Drug Price Gouging in Generics

General info on prescription drugs and generic drug price gouging.

Martin Shkreli managed to make himself a household name a few years back. His claim to fame stemmed from the decision by Turing Pharmaceuticals, a company he founded and controlled, to acquire the rights to produce Daraprim. He then raised the price of the drug by 5,000 percent.

This was very bad news for the people who were dependent on the drug. Daraprim is an anti-parasitic drug that is often taken by people with AIDS to keep them from getting opportunistic infections. People with AIDS who are being successfully treated with Daraprim are not going to want to experiment with alternatives.

Daraprim was already a 60-year-old drug at the time Turing acquired it and had long been available as a generic. This meant that other manufacturers could in principle come into the market and compete with Turing’s inflated price.

Shkreli made the bet that no other drug company would take advantage of this opportunity, because even for a generic drug, there are still substantial costs for entry. Since the market for Daraprim was small, a new entrant would be unlikely to recover these costs if Turing pushed the price back down somewhere near its original level. While Daraprim was his biggest “success,” Shkreli was trying this strategy with a number of other drugs before the Justice Department put him out of business with unrelated charges of securities fraud.

Shkreli’s days of price gouging in the generic drug world may be over, but he established a model that other ambitious entrepreneurs are likely to follow. Close to 40 percent of generic drugs have only a single manufacturer. This is partly a result of the failure of anti-trust policy to stem a wave of mergers in the industry. It is also a result of the fact that many drugs simply have very limited markets where it is difficult to support multiple producers.

Most generic producers have not tried to follow the Shkreli model and jack up prices of drugs that people need for their health or even their lives, but some have. The soaring price of insulin is one important example, EpiPen, the asthma injector, is another. Both involve well-known treatments that have long been used, but the limited number of suppliers has allowed for huge price increases in recent years.

This is the context for the public drug-manufacturing corporation being proposed in a bill by Senator Elizabeth Warren and Representative Jan Schakowsky. The idea is that the federal government should create manufacturing capacity (which could be privately licensed) that would allow it to quickly enter a market to compete with the next Martin Shkreli.

If a company tries to jack up its prices by an extraordinary amount, it would find itself soon competing with a government manufacturer that is selling the same drug for the cost of production, plus a normal profit. This is a great strategy, since simply the existence of this capacity should be sufficient to discourage the next Shkreli.

There will be little money in jacking up the price of a drug by 5,000 percent if it quickly results in the disappearance of their market. This should encourage the generic industry to keep its prices in line.

It is important to note a key difference between the generic industry and brand industry. The brand pharmaceutical companies, like Pfizer and Merck, could argue that they need high prices to pay for research. These companies hugely exaggerate their research costs and downplay the extent to which high profits just mean more money for shareholders, but they actually do research.

By contrast, the generic industry is not researching new drugs. They are manufacturing drugs that have been developed by others. In this sense they can be thought of like a company that manufacturers paper plates or shovels. They need a normal profit to stay in business, nothing more.

For this reason, the Warren-Schakowsky proposal is very much the right type of remedy for excessive prices in the generic drug industry. At the same time, we have to recognize that generic drugs are the smaller part of the problem with high drug prices.

Although generics account for almost 90 percent of prescriptions, they account for only a bit more than a quarter of spending on prescription drugs. The story of drugs costing tens or hundreds of thousands of dollars a year is almost entirely a story of brand drugs with high prices as a result of patent monopolies or related protections.

This will require a larger fix, likely along the same lines, with the government paying for research and allowing new drugs to be sold as generics. But the Warren-Schakowsky bill is a huge first step in bringing drug costs down and ensuring that people will not find themselves suddenly at the mercy of the next Martin Shkreli.

Atrocious Consequences of Pharmaceutical Price Gouging

The greed of the pharmaceutical industry has caused far too much suffering already, and it is long past time that the industry payed a high price of its own for the damage it has caused.

Particular important to highlight again is the part where — in the wealthiest country in world history — “Shane Patrick Boyle, a founder of Zine Fest Houston, died on March 18 after his GoFundMe campaign to pay for insulin came up $50 short.” What kind of society can that sentence even be written in?

Last year The New York Times published an op-ed urging the break up of the “insulin racket.” But rather than break it up, Trump has nominated one of its architects, Alex Azar, for secretary of Health and Human Services.

From 2007 to 2017, Azar worked for pharmaceutical giant Eli Lilly. While he was a senior VP, Lilly paid a record $1.415 billion to settle a case on its off-label promotion of the antipsychotic Zyprexa. Rising up the ranks, Azar became president of Lilly USA, the largest division of Eli Lilly, in 2012, a position he held until resigning in January of this year.

During Azar’s tenure, Eli Lilly raised the prices on its insulins in the United States by 20.8 percent in 2014, 16.9 percent in 2015, and 7.5 percent in 2016. Eli Lilly’s biggest seller, Humalog insulin, is now off-patent. But rather than becoming cheaper, Humalog costs more now than when it first came to market in 1996. When Azar started working at Eli Lilly in June 2007, the list price for a vial of Humalog was $74. When he quit in January 2017, it was $269.

At T1International we asked people with type 1 diabetes around the world how much they paid each month to stay alive. The United States topped every country, spending on average $571.69 per month on diabetes costs. Even with insurance, some Americans are spending around half their income on insulin and other supplies.

In fact, price gouging from Eli Lilly and other insulin manufacturers has already had deadly consequences. Shane Patrick Boyle, a founder of Zine Fest Houston, died on March 18 after his GoFundMe campaign to pay for insulin came up $50 short. Alec Raeshawn Smith, age 26, was found dead in his apartment on June 27. He was rationing his insulin after he aged out of his parent’s insurance coverage. The sad fact is more people would be alive today if insulin was affordable for all Americans.

Contrary to pharma propaganda, insulin is neither “new” nor “innovative.” It was developed in Toronto in 1921. The discoverers turned down the chance to create for-profit clinics. Instead, they licensed their creation for $1 (Canadian) a piece. Their recorded reason for doing this was to make sure insulin would be available for all who needed it. Eli Lilly’s was tasked with manufacturing insulin for North America. There was an understanding insulin would be sold at a reasonable price until there was a cure for diabetes.

What difference a century makes! Eli Lilly is currently under investigation by multiple state attorneys general for price fixing. It is also named in a class-action lawsuit that alleges that it colluded with Novo Nordisk and Sanofi to keep the prices in the US insulin market rising. These “Big 3” insulin makers control over 90 percent of the global market and maintain their lock on it in many ways. One is “pay-for-delay schemes,” like when Sanofi paid Eli Lilly to delay the launch of an insulin similar to its Lantus brand. Another is to sue potential competitors for intellectual property infringement, such as when Merck attempted to enter the insulin market in 2016. The companies also funnel money into patient-advocacy groups, both big and small. This might explain the inaction or even outright opposition of these groups on measures that may rein in prices.