idea of a patent was to let the inventor have a monopoly for several years in exchange for making the information public.

      You could argue that this is all an anachronism nowadays since so much manufacturing is done in big factories with lots of workers, and it’s much harder to keep these things secret. But there is still a lot that’s done by very small groups, or with just a few specialists controlling a key part of the process.

      1. Anyway, the point is, if patents were to be abolished, it could trigger more secrecy within industry, and could even make it more difficult for competitors to produce their own versions of new inventions.

        Or maybe not. I don’t really know enough about manufacturing or innovation to say whether competition would increase or decrease. I just know it’s possible for it to go both ways.

  5. Note the scare tactics associated with the opioid crisis are being used to preemptively limit the option of buying any drugs internationally. Senator Portman regularly touts all the illegal drugs being bought via mail order and we just shut down those pathways.

  6. Wait. A government intervention is harming US citizens?
    Say it ain’t so!

  7. Medical care is cheap and getting cheaper everyday
    Government enabled rent seeking is expensive

  8. Here is a suggestion to bring down drug prices in the US. A US company would have to sell its drugs in the US for the average price that it sells them in in Western Europe, Canada and Australia and New Zealand. A foreign based drug company would have to sell in the US for the same average price as US companies do. I am very tired of the US drug prices paying for all the research and development of these drugs then the other nations reaping the benefits of those drugs at a greatly reduced price over what we have to pay for the same drug.

  9. “Even today, methadone can be dispensed only in highly regulated settings and only for one approved reason.”

    This isn’t true, I know a lot of people who are prescribed methadone for pain management. You then get a bottle of it at any pharmacy (you won’t have trouble finding one that stocks it) just like any other CII pain pill script.

  10. Well, thats what going all out for Pro business gets you, McConnel and a majority of other republicans have never represented people……of course the Republican Party has always used fear of losing constitutional rights to get support from voters who don’t know any better.

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