Legal Drug Dealers Commit Highway Robbery
by Devon Herrick
September 22, 2015
Source: Town Hall
Many generic drugs have recently shot up in price — sometimes significantly and for no apparent reason. While there are numerous examples, several that are egregious comes to mind. Albendazole is a 33-year old antiparasitic medication approved for sale in the United States in 1996. Five years ago, a daily dose that would cost less than $1 abroad cost nearly $6 in the U.S. By 2013 the price had skyrocketed to nearly $120. According to GoodRx.com, a 400mg dose now runs about $275. Pyrimethamine is a 60-year old remedy also used to treat parasitic infections as well as malaria. Approved in 1953, the drug sold for about $1 per tablet several years ago, but had recently climbed to $13.50 a pill. Since a hedge fund purchased it from another drug maker in August, the price has since been jacked up to $750 a tablet. Talk about sticker shock! That’s nearly $25,000 for a 30-tablet bottle at your local Kroger pharmacy. Another example is Cycloserine, an old tuberculosis drug first discovered in 1952. Not long ago 30 pills cost about $500; now that same prescription costs $10,800. That an increase from about $17 to $360 a pill!
Why did these drugs’ prices increase so sharply? A common reason some generic drugs shoot up in price is due to supply chain disruptions. About 80 percent of raw pharmaceutical materials are derived from foreign sources — sometimes famine or war makes raw materials scarce. But these drugs did not suffer raw material shortages, nor are they in short supply.
A common denominator in sharply rising generic drug prices is that many are older therapies approved decades ago, and are often aging, niche therapies, was in the cases above. Market consolidation in manufacturing and drug distribution may play a role. In many instances, manufacturers have dropped them in order to produce newer generic drugs that are in higher demand. But in other cases, the diseases are rare and there is little incentive for competing firms to pursue a small market.
Consider the antiparasitic drugs Albendazole and Pyrimethamine. Intestinal parasites are not a common problem in the United States. Thus, the U.S. market for these drugs is small. For that matter, the same can be said about and Cycloserine. Tuberculosis isn’t exactly a common disease either. Although the patents expired long ago, other manufacturers did not want to produce generic versions of drugs with small markets. As a result, there wasn’t any competition — which is probably why the drug makers decided to raise their prices.
Having only a couple of producers making similar drugs increases the opportunities for informal collusion. Collusion and price-fixing are both illegal. But suppose there are only two firms that make antiparasitic drugs, and one manufacturer independently decides to drastically raise its price. No law is broken when the other firm decide to follow suit — as long as there was no formal agreement or communication to coordinate a uniform increase in price. This may be what happened.
In recent years, new specialty drugs and biological agents to treat rare conditions have become increasingly common. The Food and Drug Administration provides lucrative financial incentives to encourage drug makers to research and discover new drugs for rare conditions with small markets. Specialty drugs are expensive; although only 1 percent of prescriptions are for specialty drugs they account for one-third of drug spending. The makers of the old generic drugs (mentioned above) apparently reasoned they too should be allow to profit handsomely from drugs for rare conditions — even though they didn’t perform the research and development.
Basically, they jacked up the prices because they could; pharmaceutical manufacturers are free to establish price levels they believe the market will bear. This is especially true of branded medications protected by patents. But these drugs didn’t have patents. In the case of Pyrimethamine, a hedge fund figured out this old, little-used drug had a niche that could be exploited (especially since a competitor was doing the same thing). Drug makers profit when competing drugs’ price rises.
Generics face unlimited competition — at least in theory — since any qualified drug maker can apply to the FDA to a produce a generic version when the original drug patent expires. The reality, however, is often far different. These drug makers are essentially taking advantage of the fact the FDA has a backlog of about 4,000 applications to produce new generic drugs. The agency simply cannot keep up — the median approval time for new generic drugs is about 27 months.
Drugs are a bargain. Americans spend twice as much for physician care and three times as much on hospital care as they do for drugs. Generic drugs are especially cheap — usually. However, some of these rip-off price hikes are avoidable if the FDA clears the abbreviated drug application backlog and allows competition to flourish. This, in turn, will alleviate some of the price hikes caused by market consolidation in both drug manufacturing and distribution. Finally, states need to resist the call to pass perverse regulations designed to protect local business (and pharmacies) at the expense of competition that benefits consumers, employers, insurers and drug plans.