Recently, there has been a lot of media attention on galling price hikes of generic drugs.
Historically, the social contract in pharmaceutical pricing has been tolerating expensive brand-name drugs while they have been on patent (a government-granted monopoly), followed by allowing low cost generics to rush to market after patent expiration. Yet these norms are now being challenged in the setting of increased generic manufacturer consolidation and single-source generic drugs.
Probably the most well known example is the case of Martin Shkreli (the so-called “Pharma Bro”) and Turing Pharmaceuticals, which bought out the rights of pyrimethamine (Daraprim), a key treatment for Toxoplasmosis and other infectious diseases, raising the price from $13.50 per pill to $750 per pill.
Note that even the pre-price hike price is significantly more than people other countries pay. In the UK it costs only $0.66 per pill and in Australia it is $0.18 per pill.
This same problem has cropped for other generic medicines, notably with albendazole and mebendazole, two closely-related antiparasitic agents. These drugs are highly effective against pinworm infections, for example, which afflicts about 10 percent of the U.S. population and is particularly prevalent in kids.
Both drugs were developed in the 1970s and are a part of the WHO Essential Medicines list. Both can be purchased for $0.01 to $0.06 per pill in low-income countries and about $4 to $6 per pill in high-income countries like the UK and Australia.
In the US… well, can you guess where I am going with this?
The prices for both drugs have been jacked up to over $400 per pill. This is about a hundred-fold more than than other high-income countries, which in turn is likely several-fold more than the true marginal cost – the price we expect in a truly competitive market.
What on earth is going on here?
It turns out that both of these drugs were inexpensive until about 2010 and 2011, around the time that manufacturers decided to stop making them. Impax Laboratories (the same company that sold the rights to pyrimethamine to Turing Pharmaceuticals) got the rights to both drugs and has jacked up the price.
I see a couple of failures in this story.
First, before the marketing rights to these medicines were sold, only one generic manufacturer was producing these medicine (i.e., single-source generic). Second, Impax was able to raise the price dramatically in part because there were no other manufacturers for each drug.
However, not only was there not a competing manufacturer, they have also dealt with the main competitor drugs within the drug-class by obtaining both albendazole and mebendazole. Impax has essentially cornered the market, and thus have been able to raise prices with impunity. It is no surprise that they have been able to use their monopoly position to engage in rent-seeking behavior.
How can we deal with this market failure?
Let’s think about the problem of single-source generics. While we normally expect the generic drug market to have a robust number of manufacturers and for this competition to drive down drug prices, for some drugs we see only a few (or only one) generic manufacturers. This is typically because there is not a high enough volume of sales to lure in more than one manufacturer, given the entry costs (e.g., getting an ANDA approval by the FDA). Not surprisingly, the anti-parasite market fits this bill perfectly — aside from pinworm, parasites are not a big problem in the U.S.
Fortunately, the problem of single-source generic is something that a lot of people are thinking about.
The FDA is actively trying to promote the entry of additional manufacturers by ensuring expedited ANDAs when only one generic is on the market.
Also, price controls or price negotiating for generic medicines would also likely be effective. Other high-income countries have the same issue of single-source generics, but do not have the same pricing problems because they negotiate prices with the manufacturer. In the U.S. some states have begun discussing this very approach, but as the 4th Circuit recently overturned Maryland’s attempt to regulate pharmaceutical price gouging, it may need to come in the form of federal legislation.
We could also allow import of the drugs from other countries, which would quickly result in prices to equilibrate more closely to the reasonable prices other countries pay.
Lastly, this case is a prime example of where the recently announced not-for-profit generic company, Civix Rx, a could enter and bring back some sanity in the price.
For the case of albendazole and mebendazole, we may have already have tools to address this market failure without new legislation. Enforcement of antitrust principles may be enough. As I’ve explained, Impax has essentially cornered the market to make themselves a monopolist within the drug class (Herfindahl-Hirshman Index).
However, I am pessimistic that the Department of Justice would ever take enforcement action. Nevertheless, I think this case raises questions of whether officials are paying attention to when manufacturers are buying the rights to market drugs from other manufacturers and the drug-class portfolio of manufacturers during mergers and acquisitions.
This has real human consequences.
Earlier this year, I completed an infectious disease rotation, where I ran into insanely expensive generic medicines on a near daily basis. For some patients with serious medical conditions, we actually recommended they fly out of the country and buy the drug out-of-pocket elsewhere as that was cheaper than having insurance cover it here in the U.S. It disturbs me that we can not prescribe these essential medicines in this country, without putting patients at risk for extreme financial toxicity.
It should bother you as well.
After all, though less serious, it is not hard to imagine that your child will come home from daycare with an itchy butt requiring a prescription costing several hundred dollars.
