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.