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The Self-Correcting Drug Market

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eye on the news

The Self-Correcting Drug Market

Competition and public opinion generally ensure that high prices and profits don’t persist for long. January 26, 2017
Health Care
Politics and law

In recent years, stories about high drug prices and excessive price increases have prompted calls to rein in pharmaceutical “price-gouging.” Days before his inauguration, President Trump proclaimed that drug-makers were “getting away with murder” and raised the specter of direct government negotiation. Concerns about drug prices are understandable but overblown. By and large, the market for pharmaceuticals works. The prices of highly publicized, expensive medications are falling as a result of two powerful forces: public opinion and competition.

High drug prices first hit public consciousness in late 2013 and 2014, when Gilead Sciences introduced two new, highly effective drugs for hepatitis C, a disease that can lead to fatal complications such as liver failure and cancer. Doctors and patient groups complained about the $80,000 list price for a course of treatment. More recently, Mylan faced criticism for raising the price of the epinephrine auto-injector EpiPen—used to treat severe allergic reactions—by 500 percent over a decade.

In a perfect free market, a drug manufacturer can charge whatever price it wants to maximize profits, subject to the constraints of competition and customers’ willingness to pay. If the price is too high, patients, pharmacies, hospitals, and physicians will seek alternative treatments. If profits are high, other manufacturers will come into the market to compete, either making generic versions—once a drug’s patent protection has expired—or developing new, patent-protected drugs.

The real-world market is more complex. Effective alternatives to costly drugs aren’t always available. Government regulations create barriers for other potential manufacturers of the existing drug or alternatives to it. Generic-drug applications to the FDA (known as “Abbreviated New Drug Applications,” or ANDA) cost applicants as much as $20 million and can take 50 months to complete. The FDA Office of Generic Drugs reports an ANDA backlog of 4,000 applications. And it’s much worse for new, branded competitor drugs: companies trying to develop these face FDA approval hurdles costing billions of dollars and taking many years.

Contrary to the concerns about price-gouging, Noble Prize-winning economist Daniel Kahneman observed that most firms are motivated by more than just profit maximization. They’re also worried about their reputation for fairness. Even manufacturers and suppliers with some degree of monopoly power don’t always raise prices as high as the market will bear. Entertainment and sports firms, for example, offer tickets at standard prices for popular events that generate excess demand, and companies refrain from price hikes during periods of emergency shortages. While customers generally don’t object to prices and profits that appear in line with historical norms and reflect increased costs, extraordinary price increases and exploitation of vulnerable, dependent buyers are widely considered “unfair.”

Most drug-makers have responded both to market forces and fairness concerns. Following the public outcry over high prices, Gilead announced coupon programs and discounts to make its hepatitis drugs more affordable. The potential market for drugs treating hepatitis C—which afflicts 3.2 million people in the U.S. alone—attracted competition. Since the approval of Gilead’s hepatitis C drugs in 2013 and 2014, six other new, highly effective hepatitis C drugs have been approved, four of them from competing companies. Prices for these lifesaving drugs have dropped substantially.

Responding to public pressure, Mylan announced that it would market a generic version of EpiPen at $300 for a two-pack, effectively cutting prices by 50 percent. The major insurer Cigna recently announced that it will no longer cover branded EpiPen and will only pay for Mylan’s generic. CVS will start selling Adrenaclick—a different auto-injector that delivers the same lifesaving drug, epinephrine, that EpiPen does—for $109 per two-pack, or one-third the price of Mylan’s generic. Kaleo Pharmaceuticals, a small, privately held drug-maker, plans to reintroduce the previously withdrawn Auvi-Q epinephrine auto-injector into the market this year at a price similar to Mylan’s generic. And Teva Pharmaceuticals is seeking approval for its auto-injector over the next year or two. Physicians and EMTs have increasingly replaced expensive EpiPens with vials of epinephrine and syringes that cost only a few dollars.

Granted, a few companies have followed the business model pioneered by Valeant Pharmaceuticals—buying old, inexpensive, effective medicines, for which few alternatives exist, and then instituting sharp price increases. These firms have been unresponsive to public opinion and concerns about fairness. Valeant acquired two important cardiac drugs—Nitropress and Isuprel—and raised prices on them by more than 200 percent and 500 percent, respectively. The company promised price cuts but failed to follow through. Similarly, Martin Shkreli acquired an old drug, Daraprim—the most effective treatment for the parasite Toxoplasmosis, which causes serious infections in HIV patients, people receiving immunosuppression, pregnant women, and babies—and overnight raised the price by 5,000 percent. Shkreli’s assurances that his company, Turing Pharmaceuticals, would lower prices were never fulfilled.

Nevertheless, the market responded. Last month, the FDA approved Namigen, LLC’s generic version of Valeant’s Nitropress. Daraprim sales dropped after Turing’s huge price increase. In October 2015, San Diego pharmacy Imprimis announced a generic version of Daraprim compounded with another drug, Leucovorin, which reduces side-effects. Shortly afterward, the nation’s biggest pharmacy-benefits manager, Express Scripts, announced that it would add the Imprimis product to its formulary. Medical societies applauded the company’s move. Imprimis says that it has already captured 20 percent of the Daraprim market.

The market for pharmaceuticals is not perfect. But competition and public opinion generally ensure that high prices and profits don’t persist for long. The recently enacted 21st Century Cures Act should help by speeding up FDA drug approvals, making competition even more effective.

Photo by Scott Barbour/Getty Images

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