The Great American Drug Deal

by Peter Kolchinsky

  Lee Cooper, “To Fight High-Priced Drugs, Sidestep the Disease,” Medium, Dec. 27, 2018, https://medium.com/@leecoo4/to-fight-high-priced-drugs-sidestep-the-disease-b40e4a689c58.

  134A gene therapy is an extremely complex type of drug that inserts novel genetic material into the cells of a patient whose own DNA is missing a functional copy of an important gene. For example, children with Spinal Muscular Atrophy are missing a functional copy of the SMN1 gene, which is needed for normal function of neurons. Children with this disorder can be rescued by an infusing of a gene therapy that consists of a virus modified to insert a normal copy of SMN1 into their neurons. Some gene therapies involve taking a patient’s bone marrow stem cells out, exposing them to a virus carrying a copy of the gene they are missing, and infusing the genetically engineered cells back into the patients. When this procedure is done to help patients suffering from sickle cell anemia due to a mutation in their gene encoding hemoglobin that distorts their red blood cells (into a sickle shape), the modified bone marrow cells make healthy red blood cells. When this procedure is done to help babies born without immune systems due to another genetic mutation (e.g., Bubble Boy Syndrome), the new stem cells save their lives by restoring their immune systems.

  135Anne Casselman, “Identical Twins’ Genes Are Not Identical,” Scientific American, April 3, 2008, https://www.scientificamerican.com/article/identical-twins-genes-are-not-identical/.

  136In a randomized controlled trial (sometimes called an RCT), a patient starts the trial by being randomly assigned to get either the Experimental Drug arm or the Control Treatment arm of the trial (arm here means “group”). Sometimes the Control Treatment is just placebo. But for a biosimilar trial, the Control Treatment is the original drug that the biosimilar must show similarity to. Usually, neither the physician nor the patient know what they got until the end of the trial—they are said to be “blinded”—and since both the people doing the experiment and the patients who are being experimented on are blinded, the trial is said to be “double blinded.” A trial might enroll dozens or thousands of patients, depending on what data the FDA needs to see to decide whether to the approve the experimental drug. For the comparison of the data in the two arms to be valid, the patients enrolled in each of the arms should be similar to one another, which is why all the patients who qualify for the clinical trial are randomly assigned to the Experimental or Control arms of the trials. If one enrolled males into the Experimental arm and females into the Control arm, you would never know if the differences observed between the two arms (let’s say the Experimental arm did better than the Control) were due to gender differences between the patients in the arms (e.g., maybe males have milder disease symptoms) or because the Experimental treatment was actually better.

  137At least until we find ways to get ahead of treatment entirely by side-stepping the disease in the first place.

  138Most biotechnology companies hope that their innovation will lead to a so-called blockbuster drug, which corresponds to at least $1 billion in global annual revenues. In the case of rare orphan disorders, the US conventionally represents 30–40% of global sales (roughly $350 million for such a blockbuster). Therefore, to calculate a price for the drug in the US, one could divide roughly $350 million by the number of patients that would likely be treated in the US each year. So if one would expect to treat 1,000 patients each year with a drug in the US, one might set a price of $350,000/patient/year. If there are only 500 eligible patients in the US, then one might charge $700,000/patient/year. Some companies might aim to generate a higher return and would charge more per patient. Companies rarely aim lower. You can probably think of examples of drugs that cost more per patient and generate more in revenues, but those are the ones that make the headlines and there are many others that cost less and make less. Whether we average at $350 million/year/drug for this thought experiment or any other large number, the point is that there are so many genetic disorders that the costs for gene therapies could stack to a truly large number in perpetuity. And investors don’t need to be paid in perpetuity to be motivated to fund the development of a drug—they only value the first 10-15 years of profits—and so simulated genericization after a drug’s patent expires would save society a lot of money in the long run without reducing the incentive to fund the development of these products in the first place.

  139This same agency or contractor would need to audit each company to ensure that production costs are calculated properly or else companies might find ways of creatively inflating the production costs of a drug, for example assigning people’s compensation fully to the drug’s production costs even when some of them are splitting their time between making that drug and making others. Ultimately, as an enforcement measure to protect against accounting games, it makes sense that the manufacturing of a contract generic drug be hived off in a separate entity, which regulators could require the original manufacturer to divest to another company to be run competently and leanly. That way, if the original company were to run into financial difficulty due to other failed investments, it would not be able to inflate the operating costs of the contract generic manufacturing unit. Should it try to do so, the US Government agency that oversees contractual generics could put the manufacturing facility up for bid and require its sale to the winner. It might even turn out that there would emerge specialized contract manufacturers that would bid for the right to manage contract generic manufacturing. The manufacturing sites would stay, but management might change periodically as such companies competed to shave down the costs of administering the manufacturing sites. To the extent that the original manufacturer wanted to protect manufacturing trade secrets from falling into competitors’ hands, it would be motivated to manage its contract generics efficiently to keep their costs low so that regulators would not see an opportunity to save society money by forcing divestment of a contract generic production to another manufacturer.

  140Charlotte Hu, “Pharmaceutical Companies Are Backing Away From a Growing Threat That Could Kill 10 Million People a Year by 2050,” Business Insider, July 21, 2018, https://www.businessinsider.com/major-pharmaceutical-companies-dropping-antibiotic-projects-superbugs-2018-7.

  141Ike Swetlitz, “Gottlieb Pitches ‘Subscriptions’ to Incentivize Pharma to Make New Antibiotics,” STAT, Sept. 14, 2018, https://www.statnews.com/2018/09/14/gottlieb-idea-antibiotic-resistance/;

  “Wanted: A Reward for Antibiotic Development,” Nature Biotechnology 36, no. 555 (2018), accessed Oct. 15, 2019. https://www.nature.com/articles/nbt.4193.

  142Phil Taylor, “UK Unveils New Antibiotic Buying Plan, Pharma Incentives,” PMLive, Jan. 24, 2019, http://www.pmlive.com/pharma_news/hancock_proposes_new_antibiotic_buying_plan_for_nhs_1276081.

  143Preston Atteberry et al., “Biologics Are Natural Monopolies (Part 1): Why Biosimilars Do Not Create Effective Competition,” Health Affairs, April 15, 2019, https://www.healthaffairs.org/do/10.1377/hblog20190405.396631/full/;

  Mark Trusheim et al., “Biologics Are Natural Monopolies (Part 2): A Proposal For Post-Exclusivity Price Regulation of Biologics,” Health Affairs, April 15, 2019, https://www.healthaffairs.org/do/10.1377/hblog20190405.839549/full/.

  144Joshua D. Schiffman et al., “Early Detection of Cancer: Past, Present, and Future,” ASCO Educational Book, 25 (2015): 57-65, accessed Oct. 15, 2019. doi: 10.14694/EdBook_AM.2015.35.57, https://www.ncbi.nlm.nih.gov/pubmed/25993143.

  145Lee Cooper, “A Radical Proposal for Preventing Rare Genetic Diseases,” Wired, June 5, 2017, https://www.wired.com/2017/06/radical-proposal-preventing-rare-genetic-diseases/.

  9

  Preventing Price-Jacking of Off-Patent Drugs

  By now, it should be clear that in order for the Biotech Social Contract to work, drugs that go generic must stay inexpensive for the rest of time. Unfortunately, regulatory loopholes and quirks in certain co
mmercial markets have allowed bad actors in the industry to egregiously raise prices on old, off-patent drugs. You may have heard or read about such cases, which have drawn media attention and public ire in recent years—as well they should.

  As we did with non-genericizable drugs in Chapter 8, let’s take a closer look at the size of the problem, why it happens, and what can be done about it.

  First, a bit of context. Despite what you might assume from mainstream headlines, price-jacking of sole-source,146 off-patent drugs has a relatively small impact on total drug spend. Old, sole-source drugs tend to address very small markets and typically are priced modestly, which is often why they are manufactured by just one company and, though the patents are expired, others have no interest in competing. By my estimate, known examples of such drugs being price-jacked add up to less than 1% of what the US spends on prescription drugs each year. This is not to say that the practice isn’t abhorrent. But, generally speaking, companies like this are the exception, not the rule.

  What makes price-jacking of old drugs wrong is not that it makes these drugs unaffordable to patients—that’s still due to our broken insurance system—but that these companies are taking advantage of all of society. Their goal is to siphon off money that they think society won’t notice, which means they don’t want to draw attention to themselves by causing any patient that needs their drug to go without. Such companies had typically provided copay assistance and supplied free drugs to patients when their insurance wouldn’t pay or if they didn’t have insurance.147 Still, the media found patients who were disadvantaged and rightfully raised hell. In a world in which patients have insurance with capped or no copays, they probably wouldn’t even notice that a drug’s price had been dramatically increased. Such insurance reform is important to allow patients to afford any drugs they need, but it would make it easier for such companies to parasitize society’s collective wallet without being noticed—unless we close the loopholes that let price-jacking happen.

  But before we attempt to fix the problem it is important that we understand the facts.

  Price-jacking: A Case Study

  More than sixty years ago, the drug pyrimethamine was developed to treat a variety of pathogens, including the parasite that causes malaria. In 1953, the drug was released by what is now the British big pharma GlaxoSmithKline under the brand name Daraprim. Over the years, malaria became resistant to the drug, and its uses have narrowed—but not completely.

  The drug remains an effective treatment for toxoplasmosis, a disease caused by a fairly common parasite that is often picked up from cats. In fact, as much as half of the world’s population and up to 23% of Americans carry the parasite, though most carriers never experience any observable symptoms and do not require treatment.148 However, young children who contract the parasite and carriers who are immunocompromised (i.e., those with weak immune systems) are more likely to develop acute toxoplasmosis, which can lead to encephalitis and organ damage.149 Pregnant women who contract the parasite can suffer a congenital infection that may cause devastating pre- and post-natal complications, including miscarriage, stillbirth, microcephaly, epilepsy, and deafness.150 In India, Africa, Indonesia, and South America, the need is great, with millions of people requiring treatment every year. As a result, there are multiple suppliers of the drug outside of the US, and the competition between the suppliers keeps the costs down, which is how it is supposed to work in the market for a generic drug.

  Cases of toxoplasmosis are much rarer in the US, but the risk of harm is such that pyrimethamine remains an important component of our armamentarium.151 None of the generics manufacturers that compete in the large global pyrimethamine market bothered to get FDA approval to sell their product in the US because the market here was so small. Fortunately for the American patients who needed the drug, GSK continued to supply the US market for decades, not bothering to raise the price, even as the rate of toxoplasmosis in the US declined and its market shrank. Even into the 21st century, Daraprim cost just $1/pill for a 20-60 pill treatment. With only 8,000-12,000 prescriptions written per year, this amounted to revenues of less than $1 million per year for GSK. It had been a larger product for GSK in the past when there were more patients, but it became insignificant, lost amidst the hundreds of other pharmaceuticals GSK sold with total annual revenues climbing into the tens of billions of dollars.152

  Selling Daraprim in the US might even have been a money losing proposition for GSK. The company could presumably have raised the price to keep it profitable. But sometimes large companies opt to off-load off-patent products with limited markets to smaller companies rather than risk negative publicity that comes with a large price increase.

  Companies are generally more willing to endure negative publicity for smaller price increases for expensive branded drugs that address larger markets since these have a more significant impact on their bottom lines. Increasing the price of a $1 billion/year drug by 5% boosts revenues by $50 million/year. Increasing the price of Daraprim by 500% would have looked egregious yet would only have boosted revenue by $5 million.

  Daraprim just wasn’t worth the trouble for GSK, which in 2010 sold the rights to distribute Daraprim in the US to a small generic drug company called CorePharma. The sale price was not disclosed but it was probably modest. CorePharma now controlled the only source of Daraprim for the US market and immediately raised the price of the drug to $13.50/pill, quickly boosting revenue from the drug, though—interestingly—attracting almost no media scrutiny.153 That proved far more profitable for CorePharma than making a generic and competing with GSK. Although it’s entirely possible that had CorePharma made a generic and competed with GSK on price, GSK would have just dropped out rather than continue to lose money, leaving CorePharma as the sole supplier. So at $1/pill, all roads led to Daraprim being a sole-source drug in the US.

  As long as Daraprim was in the hands of GSK, its price would likely have stayed low. GSK had more to lose from bad press than anything it could gain from one such small product, and no shareholders or executives who would discernibly benefit by maximizing Daraprim profits. But once the drug ended up in the hands of a much smaller company, the rewards of raising its price became more pronounced.

  With the market shrinking, some price increase might have been necessary to keep it worth manufacturing for any company. Maybe a 13.5-fold increase was more than was needed to make the product worthwhile for CorePharma, but, as we’ll see, it hardly represented the limits of a true price-gouging strategy.

  In 2014, Impax, a larger generics company, acquired CorePharma. At the time, Daraprim revenues were a mere $9 million per year. Still too modest of a market to attract competing companies, even though the chemical isn’t difficult to manufacture, and the FDA approval process for a generic would have taken only about a year.154 One year later, Impax sold Daraprim’s rights to a newly formed, small company called Turing Pharmaceuticals for $55 million, a price that would seem difficult to justify, given the size of the market—and instead an indicator that Turing was planning to jack up the drug’s price, just as CorePharma had done. As you might expect (or probably already know from media coverage and public outrage that ensued), Turing immediately raised Daraprim’s price. What was astounding was that they did so by over 55-fold to $750/pill.155

  Had Turing stopped there, Daraprim’s suddenly surging revenues would have attracted other companies to launch pyrimethamine generics, and within a year or two, competition would have driven the price back down. Turing would have enjoyed a year or two of high revenues, amounting to a windfall of several hundred million dollars, while taking a hit to its reputation in the industry and strong, but fleeting, backlash from the media and the public. It would have been unlikely that sustained coverage and outrage and Congressional hearings would have followed.

  But Turing didn’t stop there. It had cleverly exploited an FDA safety regulation to block generic competitors from coming to market, takin
g advantage of a particular mode of distribution normally reserved for highly personalized treatments, like cell therapies, and drugs with especially dangerous side effects.

  A Red-tape Monopoly Strategy Irks the FDA

  Jazz Pharmaceuticals sells the drug Xyrem for narcolepsy, a disorder in which people lose muscle tone and can fall asleep instantly during the day. Xyrem is chemically nearly identical to the illicit sedative GHB (also known as “the date-rape drug” and discussed more in Chapter 15) and therefore must be distributed carefully under an FDA-mandated drug safety program (for example, making sure patients aren’t taking other sedatives). Jazz’s patented distribution methodology relies on a single pharmacy which prevents generic companies accessing Xyrem for bioequivalence studies, a necessary step to get their own versions approved. This is essentially the strategy that Turing later employed when it got control of Daraprim. Furthermore, competitors wouldn’t be able to come to market since Jazz could refuse to coordinate distribution of their generics through its one pharmacy.

  When the FDA reviewed and approved Jazz’s safety program in February 2015 (before Turing made headlines), its commentary revealed that it did not think it critical to limit distribution to one pharmacy and suspected Jazz’s real purpose for favoring this approach was just to block generics.156

  Two years later (after Turing made headlines), the FDA waived the requirement that Xyrem generics be distributed through Jazz’s pharmacy, and later that year approved the first Xyrem generic, made by Hikma.157 However, Jazz sued Hikma, claiming it infringed its patents, and the two companies settled, agreeing that Hikma could launch its generic in 2023, sooner than would have been the case had they had to wait for Jazz’s patents to expire but still 21 years after Xyrem had first been approved.158 Jazz’s strategy represents an exploitation of the patent system to secure a long monopoly extension for what amounts to a straightforward upgrade of a drug’s distribution system. An incremental extension of regulatory exclusivity (see Chapter 13) would have sufficed. The Biotech Social Contract calls for industry to develop drugs that will go generic without undue delay. I think that the Xyrem case is an example of an undue delay.