Why Price Gouging May Come to an End
(And a way to save some drug companies from themselves)
November 25, 2015
By Karl Thiel for BioSpace.com
Price gouging in the pharmaceutical industry has been much in the news lately. There was, of course, the recent case of Turing Pharma and its 5,400 percent increase on the price on Daraprim, a decades-old drug. Turing’s easy-to-hate CEO Martin Shkreli helped make this a casus belli for industry critics, including Democratic presidential candidates Hillary Clinton and Bernie Sanders.
But if Shkreli was different than the leaders of a number of other companies, it was only that he was unusually transparent, blunt and ham-fisted in his approach. Now attention on Turing’s one drug has been overshadowed by larger companies: There’s Valeant (VRX), which has hiked prices on over 60 drugs so far in 2015—some more than fivefold—and Mallinckrodt (MNK), which has gotten attention for its 2,000 percent increase on a drug used to prevent seizures in babies, among other things. And they are not alone.
Hitting the Self-Destruct Button
Is there something we as a nation should be doing about this? There’s a lot of room for debate on that subject. But even without doing anything, the market may be consigning this extreme buy-and-hike strategy to the dustbin. It just doesn’t look like a good business model. Consider: Valeant has seen its stock price drop over 70 percent in recent weeks. Mallinckrodt is down well over 50 percent. And I wouldn’t want to be one of Turing’s investors right now.
Stock price isn’t everything, of course, but the issue isn’t just fear of regulation or investor uncertainty. It’s that purchasers don’t always just blithely swallow four and five digit price increases. Mallinckrodt found that out with Ofirmev, its injectable acetaminophen that it bought and then more than doubled in price. This move brought only a short-term spike in sales. Hospitals paid up temporarily while they adapted, then found substitute products. Patients no longer got a product that arguably might have helped them. Mallinckrodt got some short-term gains, and a lot of long-term ill will. Hospitals got bled. Investors got hosed. Nobody really won…except maybe short-seller Andrew Left.
It appears the same with Valeant and its price increases on Isuprel and Nitropress—these jacked up drugs brought in a quarter of heightened sales and then dropped off sharply. That’s a large part of the reason Left claims the company “will fall under its own weight”—its boom and bust strategy of hiking drug prices seemingly yields only short-term (and very destructive) results as payers scramble to adapt. I’m not making a comment on whether Valeant was up to anything nefarious, but the company is certainly inviting a lot of scrutiny when it uses this strategy, and there’s no doubt that patient, doctors, and insurers look for alternatives as quickly as they can when they’re blindsided.
But hoping that extreme abuses will sort themselves out eventually isn’t an entirely satisfying solution. Luckily, there’s something else that can be done that is market-based and requires little legislative action. And its efficacy has already been demonstrated.
FDA Helped Cause This, It Can Help Fix It
Thousands of marketed drugs—representing almost two percent of all prescriptions—are not approved. That’s because they are, quite simply, old. Prior to the Kefauver amendments of 1962, drugs only had to be tested for safety, not efficacy. (Prior to 1938, they only had to be tested for purity, and prior to 1906 there were no limits whatsoever.) That’s left us with a legacy of old drugs—from aspirin to nitroglycerin to Daraprim—that were never formally approved by the FDA according to current standards.
That’s led to some troubles over the years. A formulation of quinine used off-label to treat leg cramps, for instance, caused 93 deaths before being yanked from the market in 2006. So that year, the the FDA announced an initiative to encourage approval of pre-Kefauver drugs, and to step up enforcement against unapproved products. There was a carrot as well as a stick: Companies that went through the process of establishing efficacy for old drugs got the FDA’s blessing while rivals faced enforcement action, giving de facto market exclusivity to those who acted. And market exclusivity, of course, means a price increase. So for years, companies have been producing new data on old drugs—whether pre-Kefauver or simply off patent—and winning approvals.
That’s also led to some abuses. Back in 2011, K-V Pharma got approval for an old drug called hydroxyprogesterone caproate, long used to prevent premature labor in certain high-risk pregnancies, and marketed it under the name Makena. And it promptly marked the drug up as much as 14,000 percent.
This wasn’t quite what the FDA had in mind, and it took an unusual step: It told compounding pharmacies, which for years had been formulating these drugs for patients on a case-by-case basis, that it wouldn’t stop them from continuing to make what was now an approved drug that one company thought it had exclusive rights to.
It turns out the extreme price-hike strategy didn’t work for K-V, either. Within little over a year from the approval of Makena, the company was bankrupt.
There are a couple of interesting points here. One is that the FDA acted, as it typically does, with a broad degree of latitude. Its unapproved drug initiative was internally motivated, not an act of Congress, and its decision to interpret and enforce regulations as it sees fit went pretty much unchallenged. FDA isn’t supposed to concern itself with drug pricing, but it clearly did in this case. And there were echoes of this recently when a compounding pharmacy called Imprimis Pharma said it would produce a custom version of Daraprim at about one dollar a pill.
There’s a potential model for reform there. Even when you’re talking about drugs that are merely off-patent, as opposed to pre-Kefauver, compounding pharmacies could be better leveraged as a check and balance on pricing. Compounding pharmacies aren’t allowed to manufacture drugs in quantity, but many of the offending medications are for niche indications that compounders could easily address ad hoc. Encouraging more use of compounders might require little more than an indication from FDA that it will stand back in certain circumstances. Some legislative tweaks could do more to make sure that there is a competitive marketplace for old drugs.
Of course, compounders aren’t without their own controversy—many of us still remember that non-sterile injectables from the former New England Compounding Pharmacy caused 64 deaths and 750 hospitalizations from meningitis between 2006 and 2012. But as a result of that tragedy, Congress passed the 2013 Drug Quality and Security Act. That welcome bit of regulation means there are better controls on this part of the industry, and compliant compounders could benefit from the increased burden.
Then the lose-lose political battle that’s brewing might finally look a little brighter.
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