Medicated Monopolies

At 32 years old and with a net worth of $100 million, Martin Shkreli has become the face of corporate greed and price manipulation in the pharmaceutical industry. Shkreli is the founder and CEO of Turing Pharmaceuticals. The now-infamous young biotechnology company made headlines after it acquired a 62-year-old toxoplasmosis medication, Daraprim, and increased the drug’s price from $13.50 to $750 per tablet. The public outcry over the alleged price gouging was substantial. Turing had neither invented the drug nor improved upon it in any way that would justify the price increase; it had imply acquired the rights to manufacture it in the United States.

While citizens, presidential candidates, and medical associations alike have all decried the price increase as morally repugnant and exploitative of those who have been diagnosed with serious diseases, Turing’s actions were completely legal. Moreover, they were not an isolated incident. In recent years, several pharmaceutical companies have adopted the same business strategy of purchasing drugs that they did not develop and then significantly raising the price. Ultimately, the legality of these actions overlooks the moral implications of allowing profit-driven companies to determine prices of potentially lifesaving medications.

A Bitter Pill 

The pharmaceutical patent system encourages companies to invest in medication research and development. Companies receive patents of approximately 20 years for the medications they develop, and for this period of time, each company that invents a drug holds an essential monopoly over the market. “The whole point of the patent system is for there to be high prices temporarily,” MIT technological innovation, entrepreneurship, and strategic management professor Benjamin Roin told the HPR. “We have a system set up where we try to get companies to spend a lot of money to research a new drug. When a company has a really successful drug, they charge a high price.”

But Daraprim’s price increase did not represent any new contribution to medical research. Instead, according to Roin, Turing simply “bought the manufacturer, and they just raised the price and didn’t make any socially valuable investments. That’s an example of the system working in unintended and perverse ways.” If pharmaceutical companies believe that they can increase the price of a drug without losing a significant number of customers, there is no law to prevent them from doing so.

Generally, the patent system should prevent a monopoly—such as the one Turing currently holds on Daraprim—from persisting for too long. Once a patent expires, other pharmaceutical companies are able to develop their own versions of the medication. With more brands of the same drug on the market, the price should fall.

But Turing has been able to avoid competing with other firms for business because of the high fixed costs for entering the market. “Even if you don’t have a patent, a new company couldn’t just enter with the drug. In theory, any company could seek that [market], but it’s not automatic,” Harvard T.H. Chan School of Public Health health economics and policy professor Meredith Rosenthal explained to the HPR. Only 2,000 Americans use Daraprim each year. The drug’s small market means that it is difficult to make money unless the price is set very high. Therefore, Rosenthal concluded, “there is money to be made, but there are big fixed costs even after the patent has expired.”

Additionally, by maintaining tight controls on distribution, Turing has prevented other companies from acquiring Daraprim or developing their own version of the drug. Roin explained that “generics need to purchase some amount of the brand name [medication] to run their bioequivalent studies,” therefore other companies cannot create different or improved versions of Daraprim unless they have the original medication itself. These factors keep drug prices high and give Turing even more control over the price they can charge for Daraprim or other drugs they acquire.

Profiting Off of Desperation 

This example of pharmaceutical price gouging is not an isolated incident. From January 2006 to December 2013, the prices of 140 brand name drugs increased by an average of 113 percent in eight years, according to a study by the AARP Public Policy Institute. If the pharmaceutical market were functioning properly, we would expect that prices would gradually drop, since new companies would enter the market and compete with the name-brand companies for business. In reality, the market encountered a roadblock somewhere along the line, and competition to manufacture old medications has dwindled.

In the past three years alone, there have been several cases in which pharmaceutical companies acquired the rights to a drug from another company and almost instantly increased its retail price. In November 2013, Horizon Pharmaceuticals purchased the rights to sell Vimovo, a medication that treats osteoarthritis. Two months later, on the day that Horizon began selling Vimovo, the company increased its price by 597 percent to $959.04 for 60 tablets. After purchasing Isuprel and Nitropress, drugs that lower blood pressure, Valeant Pharmaceuticals increased their prices by 525 percent and 212 percent, respectively.

Drug acquisition and price gouging have become fundamental parts of Valeant’s business strategy, in particular. An analysis by Deutsche Bank found that in 2015 alone, Valeant raised the price of 81 percent of its drugs by an average of 66 percent (Valeant has disputed these findings). Some of the steepest price increases were for Glumetza, a diabetes pill whose price shot up 800 percent, and Zegerid, a drug that treats gastrointestinal problems, which increased 550 percent from its original price. As Valeant has profited from these acquisitions, it has steadily become one of the largest drug companies in the world.

The typical argument in defense of companies that pursue these pricing strategies is that they will use the profits for the research and development of future medications. However, pricing strategy consultant and Harvard Business Review contributor Rafi Mohammed believes that defending exorbitant price increases on the grounds of research and development is a scare tactic that pharmaceutical companies use to prevent regulation. “The minute you start talking about regulation, drug companies say, ‘That’s going to reduce our research and development.’ Saying this is akin to yelling fire in a theater,” Mohammed told the HPR. “In an ideal world, we’d love unlimited research and development, but there are costs and benefits.” Furthermore, Valeant—which has pursued an aggressive drug acquisition strategy—spends significantly less than its counterparts on research and development. Over the past year, the company spent just three percent of its total sales on research and development, while one of its competitors, Bristol-Myers Squibb, spent over 30 percent.

Creating a Moral Market 

Turing’s response to the intense public backlash over Daraprim suggests that pharmaceutical companies could be pressured into controlling their prices, even without legal regulation. The day after Turing announced Daraprim’s new price, the House Committee on Oversight and Government Reform sent a letter to Shkreli requesting some of Turing’s financial information as part of its ongoing investigation into a series of pharmaceutical price increases. Even after Shkreli had initially defended the company’s price increase, he later acquiesced to the public outcry, stating that “it is absolutely a reaction. I think it makes sense to lower the price in response to the anger that was felt by people.” More recently, the company announced that it would lower the drug’s price by the end of 2015, although by the writing of this article it has yet to release details on its plan.

But even these kinds of public pressures and non-obligatory government requests are usually ineffective in changing pharmaceutical companies’ actions. Under the current system, corporate and public goals are severely misaligned. While it is in the public’s interest to have the most advanced medicine for the lowest price, Rosenthal noted, “Corporate strategies must be driven by profit due to their fiduciary duties to their investors.” This misalignment between the needs of consumers and the desires of suppliers is neither surprising nor confined to the pharmaceutical industry. Rather, the truly unique aspect of pharmaceuticals is that access to products is often quite literally a matter of life or death. Few other products can claim that importance. It follows that moral considerations ought to be necessary in the pharmaceutical industry when corporations make pricing decisions on their products.

Yet in lieu of any moral decision-making or legal regulation, the industry still seems ruled entirely by market principles. Since 2013, Valeant’s revenue increased 43 percent, with its stock prices falling comparatively little—at least until September, when some of the company’s inflated pricing techniques and accounting inconsistencies came to light. Current laws give “companies carte blanche to charge what they market will bear, and now we’re getting upset because they are charging what the market will bear,” Mohammed said. As long as it remains in the pharmaceutical companies’ financial interest to continue a strategy of drug acquisition and subsequent price gouging, they will continue engaging in this strategy.

Image Credit: Tom Varco/Wikimedia

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