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Deflate Drug Prices by Reforming the FDA

This Wednesday, the Senate Select Committee on Aging will hold a hearing on “sudden price spikes” among certain off-patent drugs. The most widely publicized of these spikes was the recent price increase of Turing Pharmaceuticals’ toxoplasmosis treatment Daraprim, which jumped in price from $13.50 per dose to $750. The medical consequences of the price increase, obviously of concern to hospitals, doctors, and patients, was, at times, overshadowed by personal attacks leveled at Turing CEO Martin Shkreli, who quickly became a target for complaints about corporate greed.

Shkreli was unfazed, telling the audience at last week’s Forbes Healthcare Summit that he should have raised the price even higher, citing his duty to maximize profits to shareholders. That PR provocation aside, pricing in the drug industry is a complicated and often counterintuitive process that involves maneuvering around domestic and international government policies as much as it does simple matters of supply and demand. As Forbes staff writer Matthew Herper reported in September, even for people who think pharmaceutical companies are charging “unfair” prices for certain life-saving drugs, the question of what would constitute a fair price (and how to enforce such a verdict) can be very tricky.

Richard Evans of Sovereign & Sector, a former Roche executive and longtime industry analyst, says there’s probably nothing in Hillary Clinton’s proposals on drug pricing that would have prevented Shkreli from executing his price increase. Allowing importation of drugs from outside the U.S. might help, but companies can just limit supply, forcing countries to decide between U.S. patients and their own. And Clinton’s plan to limit patients’ out of pocket drug costs to $250 a month? Evans and I agree that would be a dream come true for pharma, losing one of the biggest points of real leverage that insurance companies have.

Even if we simply accept that a company like Turing has the right to charge whatever the market will bear, however, we are left with the question so frequently asked at the time of the Daraprim price hike—if the drug is decades old and no longer covered by its original patent, why doesn’t another company come along and market a cheaper alternative? The answer is that another company is doing exactly that. Express Scripts has already announced a partnership with Imprimis Pharmaceuticals to sell a similar treatment for $1 a dose rather than $750.

But this week’s Senate hearing isn’t just about Turing Pharmaceuticals and its inflammatory CEO. It’s premised on the theory that there has been a pattern of dramatic price increases for off-patent drugs that requires congressional inquiry. To the extent that that is true, however, it is, as the Cato Institute’s Walter Olson explains, “a pure artifact of regulation.”

Pyrimethamine [brand name Daraprim] is long since off patent. It is not difficult to manufacture, and sells cheaply in Europe. But under the distinctive food and drug laws of the United States you can’t just start turning out pills in your factory to compete with Shkreli, at least not without compiling and submitting a huge pile of regulatory paper with the U.S. Food and Drug Administration. This calls on the services of lawyers and scientists, costs a lot of money, and takes time, and you might or might not be able to recover the costs from the relatively small pool of users.

As noted above, Express Scripts and Imprimis have since decided that the expense is justified in the high-profile case of Daraprim, but not every off-patent drug can become a cause célèbre in the national news media. And even in this case, the companies involved are exploiting a workaround of uncertain legality that will not be available for every drug class. Plenty of other drugs are still stuck in a regulatory limbo in which a medication that has been shown to be safe and effective is held hostage by unnecessarily restrictive regulations.

The FDA’s Unapproved Drugs Initiative, for example, effectively awards a government monopoly over an existing generic drug to any company that spends the money on additional effectiveness research and receives full FDA approval. Congress created this process as part of the Hatch-Waxman Act in 1984 to generate more data on long-existing drugs that had never gone through rigorous modern trials, but unfortunately it has had the effect of killing off what had previously been robust competition.

In addition, while the FDA’s approval lag for entirely new drugs has gotten slightly better over the past 20 years, they’ve actually gotten slower at processing the “abbreviated” applications that pharmaceutical companies must file for generic drugs. The slow pace of that process has been gaining more attention recently. In October, Sen. David Vitter (R-La.) wrote to FDA Acting Commissioner Stephen Ostroff urging him to do everything possible to speed up the process and clear the backlog of almost 3,000 applications for generic drugs. Speeding generic approvals is also part of Hillary Clinton’s campaign platform, but her proposed solution is to shovel vastly more money to the FDA, not reduce unnecessary regulatory hurdles.

Many news stories have noted that Daraprim is most frequently used to treat symptoms of AIDS. In the late 1980s, gay right activists (and CEI) were rightly furious with the FDA for not moving faster to approve treatments for HIV/AIDS, in particular the first effective drug treatment, AZT. Eventually, political pressure resulted in a fast-track process for AZT that became one of the shortest approval cycles in pharmaceutical history. We have the same opportunity today with this class of expensive off-patent drugs. Rather than stringing up pharmaceutical executives in front of news cameras, Congress should reform the legal obstacles that stand in the way of effective drugs reaching those who need them.