World Class Faculty & Research / November 20, 2015

Backlash Against Eye-Popping Drug Prices

Martin Shkreli became the Internet villain of the fall (some publications used much harsher language) when his company, Turing Pharmaceuticals, acquired the rights to Daraprim, which treats a condition called toxoplasmosis — and promptly raised the per-pill price from $13.50 to $750. Toxoplasmosis can be deadly for people with weakened immune systems, and Daraprim is the only treatment around.

Shkreli said Turing planned to use the proceeds to finance a search for a better anti-toxoplasmosis drug, but doctors replied that Daraphim works just fine. Reports suggest the drug costs about $1 a pill to make. A bipartisan Senate Committee now says it wants to examine the issue of price gouging in the drug industry. Meanwhile, the Justice Department is looking into both the pricing of specific drugs, by several companies, and whether those companies are overcharging Medicare, which gets a discount pegged to prices paid by private consumers.

The demonized Shrkreli is hardly alone in his approach to turning drug patents into profits. Valeant Pharmaceuticals purchased the rights to Isuprel and Nitropress, two drugs used to treat cardiac arrest, and then boosted prices 625 percent and 820 percent. Charlie Munger, vice chairman of Berkshire Hathaway, and a Republican, has referred to Valeant’s behavior as "deeply immoral."  Smith School professor David Kass observes that drug prices in the United States, on average, are higher than those in Europe and Canada, where governments have negotiated prices with the pharmaceutical companies. Are U.S. consumers, he asks, in effect funding a disproportionate share of the industry's R&D and profits?

Presidential candidate Hillary Clinton has proposed that Medicare be allowed to negotiate with drug companies, to lower costs, something currently banned by law, and has also floated the idea of a monthly cap on out-of-pocket drug costs. Republicans generally balk at anything smacking of price controls. But the Congressional investigations and the Democratic candidates' comments ensure that the peculiar economics of the prescription-drug industry will be a live issue in the 2016 race.

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