Regulators are the reason big pharma can charge what it likes
Author: Jasson Urbach Published: 2017-05-26
Pharmaceutical companies, such as Aspen, are buying built-in marketing rights, not just drugs, when they purchase other companies.
The drug pricing policies of pharmaceutical companies are once again in the cross-hairs. Aspen pharmaceuticals recently made headlines for failure to disclose a fine that Italian competition authorities imposed for "price gouging". In the media, Aspen has been portrayed as the villain and it appears the British and European competition authorities will launch their own investigation into the price-gouging allegations. But critics and the public should know better.
In 2014, Turing Pharmaceuticals became the most hated company in America when it raised the price of an old, off-patent drug branded as Daraprim (pyrimethamine) from $13.50 (approximately R181) a tablet to $750 (approximately R10,028) — an increase of more than 5,000%. Pyrimethamine is a drug that, for decades, has been used to treat toxoplasmosis and, more recently, AIDS and cancer patients. Similarly, Aspen dramatically increased the price of several cancer drugs, some by more than 1,000%. People outraged at these increases, fail to recognise the underlying reasons drug companies can hike-up the price of old, off-patent drugs and simply ascribe the price increases to "greedy", "price-gouging" pharmaceutical companies.
As part of a deal worth approximately R4.7bn, Aspen bought the marketing rights to a portfolio of cancer drugs from GlaxoSmithKine in 2009, and Turing paid approximately R723m for the marketing rights for Daraprim. But why would pharmaceutical companies pay millions for drugs already (or soon to be) in the public domain which can be freely copied by generic drug manufacturers?
What they both effectively paid millions for was the marketing approval from drug regulatory authorities. In other words, they were purchasing the marketing rights, along with access to a supply of the drug, which meant they could by-pass the regulatory hurdles required to market the medicine.
If other companies wanted to compete in the respective "markets" and sell the same medicines, they would need to apply for a new generic drug approval from the relevant drug regulatory authority. In the case of the US, a would-be competitor would have to submit an "abbreviated new drug application" to the US Food and Drug Administration (FDA). According to the FDA commissioner, Dr Scott Gottlieb, "Filing [an abbreviated new drug application] with the FDA used to cost as little as $1m; today it can run as high as $20m, sometimes more".
Entering the US drug market is not only costly; the FDA has a backlog of thousands of generic drug applications that, on average, take 50 months to approve. This means that some old, off-patent drugs may not be facing competition from other generic entrants, which creates an opening for companies to extract extraordinarily high profits by driving-up the prices of drugs such as Daraprim.
To be clear, if no barriers put up by the FDA and other drug regulatory authorities existed, the high price of drugs would be the signal for other pharmaceutical companies to step into the market and produce a good quality drug at a lower price. Companies such as Turing (Aspen) that buy the marketing rights from others can charge relatively high prices only because they are, inadvertently, being protected by the drug regulators. In a competitive free market, there would be many more drug producers making and marketing these products.
To make matters worse, instead of addressing the underlying problems that hamper competition, the typical response has been to double-down on bad regulation, conduct further investigations and introduce (or impose) stricter price controls. The perverse effect is that governments which arbitrarily define markets by insisting on imposing price controls and other bureaucratic hurdles, force out producers over time and thus lessen competition in the domestic market.
The public ought to be focusing its attention on the real barriers that hamper access to medicines and pressuring governments to improve regulatory environments. For example, in SA, bureaucratic bungling and an inefficient drug registration system unnecessarily delay the entry of drugs (both generic and originator) into the South African market, sometimes by up to five years. Drug prices set by government pricing committees are fixed for protracted periods that fail to accommodate subtle nuances in the market including, but not limited to, a wildly fluctuating local currency. The South African government continues to charge VAT on pharmaceutical drugs even though taxing the sickest and most vulnerable members of society is clearly counter-intuitive.
These are some, but certainly not all, of the obstacles that result in shortages and hamper access to medicines in SA. If enough pressure is exerted by the public and through the media, these government-created obstacles could be removed with one stroke of the statutory pen.
*Urbach is an economist and director of the Free Market Foundation