Generic Drug Regulation and Pharmaceutical Price-Jacking

by on September 24, 2015 at 2:15 pm in Economics, Law, Medicine | Permalink

The drug Daraprim was increased in price from $13.60 to $750 creating social outrage. I’ve been busy but a few points are worth mentioning. The drug is a generic and not under patent so this isn’t a case of IP protectionism. The story as I read it is that Martin Shkreli, the controversial CEO of Turing pharmaceuticals, noticed that there was only one producer of Daraprim in the United States and, knowing that it’s costly to obtain even an abbreviated FDA approval to sell a generic drug, saw that he could greatly increase the price.

It’s easy to see that this issue is almost entirely about the difficulty of obtaining generic drug approval in the United States because there are many suppliers in India and prices are incredibly cheap. The prices in this list are in India rupees. 7 rupees is about 10 cents so the list is telling us that a single pill costs about 5 cents in India compared to $750 in the United States!

drugs India

It is true that there are real issues with the quality of Indian generics. But Pyrimethamine is also widely available in Europe. I’ve long argued for reciprocity, if a drug is approved in Europe it ought to be approved here. In this case, the logic is absurdly strong. The drug is already approved here! All that we would be doing is allowing import of any generic approved as such in Europe to be sold in the United States.

Note that this is not a case of reimportation of a patented pharmaceutical for which there are real questions about the effect on innovation.

Allowing importation of any generic approved for sale in Europe would also solve the issue of so-called closed distribution.

There is no reason why the United States cannot have as vigorous a market in generic pharmaceuticals as does India.

Hat tip: Gordon Hanson.

1 Hasdrubal September 24, 2015 at 2:20 pm

That’s what was confusing me, if it’s a 60 year old drug it’s got to be off patent so at $750 it’s only a matter of time before someone else enters in and starts producing at $20 or something. Then competition brings the price back down.

If there’s still an FDA approval process beyond confirming that you’re producing what you say you’re producing, that would explain it.

2 collateral September 24, 2015 at 2:28 pm

The process of proving to the FDA that you are producing what you say you are producing is involved and expensive. Notably it also requires that you obtain a fair amount of your competitor’s products which they are (apparently) allowed to go to great measures to keep out of your hands.

3 Marc W September 24, 2015 at 3:12 pm

Yep, this. The process is called filing an ANDA (Abbreviated New Drug Application) and it is expensive and slow.

Also, keep in mind that all pricejackers have to do is watch for a competitor to be well along the road to approval and then lower the price again. Then it’s a three-fer. They get the markup in the meantime, they induce a competitor to incur enormous expenses, and then they scare them off by sucking all the margin out before the competitor gets pill one out the door. As soon as competitor abandons its ANDA, repeat.

4 Nick C September 24, 2015 at 5:10 pm

Isnt this what anti-trust regulation is supposed to stop?

5 collateral September 24, 2015 at 5:17 pm

Yes. And the FTC is apparently taking that position in litigation: (see page 15), but the courts move slowly.

6 Cowboydroid September 24, 2015 at 7:00 pm

No. Well, that might be what “they” tell you, but intent is easily disguised.

7 Marc Whipple September 24, 2015 at 9:13 pm

It is, but as pointed out, the FTC moves slowly. Also, they would have a hard time sustaining public support fighting a drug manufacturer for making life-giving medicine too cheap.

8 Cowboydroid September 28, 2015 at 1:18 pm

The federal government forces price floors on a number of industries and products, and yet somehow sustains public support. All they need is some academics making an “intellectual” argument.

9 HC September 24, 2015 at 2:57 pm

Under the current regulation, it is almost impossible. To get an FDA generic drug approval, you need to buy Daraprim and test your drug have similar effects. But Turing pharmaceuticals, the only distributor, won’t sell you the drug for the necessary tests.

10 Albigensian September 24, 2015 at 3:45 pm

The attraction to potential alternate suppliers presumably depends not only on the cost of getting to market but on the size of the market.

Which is why this happened in the first place: there’s not much demand for this drug- not because it isn’t very beneficial to some, but because there are few who benefit from it.

11 Thomas September 24, 2015 at 2:21 pm


12 Hideous September 25, 2015 at 11:33 am


13 Cliff September 24, 2015 at 2:25 pm

So people should be buying it online then. It’s quite easy to do.

14 Jan September 24, 2015 at 8:27 pm

The unregulated market is the best market.

15 Hazel Meade September 24, 2015 at 9:25 pm

Silk Road worked pretty well before the DEA shut it down.

16 ns September 24, 2015 at 11:29 pm

You’ve got to be kidding. People are to obtain a life-saving drug from an unregulated black market and just hope it works? Well, if it doesn’t, the market will drive the offending party out of business. Too bad about the unnecessary deaths it takes to to shift the market.

17 Hazel Meade September 25, 2015 at 3:12 pm

I’m joking of course. Online pharma is not nearly as “black market” as Silk Road. People ought to be able to buy the generics direct from Europe, where they have passed Europes approval process.

18 bulletBob September 25, 2015 at 4:38 pm

There is another option too. This drug is also available in Canada and Canadian online pharmacies carry it. Check out the web site: It lists 60 tablets of Daraprim for $104.00. That is $1.73 a pill. In the details of this page it states:
Manufactured by: GlaxoSmithKline UK Ltd Product of United Kingdom. Shipped from United Kingdom.

Now the bad news: It is illegal for a US citizen to purchase a prescription drug from Canada. However, if we are looking for a quick and easy way to reduce healthcare costs, allowing US citizens to purchase drugs from Canada, UK, EU states or the Swiss would be an easy start.

19 Cowboydroid September 28, 2015 at 1:20 pm

You’re really going to make an anti-market argument on a market oriented blog?

20 Ethan September 24, 2015 at 2:32 pm

Besides the FDA approval issue, the number of scrips annually is quite low in the US (10k or so). I imagine it is used quite a more in India.

21 Bernard Yomtov September 24, 2015 at 2:49 pm

It’s easy to see that this issue is almost entirely about the difficulty of obtaining generic drug approval in the United States because there are many suppliers in India and prices are incredibly cheap.

Is it at all about trying to rip off sick people? At all? Is there no moral issue whatsoever?

22 btdnyc September 24, 2015 at 3:42 pm

the effect is ripping off sick people. the issue is the approval process which causes the effect.

23 Bernard Yomtov September 24, 2015 at 4:44 pm

That’s part of the issue.

But there is nothing compelling the company to charge the price they do. This was a deliberate plan to rip people off. There is no rational way to claim that the money supports research, because Turing doesn’t do any. The guy found a loophole and is trying to cash in big-time.

Could the rules be better? Of course they could. But so what? It may be foolish of me to leave my door unlocked when I go away, but the guy who goes in and steals things is still a thief.

24 HL September 24, 2015 at 5:59 pm

It seems trying to shame people into proper social behavior has become increasingly in vogue. This works for your every day joe who can’t afford to be fired for having an unpopular opinion, but oddly has little effect on the elite like this jerk. There is an inequality effect of the shame system but I doubt the those who instigate the shaming care so much.

25 Alain September 24, 2015 at 8:03 pm

You clearly believe that the people who need this drug should have access. That’s great. I am sure that you have given every penny that you have control over to help these poor people. What’s that, you didn’t? You simply like espousing your crapy philosophy? Ok.

26 Bernard Yomtov September 24, 2015 at 9:35 pm

Well, at least I can spell.

Go back to your room and read some more Ayn Rand. Leave the people having a serious discussion alone.

27 Alain September 24, 2015 at 9:49 pm

Give lib. Give.

You say you believe in charity. Prove it. Give.

28 Jan September 25, 2015 at 7:36 am

This is Alain’s canned response to anything he thinks might be liberal. Just ignore him.

29 High Plains Lawyer September 25, 2015 at 1:43 pm

I absolutely believe that we should care for sick people. We are not talking about scarcity here. The marginal cost of producing the drug is very low, approaching zero. Clearly our society has the ability to make enough of the drug so no one has to go without.

The only question is whether certain jackals should allowed to get wealthy by increasing human misery.

In a post-scarcity economy, no one has to go without the necessities of life. No one has to go without food, clothing, shelter or medical care. To suggest otherwise is barbaric.

30 MC September 25, 2015 at 5:06 pm

Your moral outrage is selective. Everything sold (including “necessities”) is more expensive due to avarice (at least from a static, short-term point of view). As has been pointed out, the major fault lies with the government that enables this rent-seeking with its regulations. If this case helps to stimulate reform by exposing inefficient government regulations, then Turing will have done a public good.

31 meyerkev248 September 24, 2015 at 7:41 pm

The issue is not “Large corporation is greedy and wants to rip you off”, that’s not exactly news.

The entire point of capitalism is that in theory, there’s more than 1 guy who wants to rip you off and so they compete to see who can make you feel the least ripped off so that you’ll buy their stuff and not Bob’s over there.

Which the regulations are preventing in this case, so they’re questionable regulations.

32 Bernard Yomtov September 24, 2015 at 7:59 pm

You miss my point. I do not claim the regulations are perfect, and the process cannot be improved. What I am saying is that imperfect, or even bad, regulations do not excuse the kind of price-gouging that went on here.

33 HL September 24, 2015 at 9:15 pm

The desire to screw someone else in favor of yourself is innate, or at least common enough to expect it. Regulations are often designed to minimize the damage done by this and, like meyerkev248 says, to encourage others to offer a better deal. In this case the regulations are preventing others to offer such a deal.

Whatever moral issue there is should be with the state to allow this. We the people are nominally in control of the state and should be arbiters of their power. We cannot control another individual or his morality, just limit their ability to work within the confines of the law. If the law allows an immoral act, change the law. You cannot change the individual.

34 Hazel Meade September 24, 2015 at 9:27 pm

The price-gouging wouldn’t be profitable if the FDA allowed fast approval of generics. That’s the point. You can’t outlaw greed. But you can allow less greedy people to compete against the more greedy.

35 Bernard Yomtov September 24, 2015 at 9:36 pm

Wow. You people are dense.

36 HL September 24, 2015 at 9:59 pm

well ok the guy’s an asshole, i get it, what are you going to do about it?

37 Jay September 25, 2015 at 12:25 pm

No we’re not dense, we get what you’re trying to do and morally shame the guy for hiking the price. They’ve offered solutions to that by getting rid of the bad regulations that allow him to do that but all you’ve shot back with is “but but he’s an evil price gouger!”.

38 Bernard Yomtov September 25, 2015 at 9:59 pm

I’m not trying to “morally shame” the guy. I’m saying that his conduct is immoral and I wish that commenters here, and Alex, would recognize that, quite apart from discussing the regulations that make his conduct possible.

Instead, everyone seems to think the conduct is just fine. That’s absurd.

39 Bernard Yomtov September 25, 2015 at 10:03 pm


Whatever moral issue there is should be with the state to allow this. We the people are nominally in control of the state and should be arbiters of their power. We cannot control another individual or his morality, just limit their ability to work within the confines of the law. If the law allows an immoral act, change the law.

Do you agree that this is an immoral act? O, in your world, is anything legal also moral?

40 RPLong September 24, 2015 at 4:54 pm

The moral issue is any delay in patients’ being able to access a product that can treat what ails them. Any delay. So those delays caused by regulatory overreach or inefficiency are morally unconscionable. Any delays caused by insurance claim inefficiency or bureaucracy are morally unconscionable. Any delays caused by rent-seeking legal battles among pharmaceuticals that result in a temporary or permanent suspension of product sales are morally unconscionable.

Eliminate those morally unconscionable obstacles, and we are left with an objective market pricing process. Those who attempt to cheat in an environment of efficiency are doomed to fail, and we as patients should welcome them to try in the name of gaining better access to better products from more ethical producers.

I’ve said it before, I’ll say it again: The only moral consideration worth talking about in the health care industry is access to treatment. Nothing else should matter to patients.

41 Jan September 24, 2015 at 5:06 pm

But any delay of course becomes less of a man bogeyman when one realizes that one of the causes of this delay is the existence of a national system in place to ensure the quality and safety of generic drugs. One which, on balance, protects rather than harms people.

42 RPLong September 24, 2015 at 5:50 pm

“One which, on balance, protects rather than harms people.”

This is an odd statement to make underneath a blog post that provides strong empirical evidence to the contrary. I’ve seen AT’s evidence – where is yours?

43 XVO September 24, 2015 at 7:43 pm

No doubt there are some Jan can pull out, but Jan’s a troll and it’s best not to feed her. You have to ask yourself, do you really want to comb through 50 studies on the cost/benefit analysis of the FDA ( 40% saying it’s great, 40% saying it’s terrible and 20% being inconclusive) with someone as obtuse as Jan? No, god no…

44 Jan September 24, 2015 at 8:15 pm

What evidence does Alex have?

And one can’t prove how many deaths are prevented by requiring taht drugs are safe and effective before marketing. So I am not sure what you are asking for.

45 HL September 24, 2015 at 9:18 pm

tbf i always think of Jan as a long haired swedish gentleman

46 Ken B September 27, 2015 at 8:02 pm

What evidence does Alex have? That the generic drug is approved in Europe, Canada, everywhere.

47 Hazel Meade September 24, 2015 at 9:30 pm

Why should that system be any different than (say) the one that the USDA uses to make sure there isn’t salmonella in the peanut butter?
If the FDA already approved the substance, then the only real issue is whether the dosage of the substance in the pills you are selling is accurate.
How is this different from the USDA making sure that a pound of butter actually contains a pound of butter?

48 Nathan W September 24, 2015 at 9:41 pm

My understanding of the rationale to make generics go through rigorous testing is that two ways to produce the same “end result” don’t always end up quite the same. I loosely understand this fact after second year organic chemistry, but can’t explain it very well. Something about “left” and “right” versions of the same molecule that can have different biological effects.

Why not make it easier to import some generics? (And therefore accept generic testing from different regulatory authorities, such as Europe.)

49 Hazel Meade September 25, 2015 at 3:14 pm

How hard would it be to test to make sure they are the same?
it shouldn’t require clinical trials. It should only require a chemical analysis.

50 Nathan W September 25, 2015 at 5:38 pm

Hmmm…. Yeah, it seems that you should be right.

Probably the existing regime exists to create barriers to entry so that fewer drugs go to generics and pharmaceuticals can bilk us for extra money.

51 A Definite Beta Guy September 24, 2015 at 4:54 pm

No, that’s a simplistic moral heuristic that will screw you over because it does not apply to all situations. “Corporations=bad” gets you Bernie Sanders, not good governance.

52 BMan September 24, 2015 at 7:21 pm

You need to be careful about assigning moral blame. Some people desperately need this drug. Turing will sell it to them for $750/pill. What will you sell it to them for? After all, you could have bought the manufacturer, but you didn’t. Alternatively, you could go through the process of getting FDA approval to make it. Or you could invent a substitute. It is easy to say that Shkreli’s price is too high, but at the same time his is the lowest price that anyone in the United States is willing to sell it for, which is why he still has customers. I don’t approve of what he did; but, because I am unwilling to supply the drug more cheaply, I don’t find it useful to assume a morally superior attitude. Instead, I like to think about practical solutions — which is why I like this article.

53 XVO September 24, 2015 at 7:40 pm

I could import it from India but it’s against the law…. We can assign moral blame to our government.

54 Bernard Yomtov September 24, 2015 at 8:09 pm

Some people desperately need this drug.

And it was available for $13.50 before all this happened.

This is not some revolutionary new compound that involved many years of research and expensive trials. It’s a generic, for Pete’s sake, that’s been around forever. What Turing tried to do is exploit regulations that may or may not be wise to extort money from sick people. Maybe, just maybe, we could back off all the wonderful free market rhetoric and look at what’s going on. Maybe we could concede that there is blame to go around here.

55 HL September 24, 2015 at 8:21 pm

clearly it isn’t a free market

56 Konstantinos Koukopoulos September 25, 2015 at 1:00 am

If there is blame then should not at least half of it fall on the person who was selling it for $13.50 but decided to stop selling it and sell out? His action (or inaction, if you prefer) is also part of the reason why this drug now is more expensive.

Ιn any case, if you can sell something at a particular price, then that price is, if not exactly right, then pretty close to being right, for the current market. Barring a not-for-profit pharmaceutical company, or a government sponsored enterprise, you are left with profit seeking entrepreneurs and drug-safety regulators to determine the cost of a drug. And they have determined it to be $750. Perhaps you would like some other regulator come and impose price controls. But that is quite a lot more complex a matter than your “THE DRUG WAS CHEAP BEFORE” argument.

57 Ricardo September 25, 2015 at 11:57 am

“Ιn any case, if you can sell something at a particular price, then that price is, if not exactly right, then pretty close to being right, for the current market.”

No, as Alex pointed out, this drug is sold in India for less than 10 cents per pill. It sells for only slightly more in the U.K. You could fire back and say the Indian versions are of questionable quality and the U.K. has price controls but if U.K. price controls were so onerous that firms could not make a profit selling the drug there, they would stop.

This is a classic case of monopoly pricing where the price deviates far from what a firm needs in order to return a normal risk-adjusted rate of return on its investment. We don’t need price controls on generics; we need free trade to open up competition and we need Medicare to have the power to bargain over price.

58 Jay September 25, 2015 at 12:28 pm

The FDA approves one manufacturer and it’s a free market?

59 Jon September 24, 2015 at 2:50 pm

It sounds like what is needed is streamline approvals to use studies done to get approval in Europe, and perhaps more FDA reviewers, as I understand the FDA is backlogged. Also, existing off patent drug manufacturers should be forbidden from refusing to sell to competitors (unfortunately needs an act of Congress)

The challenge is creating a review process that can’t be gamed to get substandard product in the market.

Because all of this takes time, we should try to make it as costly as possible for people to game the current system, including shaming individuals such as the CEO of Turing and making it clear that when he needs a favor, he wont get it.

60 Michael Prce October 23, 2015 at 7:03 am

“The challenge is creating a review process that can’t be gamed to get substandard product in the market. ”
Challenge accepted. Ok, anyone can buy my product and test it. If it isn’t exactly what I said it was then I’ve committed fraud. Let’s say a $10M bond requirement (interest bearing, so if you don’t cheat you don’t lose) in case that happens.


61 Ben September 24, 2015 at 2:58 pm

Part of the problem is cultural.

I recall from a lot of my undergrad science courses deification of FDA regulators who prevented this drug or that drug from going out “stopping profits with science” sorta thing

They don’t examine alternatives – that a culture of making it a pain in the neck to get a drug out kills a lot of people.

62 Jan September 25, 2015 at 7:40 am

The point is not to make it a pain in the neck. The point is to uniformly apply a safety and effectiveness standard, as well as manufacturing quality standards, as congress has instructed the agency to do.

63 ZHD September 24, 2015 at 3:02 pm

Sorry buddy, there is no reality in which the FDA should reciprocate the ridiculously populist, anti-science governance of European Pharma.

64 Moreno Klaus September 24, 2015 at 3:19 pm

Please Explain. (or are you just trolling?)

65 ZHD September 26, 2015 at 7:48 am

The European equivalents of the FDA are run pretty fast and loose. There’s much more scam medicine (e.g. homeopathy) and much less rationality (e.g. outright banning GMOs).

The US would be taking a huge step backwards if we reciprocated. But by all means, if Europe wants to join the science-based approval process and make a model similar to the FDA, then we can start to talk about reciprocation.

66 a September 25, 2015 at 9:24 am

If European regulations are stricter (like those against GMOs), and a drug passes through those, then it’s even better.

67 ZHD September 26, 2015 at 7:49 am

Being “strict” against GMOs isn’t a good thing. It’s an anti-science point of view.

68 a September 25, 2015 at 9:25 am

If European regulations are stricter (like those against GMOs), and a drug passes through those, then AT’s argument for US approval becomes stronger.

69 An Onyx Mousse September 24, 2015 at 3:12 pm

Alex, there are specific regulatory provisions for older drugs. Exclusivity can be granted to a single company in the U.S. in return for doing some additional work to bring the scientific data of very old but still useful drugs up to modern expectations. Unfortunately, this can result in pricing abuse because there is no competition. These regulatory loopholes could be closed – the FDA should maybe consider keeping an economist on staff to help ensure we have viable competition (and a functioning market) for as many products as possible! Sensible principles would suggest that we don’t grant monopoly powers to companies without very good reason – the temporary patent system works fine for new molecular entities but exclusivity should otherwise be wielded very rarely. There also have been cases where the FDA has mandated that companies continue to supply a drug when there is no alternative supplier for a niche drug (because it might be critical to a small number of patients.)

70 Roger Chittum September 24, 2015 at 3:17 pm

“Allowing importation of any generic approved for sale in Europe would also solve the issue of so-called closed distribution.”

Look up Thalidomide for a likely side effect of that solution.

71 MOFO. September 24, 2015 at 3:34 pm

I was going to come here and mindlessly shout Thalidomide, but someone beat me to it.

72 Jan September 24, 2015 at 5:11 pm

Your rebuttal, sir. We are all ears.

73 collateral September 24, 2015 at 3:52 pm

That’s a different situation. No one was allowed to sell thalidomide on the US market. Where reciprocity would be useful was where a drug was already allowed, but manufacturers have to prove quality standards in Europe, Canada, Japan and the US.

Can you point to any thalidomide-like circumstance that happened in those countries because of poor manufacturing quality standards?

74 Roger Chittum September 24, 2015 at 4:08 pm

I did not read Alex as you did, but upon rereading, I think you are probably right about his meaning. I would trust most of Europe, but not most of Asia, to qualify and oversee generic manufacturers.

75 Mondfledermaus September 24, 2015 at 6:12 pm

Yeah, them Germans are a trustworthy bunch.

76 Doug September 24, 2015 at 7:31 pm

To be fair, Volkswagen fooled California regulators.

77 Hazel Meade September 24, 2015 at 9:35 pm

Thalidomide wasn’t already approved for sale in the US under a patented brand name.

We’re talking about generic version of drugs that have already passed FDA approval and gone out of patent.
It’s literally the same substance that has already been tested and passed FDA approval.

78 Aaron Luchko September 24, 2015 at 3:18 pm

I didn’t focus on the generic angle because I feel it misses half the problem.

Whether the monopoly is granted through FDA regs or patents you still end up in a situation where company X is the only one allowed to sell a pill that is necessary for someone’s survival. That’s not the standard model of free markets and that’s why you get bizarre scenarios like this.

You can allow imports from Europe for generics but there’s no reason to think the market for patented drugs is any less broken, in fact it’s probably more broken. It’s just less apparent with patent monopolies because we assume the prices are based on things like R&D and innovation.

79 Moreno Klaus September 24, 2015 at 3:22 pm

So Mr Aaron: Can you explain how will this business model be viable without patents / temporary monopolies?

80 Aaron Luchko September 24, 2015 at 4:19 pm

My claim isn’t that there shouldn’t be patents.

It’s that the model of monopoly holder charging whatever they want is really dysfunctional when it comes to this industry. The drug is necessary for survival and for the insurance company denying it means their clients are going to die. AFAIK the price decision basically comes down to which of the drug company or insurance company is better at convincing doctors and patients that their position is justified (the the drug company wins they charge a huge price, if the insurance company wins they can deny coverage with a much smaller PR hit), not exactly the standard free market model.

81 Nick C September 24, 2015 at 5:10 pm

So what’s needed is a single purchaser of drugs, a la UK?

82 Aaron Luchko September 24, 2015 at 5:46 pm

I’m not sure that helps, if anything it might make the problem worse because the entire market is a monopoly seller against a monopoly buyer with no clear price signal.

I think the solution might be some sort of official price formula, perhaps enacted by an arbitration panel who’s involved throughout the process. They take an accounting of the development costs and set a maximum price based on costs * profit margin (true this is still subject to gaming). The seller can go under but they can’t exceed.

This would only be needed for critical drugs, something like viagra should still get an appropriate price from the market.

83 Trevor H September 24, 2015 at 3:31 pm

Allowing importation of European approved drugs – generic or patented – doesn’t solve every problems with pharma and the FDA. But it would solve this problem. I think it’s worth doing.

84 Urstoff September 24, 2015 at 4:09 pm

I assume prices are based on profit maximization, given that R&D is a sunk cost. But it seems reasonable to assume that without patents, the number of companies engaged in R&D would be much smaller. Is there any reason to think that’s not the case?

85 Marc W September 24, 2015 at 4:50 pm

None whatsoever. If anything it understates the problem.

86 Marc W September 24, 2015 at 4:54 pm

None whatsoever. If anything it understates the problem. Without patents modern pharmaceutical industry does not exist. Anyone who tells you different, especially if they claim public researchers do all the real work and drug companies are a bunch of rent-seeking thieves, is ignorant at best and a liar at worst.

87 Kostya September 24, 2015 at 6:59 pm

I think the case is that a prize or grant based system might be less costly than a patent based system for encouraging innovation. The cost of the current IP system is substantial deadweight loss from monopoly rents. The costs of a prize or grant based system would be deadweight loss from the increased taxation needed to pay for those grants. I don’t know which deadweight loss is smaller, but that’s the argument at least.

88 Marc Whipple September 24, 2015 at 9:15 pm

I did not mean to imply that some *other* system could not possibly work, and I apologize for not being clear. But “same system only with drastically reduced patent rights” will not work. Some incentive of reasonably equivalent size must replace patents/generic exclusivity, or the industry will diminish significantly.

89 q September 24, 2015 at 4:52 pm

So what’s the difference in Europe? Are the costs of regulatory approval that much lower, or is there more volume to support multiple generic competitors? Or something else?

90 Jan September 24, 2015 at 5:09 pm

No. For many drugs (e.g. most innovative products, cancer drugs, etc,), the US approves them more quickly than the EU. Reciprocity would create some interesting kinds of competition between the two systems, not all good. Though I don’t think the idea is completely without merit.

91 q September 24, 2015 at 5:17 pm

Well if that’s true, then why are there multiple generic competitors in the EU for this drug? The other explanation being thrown around as to why there aren’t multiple competitors in the US is that there isn’t enough volume to support a price war. I don’t have the numbers but based on other experience I’d be surprised if volume is that much different in the EU vs the US. So what’s the deal?

92 q September 24, 2015 at 5:25 pm

I take that back. EU covers ~500M people, vs ~300M in the US. Maybe that explains it. In other words perhaps it is not so much about the costs of regulatory approval in US vs EU but more so about the size of the market accessed once approval is obtained. In any case, reciprocity would still help.

93 Aaron Luchko September 24, 2015 at 6:42 pm

Could just be random variance. It sounds like this CEO went hunting for a company who was the sole manufacturer of a critical generic drug so he could jack up the price. I’m sure there’s many reverse situations with many US manufacturers but only one in Europe.

94 Drug guy September 24, 2015 at 6:56 pm

Further, MDRP price calculations, rebates and price increase limits prevent the innovator/current NDA holder from taking this pricing strategy (Federal and all Medicaid sales would be only eligible for CPI-U price growth,) making the drug vastly more valuable by sale, to the new owner, where the initial price for the NDC is the new starting MDRP reference price. There are potentially some government windfalls here as well, particularly for states.

This is a one-time win that occurs each time the drug is sold to a new owner.

95 q September 24, 2015 at 7:02 pm

Drug guy – very interesting.

The random variance explanation is worth considering but hard to believe IMO. If I understand you correctly, the premise is that all generics companies didn’t realize this opportunity existed, as opposed to them deciding it wasn’t an attractive opportunity (whereas it is in the EU for some reason).

96 Jan September 24, 2015 at 8:22 pm

Good point. There is clearly some selection bias here. I’d be very surprised if there weren’t generic drugs with only one supplier in the EU as well.

97 Jan September 24, 2015 at 8:25 pm

@q, I’m not so sure. Generic makers like to be seen as the “good guys” in pharmaceuticals and I don’t think this is a very smart long-term business model. Already, Turing is paying the price for this move. The public relations blowback is significant. In addition, even without a PR disaster, high monopoly pricing will only last until a competitor comes to market, so a company that wants to do this has to be dedicated to seeking out a new sole source drug to buy up every couple years and repeating the cycle.

98 Drug guy September 24, 2015 at 8:29 pm

It is a fully aligned opportunity, but only exists when the market barriers to entry for a second provider are in place. It would apply mostly to a small number of drugs, but mostly old, narrow use drugs where there are no current ANDA holders and the current owner is constrained in raising prices by MDRP.

Simply stated, all government sales for the current owner would not be subject to the increase, but the identical increase would fully apply to all payers, including the goverment for the new owner. For drugs like Daraprim, this is a substantial barrier/ opportunity, as ADAP and other government programs are primary payers.

One could make a list of available drugs using this approach. It would be short, but highly potent and leveraged.

99 Jan September 24, 2015 at 8:20 pm

This is one particular case, and I don’t have the details on it, so I don’t know why there isn’t a competitor. The obvious answer would be that the supplier of this drug before Turing bought it was operating on such thin margins with such small volume that a competitor would not have really made any money on it, so nobody felt the need to apply to market it. Yes, there is some barrier to entry in a regulated industry, I don’t dispute that.

100 Dan Weber September 25, 2015 at 2:30 pm

This is a small-market drug. Even at the increased price, maybe a total of $10 million in revenue a year. If a competitor enters, the original manufacturer can drop the price back down even before the new guy gets stuff onto the shelves.

This is a case where the community should just take up the manufacture themselves, or enter into a long-term contract with some manufacturer so they know what prices will be at for N years out.

101 Just Saying September 24, 2015 at 5:00 pm

This is a much better reading on the situation than TC’s mindless “businesses can do what they want in any and all situations forever amen” approach. Thanks AT!

102 Hazel Meade September 25, 2015 at 8:52 am

Doesn’t “people should be allowed to sell generic drugs without going through FDA approval” fall under “businesses can do what they want” ?

103 Alain September 24, 2015 at 8:08 pm

Great article Alex. Way to get to the core of the issue as compared to both social and mass media which simply said ‘waaa, he’s bad’ or something even less coherent.

104 David September 24, 2015 at 9:03 pm

I do not see why you need to obtain your competitor’s product in order to prove that you are selling what you say you
are selling. You are selling something you claim is a certain chemical. One should not need another company’ product
to see if you are selling the chemical you say you are selling. And if you do need it, that other company should be required
to give you the drug for the cost of manufacturing and shipping to you the drug. Anything else is absurd extortion.
Anyway why is the FDA involved? Cannot the FDA let people import drugs from whereever and then do spot checking
for quality control? If we are talking about generic drugs (no patent), anything else is anticompetition. So let people
sell any drug they want but if it can be proven that their drugs were not what they said they were, they can be heavily
fined and perhaps even imprisoned. But people without FDA approval will have to say they do not have FDA approval.
But then other nongovernmental agencies might arise to certify the responsibllity of drug makers.

105 Hazel Meade September 25, 2015 at 8:53 am

Apparently there is some testing required to prove that the exact same chemical still does the exact same thing when a different company manufactures it.

106 Janet September 24, 2015 at 9:10 pm

There is going to be a lot of hesitation to adopt a scheme like this not just because of typicla interest group shenanigans, but also because of Thalidomide in the 60’s. Members of Congress are old enough to remember that vividly, and many younger women are aware of it because frequently, people (especially mothers and grandmothers) mention it when you’re pregnant and like: “zomg, can someone give me some medication for the many, many pains and problems I’m having?” It’s still a bogeyman.

Of course, our Congressional leadership is much more interested in shutting down the government and adding months of processing time to already understaffed agencies’ workloads, so it’s not like the merits of this idea would actually ever come into play, because actual grownup solutions are not on the table. Rah rah ideology.

107 Steve Adams September 24, 2015 at 9:13 pm

Reciprocity with Europe, Japan, Austrailia at least. Optional for others like South Korea maybe. If politicians had any incentive at all to make the system better some of these would have been done a year ago.

108 Hazel Meade September 24, 2015 at 9:23 pm

I makes no sense for generics to go through any FDA approval process other than (maybe) some sort of quality control verification. It’s literally the same substance that the FDA already approved. Who cares what the brand name is? The approval is on the substance itself, not on the brand. Once the brand name goes out of patent anyone should be able to produce and sell the drug.

109 Dan Weber September 25, 2015 at 2:20 pm

What if the manufacture process matters? There are a bunch of psychotropics were we really don’t know how they work, just that they do, and maybe being with some other molecule matters.

That said, I agree that the approval process for generics ought to be simpler than it is today.

110 Hazel Meade September 25, 2015 at 3:19 pm

That’s what the quality control is for. It should be fairly simple to test to see if the chemical composition in the final product is different or if there are any unexpected byproducts or contaminants. Generics should really be near-identical copies of the approved drug. If you can prove that it’s essentially identical, then there shouldn’t be any requirement to do trials.

111 Topper Harley September 26, 2015 at 11:13 am

My wife takes a generic, and she has to also consider the inactive ingredients as well. She is lactose intolerant and some drugs use a filler (delivery agent?) that includes lactose. There is another drug she takes that, for her, has its effects blocked by soy.

112 Harun September 24, 2015 at 9:35 pm

To the commenter decrying the immorality of this guy, we should actually be thanking him for being such a jerk.

We actually found out about this problem because he set his price to price signal Batman level.

Imagine if he’d just raised the price to double or only to $29.70 / per pill. No one would ever know.

BTW, I have a gout med colchine (sp?) like this…only supplier left is in Japan. Very expensive for a pretty bad med.

113 Ricardo September 24, 2015 at 10:27 pm

In a way, OK, sure. But there have been other drugs subject to similar price-gouging and there has been an on-going DoJ criminal investigation over the past year and a parallel Congressional investigation led by Bernie Sanders and Elijah Cummings. The media and the general public are hooked on outrage-driven, viral news story cycles instead of paying attention to slow-moving but long-standing issues such as price-gouging and anti-competitive behavior in the generic drug market.

By the way, Bernie Sanders supports importing generic drugs from Canada so there is one issue where Tabarrok and Sanders have common ground.

114 Jan September 25, 2015 at 7:43 am

I think Sanders might even support importing branded drugs from Canada, which is where the real savings are.

115 A Definite Beta Guy September 25, 2015 at 9:13 am

Which is where the real danger is. You’re using the rhetoric of orphan drugs to support your real point and real mission of screwing over drug manufacturers in general. It’s dishonest.

116 Nathan W September 24, 2015 at 9:37 pm

I thought that entrepreneurship was supposed to reward risk taking.

Since when can you justify charging current customers exorbitant prices to create super–profits to create the next generation of drugs? (This is supposedly thier story).

Sounds to my like a simple case of someone trying to bilk a group that they thought would not be able to get a fair hearing. Well, seems that they got their hearing, and more. This could be the straw that broke the camel’s back in pharmaceutical gouging.

117 Pacemaker September 25, 2015 at 7:26 am

Great job presenting a argument with broader appeal and which does not depend on one’s beliefs about the optimal IP regime.

118 John Latham September 25, 2015 at 8:02 am

Turing is extracting a rent. So slow the market down with rent controls.

119 Usha A September 26, 2015 at 8:46 am

Apparently pursuing globalization, legislating free-trade agreements and dismantling protectionism is only desirable when there is considerable potential for private industry to profit therein, not when it would be in the peoples’ interest. This explains why a drug that has been around for decades and costs 5 cents in India compared to $750 in the United States cannot be imported freely by the sick who need it to survive.

120 Laura September 27, 2015 at 9:02 am

I have practiced medicine in the US for nearly 20 years. I am wondering what is different now than it was 2-3 years ago that has made generics out of reach for many of my patients.
What precisely has changed to trigger what is now happening many times a day in medical dermatology practice? I will describe:
We treat patients with non-life threatening but disfiguring and symptomatic skin conditions – acne, poison ivy, psoriasis, pre-cancers which can be treated with creams, fungal infections, etc. These are the typical conditions for which we prescribe creams and pills.
5 years ago I could ALWAYS go with a generic prescription when the brand name was too expensive or unnecessary for a particular patient. Now MANY GENERICS have become cost-prohibitive and my patients are going without treatment. Example: The generic for Spectazole cream is called econazole cream for fungal infections. It was always $5-20 a tube. Now it’s $200. WHY?
The generic antibiotic pill doxycycline was $4 at Walmart and $10 everywhere else for a 1 month supply; now it’s $400. GENERIC. This has never been a problem.
A third of my patients are not filling their prescriptions now.
I don’t blame insurance companies for changing their formularies when a generic drug goes from $20 to $750. I don’t blame a patient for not paying $400 for a prescription. I don’t blame drug companies for being profitable. I don’t blame the FDA for having strict requirements for safety and efficacy.
I don’t want to stir political debate but this happened after The Affordable Care Act was passed. It makes me wonder if this is an attempt to drive healthcare toward a single payer system and I don’t like it one bit.
PS I also observe that some pharmaceuticals now own both their brand AND the generic version. I’ll explain more about “rebate cards” in a separate post.

121 Laura September 28, 2015 at 8:07 am

Taro, Valeant & Medicis Pharmaceuticals are the top of my list of dermatology drug manufacturers with gargantuan prices – some generic.
What’s up?!!?

Someone needs to investigate this.

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124 Alan October 2, 2015 at 8:21 am

The U.S. Federal Aviation Administration (FAA), European Aviation Safety Agency (EASA) and Transport Canada (TCCA) have reached an agreement collectively and will rely on the regulatory systems of each other.

The agreement is designed to eliminate the duplicate processes that all three organizations currently face, for example, having safety equipment quickly installed on aircraft. It is expected that the agreement will result in time and money savings for the aviation industry as well as for the three organizations. The agreement allows reciprocal acceptance of a majority of Technical Standard Order (TSO) approvals, eliminating applications, validation and administrative review by all of the entities. It also makes Supplemental Type Certificates (STC) classification easier to accomplish. However, audits will be conducted to ensure the classifications meet established criteria and standards.

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125 UwWqhsBXqGlDSdf October 11, 2015 at 9:59 pm

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