The smirking face of Big Pharma

October 1, 2015

Martin Shkreli's villainous, yet completely legal, plan to drastically increase the price of a life-saving drug shows the sickness of for-profit health care, writes Nolan Rampy.

TURING PHARMACEUTICALS CEO Martin Shkreli earned the title of most hated man in America last week after his company purchased the rights to the drug Daraprim and immediately jacked up the price from $13.50 a pill to $750 each.

The overnight price increase of more than 5,000 percent for a drug used to treat toxoplasmosis--a virus that can be fatal to individuals with weakened immune systems--drew immediate and unanimous public outrage. Even Donald Trump called Shkreli a "spoiled brat."

Initially undaunted by the backlash, Shkreli appeared in various media outlets claiming the high cost was necessary to fund research to develop an improved version of the drug. But his smug and condescending delivery only further enraged the public, and within a few days, Shkreli announced he would roll back the price.

Shkreli may very well be a sociopath, but that shouldn't divert attention from the larger U.S. health care system, where these types of actions are widespread and perfectly legal.

Daraprim is a 62 year-old drug that has been out of patent for decades. It was so cheap to sell that only a few companies bothered to manufacture it. Thus, when Turing bought the manufacturing rights from all the manufacturers at once, it had a monopoly on the drug and was free to name the price.

Martin Shkreli
Martin Shkreli

Because Daraprim is out of patent, any other company could manufacture a generic version of the drug, but that would simply drive the price back down, making the investment pointless.

There are an increasingly limited number of companies manufacturing cheap drugs for a small market. As James Hamblin explains in The Atlantic:

Many drugs are down to three or fewer manufacturers, creating oligopolies. When one or two of those competitors has a raw material interruption, an FDA-compliance problem, or for any other reason decides to stop producing the drug, a monopoly results. The company can charge anything it wants.

THE DRUG industry quickly distanced itself from Shkreli. Industry trade groups and organizations such as BIO and Pharmaceutical Research and Manufacturers Association of America (PhRMA) issued statements claiming that the actions of Turing Pharmaceuticals did not represent the values of the industry.

This is, of course, an objectively false claim. Groups like PhRMA spend tens of millions of dollars every year lobbying Congress to make sure that drug companies can charge outrageous prices for prescription medications that often cost only a few dollars to manufacture. This set-up has been a significant contributor to the astronomical cost of health care in the U.S. and has made drug companies one of the most profitable businesses in the global economy.

For example, in 2003, the pharmaceutical industry worked closely with the Bush administration to pass legislation that made it illegal for the government to negotiate with drug companies for better prices for Medicare and Medicaid recipients.

Drug lobbyists also successfully pushed the Obama administration to keep price controls out of the Affordable Care Act. As a result, while many governments can use their enormous purchasing power to negotiate lower prices, in the U.S., Big Pharma gets to name its price.

This ability to engage in price gouging is potentially undercut by competition from much cheaper generic drugs. "In the U.S., generics now comprise more than five-sixths of all prescription drugs," Politico reports, "but only about one-quarter of drug costs."

In order to undercut any threat to their profit margins, drug companies have successfully lobbied Congress to pass absurd patent protection laws preventing manufacturers of generic drugs from entering the market place.

Most recently, leaked drafts of the Trans-Pacific Partnership trade agreement reveal that the Obama administration is pushing hard for strong provisions that would make it difficult for poor people to gain access to cheaper generic drugs. As Michael Grunwald of Politico writes:

The draft includes provisions that could make it extremely tough for generics to challenge brand-name pharmaceuticals abroad. Those provisions could also help block copycats from selling cheaper versions of the expensive cutting-edge drugs known as "biologics" inside the U.S., restricting treatment for American patients while jacking up Medicare and Medicaid costs for American taxpayers.

IN RESPONSE to Turing Pharmaceutical's price hike, Hillary Clinton--eager to present herself as a champion of the people--jumped on the outrage bandwagon with a proposal to cap out-of-pocket expenses at $250 for prescription drugs.

Without a hint of irony, PhRMA released a statement that used the same logic put forward by Shkreli to criticize the proposal: "Secretary Clinton's proposal would turn back the clock on innovation and halt progress against the diseases that patients fear most."

According to this logic, because research and development of drugs is such a costly and time-consuming process, investors need the incentive of possible enormous profits in order to fund innovation.

The entire justification for the astronomical prices rests on the assumption that there is a relationship between profit and innovation--an argument that makes sense, according to Hamblin, "in little more than syntax." It's true that bringing a new drug all the way from preclinical research to market is an incredibly slow and expensive process--only one in 1,000 drug candidates make it out of the preclinical stage of testing.

But what drug companies conveniently leave out is that they have little to no involvement in the front-end development of new chemical compounds. That work is done almost exclusively by universities and government research facilities, typically funded with taxpayer money.

In her book The Truth About Drug Companies, Marci Angell explains that, as a result of provisions in the Bayh-Doyle Act of 1980, publicly funded research facilities were allowed to claim ownership of their discoveries and license them to drug companies, which can then patent the new drug.

Only at this point do companies begin clinical trials with human subjects. Unlike the low success rate of drugs at the preclinical stage, one in five drugs that enter clinical trials will make it to market. Thus, explains Angell, "The great majority of drug candidates are... weeded out very early on, before a great deal of money has been invested in them."

And while clinical trials are expensive, the billions of dollars in profit that come from blockbuster drugs make the cost negligible. Thus, far from being the drivers of innovation, drug companies have managed to create a system in which taxpayers foot the bill for the most innovative part of the drug development process.

The pharmaceutical industry had to distance itself from Turing because his price hike was so transparently immoral, but the values guiding Turing's actions were perfectly in line with those of every other drug company.

With Shkreli calling attention towards practices the industry would prefer to remain hidden from the public, company leaders and politicians labeled him a bad apple and cut him loose. But there are plenty more Martin Shkreli's out there. Until we get corporations out of the health care system, the next scandal is right around the corner.

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