In Defense of Martin Shkreli: Drug pricing in America

Learning about the root causes of the high costs we face in the health care industry can be a challenging endeavor, but it shouldn’t be!  All we have to do is train ourselves to ask the right questions.  Recently there were two notable stories that made national news regarding prescription drug pricing which provide excellent examples of what’s wrong with the status quo.  These two episodes followed the all too familiar script.  Get upset about something costing too much, identify a greedy person or company who is responsible, claim that reckless capitalism allows “price gouging”, and then suggest our benevolent and wise politicians implement various interventionist measures backed by the full force of the state that will supposedly alleviate the situation.  The real culprit goes unmentioned.  Price controls get implemented, suddenly shortages appear and the incentive for creative minds to improve the state of affairs evaporates.  This line of reasoning surfaces in nearly every situation when the public decides or is persuaded that its paying too much for something.  The hyped up details of both of the stories below can easily be found by tapping into your favorite search engine, but let me briefly summarize.

  Martin Shkreli, the CEO of Pharmaceutical maker Turing, became the target of this well-worn storyline in August of 2015 when his company raised the prices of Daraprim, a decades old anti-parasitic drug used in the treatment of AIDS patients.  Turing owned the production and distribution rights to this off-patent, small-market drug, and suddenly raised the price per pill from $13.50 to $750.  The standard outcry of unfairness appeared, and politicians rose up to offer their solutions which invariably called for various forms of price controls.  Shkreli didn’t help the case for capitalism much by making statements in the press which amounted to a 2015 version of “greed is good”.

 The second story which became a national sensation in 2016 involved the pharmaceutical company Mylan, the maker of EpiPen.  EpiPens are auto injector devices which deliver a dose of epinephrine to someone having an allergic reaction, and can be lifesaving.  The public became aroused when over the course of a few years, the price of a two pack rose from around $100 in 2007 to $600 in 2016.  How could this be the case when epinephrine is an old drug, no longer on patent?  Soulless, uncaring capitalism must be the culprit.  Again, our politicians sprang into action and began to demand explanations from Mylan as to why they are engaging in “price gouging” with poor kids who suffer from peanut allergies.  I’m not sure if the CEO’s father, Democratic Senator from West Virginia Joe Manchin, was part of the pitchfork crew or not.
Side note: “Price gouging” is a term often bandied about, yet I’m still waiting to hear a definition of what it actually means.  The best I can tell; it means that you are charging a price for something that I consider to be too high.  You may be the owner of whatever is being offered for sale, but I decide that I should have a vote too.  Because….fair.  How objective, now let’s argue about it and get some politicians to look into the matter."

  While both of these stories most certainly do not paint the pharmaceutical industry in a favorable light, the trained observer must look beyond the simple answer of bad, greedy people.  Aren’t most people self-interested?  Don’t all companies strive to charge the most the consumer is willing to pay for a given product, yielding that naughty word “profit”?  Yet, how could it possibly be that these two drugs, no longer under any patent protection, can suddenly develop monopoly pricing?  What’s missing here?  Oh right, the competition!  It doesn’t take a PhD economist to surmise that if suddenly a company is making fistfuls of cash doing something that others can do as well, they are going to attract competition.  So where is the competition in these cases?  Well as it turns out, there’s more to the story than drug patent protection.  

  While Daraprim may not be under patent protection, its production process is highly regulated by the US Food and Drug Administration (FDA).  If a competitor wants to jump into the mix, they must first prove to the FDA they are able to manufacture the drug safely.  Of course we all want safe products on the market, but the FDA approval process is highly costly and time consuming.  What responsible CEO would put his limited capital at risk to work through that quagmire, knowing that the day approval is granted, Turing can simply lower the drug price, making the new investment a waste?

  The story isn’t much different with EpiPen.  While epinephrine itself is no longer patent protected, Mylan’s auto-injection device is.  The FDA has decided to lay down rules as to how any epinephrine device must operate, and luckily for Mylan, the technical details of that mandated process are under patent protection.  Many competitors would love to undercut Mylan here, however the FDA essentially says they must create a product that operates in the same manner as one protected by patent.  The competition is stifled; the consumer eats it.

  You see, while the politicians are quick to point the finger at the free market, it is the institution of their own creation that is the true culprit.  The free market isn’t being allowed to function thanks to the onerous FDA.  While I don’t want to see people manufacturing drugs in bathtubs and slapping them on the shelves, there has to be a better way for the FDA to lay regulations that hamper the free market to a lesser degree.  Maybe the politicians could ask the FDA to look into that, rather than push for price controls with all of their predictable harmful effects.