Generic Drug Rip-off
Suppose you return from abroad after traveling to an exotic location. You discover you also brought home a souvenir — a nasty tapeworm infection. The drug of choice for many parasitic infections is Albendazole, a 33-year old antiparasitic medication. Although approved for sale in the United States in 1996, it was sold abroad much earlier. Five years ago, a daily dose that would cost less than $1 abroad cost nearly $6 in the U.S. By 2013 the price had skyrocketed to nearly $120. According to GoodRx.com, a 400mg dose now runs about $275.
Suppose instead you were exposed to malaria. Pyrimethamine is a 60-year old remedy used to treat parasitic infections as well as malaria. Approved in 1953, the drug sold for about $1 per tablet several years ago, but had recently climbed to $13.50 a pill. Since a hedge fund purchased it from another drug maker in August, the price has since been jacked up to $750 a tablet. Talk about sticker shock! That’s nearly $25,000 for a 30-tablet bottle at your local Kroger pharmacy.
Maybe you brought home a case of drug resistant tuberculosis. Cycloserine is an old tuberculosis drug first discovered in 1952. Not long ago 30 pills cost about $500; now that same prescription costs $10,800. That’s an increase from about $17 to $360 a pill!
Many generic drugs have recently shot up in price — sometimes significantly and for no apparent reason. While there are numerous examples, these are some of the most egregious ones that come to mind. Why did these drugs’ prices increase so sharply? A common reason some generic drugs shoot up in price is due to supply chain disruptions. About 80 percent of raw pharmaceutical materials are derived from foreign sources — sometimes famine or war makes raw materials scarce. But these drugs did not suffer raw material shortages, nor are they in short supply. Market consolidation in manufacturing and drug distribution sometimes plays a role. But that doesn’t appear to be the case here either.
A common denominator in sharply rising generic drug prices is that many are older therapies approved decades ago, and are often aging, niche therapies, as are the examples above. In many instances, manufacturers have dropped them in order to produce newer generic drugs that are in higher demand. But in other cases, the diseases are rare and there is little incentive for competing firms to pursue a small market.
Consider the aforementioned antiparasitic drugs, Albendazole and Pyrimethamine. Parasites and malaria are not common problems in the United States. Thus, the U.S. market for these drugs is small. For that matter, the same can be said about and Cycloserine. Tuberculosis isn’t exactly a common disease either. Although the patents expired long ago, other manufacturers did not want to produce generic versions of drugs with small markets. As a result, there wasn’t any competition — which is probably why the drug makers decided they could jack up their prices.
In recent years, new specialty drugs and biological agents to treat rare conditions have become increasingly common. To encourage drug makers to research and develop new drugs for rare conditions with small markets, the U.S. Food and Drug Administration (FDA) provides lucrative financial incentives. As a result, specialty drugs under patent protection are very expensive; although only 1 percent of prescriptions are for specialty drugs they account for one-third of all drug spending. The makers of the old generic drugs (mentioned above) apparently reasoned they too should be allowed to profit handsomely from drugs for rare conditions — even though they didn’t perform the research and development.
Pharmaceutical manufacturers are free to establish price levels they believe the market will bear. Basically, they jacked up the prices because they could. This is especially true of branded medications protected by patents. But these drugs didn’t have patent protection. In the case of Pyrimethamine, a hedge fund figured out this old, little-used drug had a niche that could be exploited (especially since a competitor was doing the same thing). Drug makers often profit when competitors’ drug prices rise.
Generics face unlimited competition — at least in theory — since any qualified drug maker can apply to the FDA to a produce a generic version when the original drug patent expires. The reality, however, is often far different. These drug makers are essentially taking advantage of the fact the FDA has a backlog of about 4,000 applications to produce new generic drugs. The median approval time for new generic drugs is about 27 months — the agency simply cannot keep up.
Drug therapy is a bargain. Americans spend twice as much for physician care and three times as much on hospital care as they do for drugs. Generic drugs are especially cheap — usually. However, some of these rip-off price hikes are avoidable if the FDA clears the abbreviated drug application backlog and allows competition to flourish. This, in turn, will alleviate some of the price hikes caused by market consolidation in both drug manufacturing and distribution. Finally, states need to resist the call to pass perverse regulations designed to protect local business (and pharmacies) at the expense of competition that benefits consumers, employers, insurers and drug plans.
For a longer version of this Health Alert, see What Is Increasing the Cost of Generic Drugs? (Part I: The Supply Chain).
While I’m not familiar with the intricacies of the FDA approval process, I don’t see why the agency can’t have a separate group that focuses on the approval of new manufacturers of generic drugs where there is no need to assess efficacy and safety of the drug itself but just the ability of the manufacturer to make it under safe production and quality control protocols. The FDA should be able to staff the group with enough people to ensure approval of new generic drug manufacturers within three to six months at the most. If it needs to increase industry user fees to cover the cost of incremental staffing, it should do so.
The application process is abbreviated, based on the Hatch-Waxman Act of 1984. But the FDA is inundated at the moment. In these egregious example, I believe the owners of the drugs have figured out they can take advantage of the backlog. I assume the hedge fund that bought Pyrimethamine probably analyzed the market until it identified a little-used drug with no competition. Such a drug wouldn’t cost much. It was likely a calculated move knowing insurers would be stuck for more than two years while the FDA processed new applications.
As I commented in another thread, the FDA has created these opportunities, and has also created expensive production problems for companies with ongoing generic drug manufacture. For example, we have seen shortages recently for Sterile Saline! Was there an epidemic of adverse events we weren’t told about? Current government policy is overly focused on the rare but obvious issues that occur when bad things happen to patients as a result of drug toxicities, etc. but largely blind to the harm resulting from patients not able to receive treatment due to shortage.
In these cases, it is likely that government fiat lowering prices to some arbitrary level would make many of these companies abandon the enterprise altogether. Better to facilitate competitors getting into the game.
Telling comment in today’s New York Times article by Andrew Pollack:
The drug made by generic companies abroad costs only about $20 for 100 capsules.
Amir Attaran, an expert on pharmaceutical access issues at the University of Ottawa, said it would have made much more sense to just import the drug from abroad, rather than have it produced in America for so few patients at such high cost.
Mr. Hasler said this was probably not done because foreign manufacturers were not willing to bear the expense of applying for regulatory approval in the United States.
Free trade in drugs and cutting the power of the FDA could perhaps solve this price gouging in 5 mintues.
“The drug made by generic companies abroad costs only about $20 for 100 capsules.”
Sure – that’s the manufacturing cost. Virtually no research, development, or clinical trials needed after the drug is available for generic manufacture.
Interesting article on efforts by politicians to establish drug price ceilings….
http://www.psmag.com/business-economics/biotech-company-marks-up-drug-cost-by-5000-percent-because-it-can
Yeah. Even the generic medicine is sold in a quite high price. I think there are someone playing it in the distributions. You know if you implement the economic rule, more demand means higher price for the same items right? Now you know what I am talking about.
http://summitmedicalcasper.com/