Last month, the cost of a drug called Daraprim, used to treat a potentially life-threatening infection in cancer and AIDS patients, increased 5500% overnight.
Daraprim is used to treat toxoplasmosis, a disease that is caused by the parasite Toxoplasma gondii. Infection with this ubiquitous parasite can cause flu-like symptoms and, in some cases, an encephalitis (or infection of the brain) that can result in blindness, brain damage or death. Babies can also be infected in utero if their mothers are exposed to the parasite. In those cases, known as congenital toxoplasmosis, infection of the child can lead to lifelong developmental disabilities, hearing and vision loss, and miscarriage or stillbirth.
The price of Daraprim increased from $13.50 to $750 per dose after a startup company called Turing Pharmaceuticals, founded by Martin Shkreli, a 32-year-old former hedge fund manager, bought the exclusive US marketing rights to Daraprim. They acquired these rights for $55 million from Impax Laboratories, which itself acquired those rights only five months earlier after acquiring a company called CorePharma.
The outcry from clinicians, medical organizations and patient advocacy groups was swift, particularly given that Daraprim costs only about $1 per pill to produce, is off patent, and has been on the market for over 60 years. For example, the Infectious Disease Society of America and the HIV Medicine Association condemned the price increase, declaring in a joint statement that, “this cost is unjustifiable for the medically vulnerable patient population in need of this medication and unsustainable for the healthcare system.” Similarly, advocacy groups like the Center for American Progress urged the federal government to start using its “march-in” rights to force licensing of drug patents to generic manufacturers, although that really wouldn’t apply for an off-patent drug like Daraprim.
Finally, Democratic presidential candidates Bernie Sanders and Hillary Clinton also spoke out, with Clinton unveiling a plan to cap out-of-pocket costs for drugs like Daraprim. The fifteen Republican candidates have been silent.
Turing CEO Shkreli was initially unapologetic, going so far as to call the price increase “altruistic” since the company plans to use the increased revenue to research new treatments for toxoplasmosis. He has since backed down, however, and has promised to lower the cost of Daraprim.
Now this is not the first time that Martin Shkreli has been linked to legal but morally questionable drug price practices. Just last year, Retrophin, a biotech company that Shkreli founded in 2011, acquired the rights to a drug called Thiola. He then jacked up the price of that drug, used to treat a chronic condition that causes kidney stones in patients, from $1.50 to $30 per dose (an increase in the annual treatment cost from $2,700 to $55,000 for patients with this disease).
So why can folks like Shkreli get away with this? They can in part because medications like Daraprim and Thiola are so called “orphan drugs”. Orphan drugs are used to treat rare illness or conditions, usually those that are so uncommon or rare that most drug manufacturers see little to no profit in developing and marketing treatments.
Let’s consider the case of Daraprim. The US market for this drug is actually quite small. Last year, American sales of Daraprim totaled only $5 million. While that would still amount to an 8% annual return on Turing’s $55 million initial investment, it is far below the billions of dollars in revenue and 30% profit margin of most blockbuster pharmaceuticals.
The reason for the small market is this: even though 1-in-6 Americans is infected with the parasite that causes toxoplasmosis — through the consumption of undercooked meat or unwashed vegetables or from their pets (cats readily transmit the parasite through their feces, which is why pregnant women or cancer patients should never clean the litter box) — most never develop symptoms. Only babies infected in utero and those who are immunocompromised because of extreme age or illness, such as cancer patients, transplant recipients or those living with HIV/AIDS, are at risk of developing the disease.
In 2014, less than 5000 people were hospitalized and 327 died from toxoplasmosis in the US. That same year, only 2000 prescriptions for Daraprim were written. Thus, there is little to no market incentive for other drug manufacturers to seek FDA approval to market generic versions of this drug and other orphan drugs.
Given this, it doesn’t make sense to respond to the Daraprim scandal by talking about patent march-in rights or proposing caps on out-of-pocket costs (which, when announced by Hillary Clinton on Twitter, caused the 144-member Nasdaq Biotechnology Index to drop by almost 5%). The problem is a lack of financial incentives for generic drug manufacturers to make orphan drugs like Daraprim or Thiola, such that the market for each of these drugs is monopolized by a single producer that can charge whatever the market will bear.
We need to get creative. We need to consider expanding laws like the Orphan Drug Act of 1983 — which provided pharmaceutical companies tax benefits, research subsidies, and extended patent protection and marketing rights for new drugs — in order to financially incentivize companies to produce generic versions of older orphan drugs. Without competition in the generic market, particularly for off-patent orphan drugs, the predatory acquisition and price spiking practices of pharmaceutical CEOs like Martin Shkreli will continue. It’s Economics 101, which, given the response to the current Daraprim scandal, many policymakers and advocates seem to have flunked.
[This blog entry was originally presented as an oral commentary on Northeast Public Radio on September 24, 2015, and is available on the WAMC website.]