A Clintonian Misdirection on Drug Prices By Scott Gottlieb
http://www.wsj.com/articles/a-clintonian-misdirection-on-drug-prices-1443568738
Dr. Gottlieb is a physician and resident fellow at the American Enterprise Institute. He consults with and invests in health-care services companies.
The high drug prices she decries are not the result of market forces gone wild, but rather bad regulation.
Major biotech indexes are down about 20% since Mrs. Clinton first tweeted news of her plan on Sept. 21. What she fails to comprehend is that the high drug prices she decries aren’t the result of market forces gone wild. Rather, they are the result of bad regulation that has created market failures and shortages.
Take Turing Pharmaceuticals, which has come under fire for raising the price of Daraprim, a drug used for decades to treat toxoplasmosis and more recently to treat AIDS and cancer patients, to $750 from $13.50 a tablet. In a Sept. 20 interview, Turing CEO Martin Shkreli said the increase was needed to stay in business and research new medicines. “This drug was doing $5 million in revenue,” he said, “and I don’t think you could find a drug company on this planet that could make money on $5 million of revenue.”
Mr. Shrkeli has since backed away from the $750 price, saying Turing will announce a new, lower price for Daraprim in the weeks to come. But Turing has been attempting to exploit a regulatory failure that is becoming far more prevalent as the Food and Drug Administration knocks older generic medicines out of production and barriers to entry make new generics costlier.
Turing bought marketing rights to Daraprim from another company, along with access to a supply of the drug, so it didn’t need to do any weighty regulatory work to market the medicine. It rebranded the pill and raised the price. But if another company wanted to compete to sell the same medicine, it would need to apply for a new generic drug approval, by submitting an “Abbreviated New Drug Application” to the FDA.
Filing one of these applications with the FDA used to cost as little as $1 million; today it can run as high as $20 million, sometimes more. This means that old but “niche” drugs may not have competition from other generic entrants, creating an opening for companies to extract windfall profits by driving up the prices of drugs like Daraprim.
The FDA has a backlog of thousands of generic-drug applications. And it takes an average of four resubmissions for a generic application to finally win approval, partly owing to shortcomings in the applications and poor communication between the FDA and generic drug makers. It may well be that competitors to Daraprim are in the FDA’s large queue. On average, it takes about 50 months for the FDA to approve a single generic application.
The FDA’s recent crackdown on the manufacturing process of prescription drugs has also led to the shutdown of U.S. drug plants. Whatever the merits of the FDA’s heightened scrutiny, it has been done with little attention to how this manufacturing capacity would be replaced. The slow approval timelines, combined with closed manufacturing facilities, create temporary drug shortages and monopolies, which can be exploited by shrewd investors.
It’s important to distinguish between new medicines that are priced at a premium because they represent genuine innovation and risk-taking, and drugs that are priced high simply because investors are manipulating regulatory failures. If Mrs. Clinton is serious about helping patients, she should focus on lowering the cost and time necessary for generic-drug entry, thus reducing the chance of perpetual monopolies for old, off-patent drugs like Daraprim.
Yet Mrs. Clinton’s proposed policy changes are mostly focused on new medicines that are transforming the treatment of disease, but also take a lot of risk and cost to develop. More than 40% of the drugs approved by the FDA in 2014 treat rare or vexing medical problems, including a cure for hepatitis C, the first and only vaccine for meningococcal B, and a radical treatment for metastatic melanoma—a disease that was once a death sentence. About 70% of the drugs in development are “first in class” medicines, meaning they use a completely new approach in fighting a disease.
In the age of genomics and molecularly targeted drugs, this often means aiming new medicines at smaller groups of patients. Drugs that target smaller groups are invariably priced higher, since the huge investment to discover and develop them, and earn the value they deliver, needs to be recouped by fewer prescriptions.
Blaming the high cost of drugs on a lack of price controls in ObamaCare fits the populist narrative in this election season. But high-cost specialty drugs constitute a fraction of health-care spending. Overall, the cost of drugs—at about 10% of total health-care spending—hasn’t budged in 50 years.
The real reason that Mrs. Clinton’s rhetorical stratagem will sell is that ObamaCare has left many consumers badly insured for “specialty” drug costs. It has done so by popularizing “closed” drug formularies that only cover a fraction of these new medicines, and leave consumers carrying the full cost of drugs not on the formulary lists. It has also promoted high deductibles, and the use of eye-popping copays.
As people experience ObamaCare’s hollowed-out insurance policies—and their costs—consumers want to know the reasons. The architects of the plan, including Mrs. Clinton, are doing their best to deflect that blame.
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