The Great American Drug Deal
Page 15
Despite the facts that Daraprim had been on the market for decades and its side effects were well known and considered modest, Turing claimed that the side effects warranted management through a Risk Evaluation and Mitigation Strategies (REMS) program. Under this pretext, Turing sold Daraprim exclusively via a “specialty” pharmacy, which tracks each bottle to make sure it’s shipped only to patients confirmed to have the appropriate medical condition, tightly controlling distribution of the product.
So how did using a specialty pharmacy block potential competitors from entering the market? The answer lies in the generic manufacturing process. When a generic company wants to make its own version of a branded drug, it has to purchase some quantity of that branded drug from a pharmacy, to use as a reference point in its bioequivalence studies. As many as 5,000 doses may be required.159 But Daraprim could only be obtained from Turing’s specialty pharmacy and only by patients, which meant that potential competitors would not be able to do the bioequivalence studies required by the FDA.
Turing had found a loophole, and it resulted in a monopoly accompanied by a huge price increase for a drug whose patent had long since expired. To be clear, Daraprim was not and is not a generic drug; it is still the original branded version. But it had been off-patent for years and was for a long time sold at a low price, so it effectively might as well have been generic before it was price-jacked. Society would be right to feel that it had paid off the Daraprim mortgage and now had a right to enjoy the benefits of the drug forever at a low cost. If the prices of novel branded drugs are mortgage payments, what Turing did was the equivalent of stealing the title to your house and offering to sell it back to you.
If you’re wondering why these kinds of cases are as rare as I suggest, consider atorvastatin, the statin sold by Pfizer as Lipitor. Once the most lucrative drug in the world, atorvastatin is still used by millions of patients in the US, so the market for it can sustain many generic manufacturers that all compete with one another on price for market share. Should a company like Turing acquire the rights to sell one of those generics and jack up its price, it simply wouldn’t be used. It would lose out to all the other manufacturers. Turings only happen in the absence of competition.
The Turing story does not yet have an entirely satisfying ending. Later renamed Vyera and then Phoenixus, the company continues to sell Daraprim with a list price of around $780/pill, although patients typically pay a small fraction of this cost.160 Medicaid plans pay much less because of legally mandated rebates, and Medicare Part D and private insurance plans also get rebates.161 Still, the company was reportedly on track to generate around $60 million in sales in 2019, mostly from Daraprim, so it continues to reap the rewards of price-jacking.162 And there are still no generics on the market.
But like a vaccine that leaves our immune system stronger, Turing exposed loopholes that Congress and regulators are now working to close.
Stopping the Next Turing
Turing was not the first company to employ tactics intended to delay the launch of generics, but in the wake of the Daraprim scandal, Congress and the FDA are trying to close this loophole by requiring companies to provide drugs to would-be generic competitors in sufficient amounts to allow for proper equivalency studies.163
Even with some loopholes closed, there is still ample opportunity for unscrupulous companies to price-jack sole-source, off-patent drugs. In 2016, there were nearly 100 such drugs in the US market, according to FDA statistics, and some of these have the makings for the next Daraprim (though many don’t because they are not uniquely essential).164 Post-Turing refinements to the law might prevent a company from dissuading or blocking potential competitors from entering the market, but there is nothing on the books that would prevent a company from acquiring the rights to one of these drugs, jacking the price up, and reaping a few years of inflated profits until competitors enter the market and bring the price back down. Currently, we depend on such erratic and inefficient competition to regulate markets over the long haul. The cost of that inefficiency comes at the expense of patients at worst and payers at best (and therefore society as a whole), and it risks supply disruptions, as we’ve seen with some products when prices drop too low.165
For a solution, we can revisit the idea presented in the previous chapter, whereby the US government would mandate that manufacturers whose products do not undergo natural genericization (either because their markets are too small to be attractive to generic companies or because their product is too complex to genericize) must agree to sell their drugs at a low but profitable price under purchase guarantees—as is done now for biodefense products and is being proposed to incentivize companies to make antibiotics. The price of the drug would be set at a fixed premium to the cost of production, approximating what it would be selling for if it were faced with normal generic competition.
Returning to the Turing case study, if GSK could have counted on a purchase guarantee for Daraprim from the US government (or more likely a drug wholesaler under contract with the US government), GSK might have continued to sell the drug for a low price, even if higher than $1/pill. Patients and society might have been better off if we had encouraged GSK to just raise the price of Daraprim to $6/pill if that would have made it worthwhile to keep producing the drug, obviating the entire CorePharma and Turing fiasco. So contractual genericization doesn’t always mean lowering a drug’s price, but it does mean ensuring that the price reliably stays lower than what it might be with little or no competition.
Another proposed solution to sole-source price-jacking includes allowing generics from other countries to be imported as soon as the price of a sole-source generic goes up in the US.166 In the case of Daraprim, generics have been made and sold cheaply in India and other countries for years. It’s hard to imagine Turing going to all the trouble of acquiring and jacking up the price of Daraprim in the US if it knew that much cheaper imports would have been made available immediately thereafter. This approach would, in essence, merge the US toxoplasmosis treatment market and the global market, which carries an added benefit: It would eliminate the risk of a sudden shortage should something catastrophic happen to the sole manufacturer for the US market (which could have a severe impact on patients who contract the parasite). In order to entice international generic suppliers to enter the tiny US market for this drug, the FDA or another government agency might have to provide assistance with documentation or waive application fees, but all of that might nevertheless end up being cheaper than incentivizing US companies to develop generic competitors to sole-source products, as Congress has proposed.167
If this solution seems enticing, it comes with its own caveat. The FDA is responsible for monitoring the quality of generic drugs made for the US market and has its work cut out for it. Contaminated products and pills with incorrect concentrations of drug still get through to the US, and these are ones that have actually gone through FDA review.168 Therefore, if America turns to overseas generics manufacturers for savings any time an FDA-approved sole-source generic is price-jacked, patients may pay a high price in terms of drug quality unless those alternative suppliers are put through a rigorous review. Unfortunately, those reviews take time and would leave us without a rapid response to a case of price-jacking.
So I would argue that the simplest solution to regulate natural monopolies is to bid out the US market for rarely used, old drugs to high quality suppliers and pick two (to avoid supply disruptions) who will do it for the lowest price, even if it’s higher than the price we pay now. Alternatively, we could award the supply contract to a single manufacturer (e.g., GSK would hopefully have put in a reasonable bid to make Daraprim at a higher but still reasonable price) who either commits to stockpiling enough product to buffer against a manufacturing disruption or else manufactures the drug at two separate sites.
What Is, and Isn’t, Price-jacking
The backlash against Turing and other companies that had price-jacked
old drugs, including Valeant, was certainly warranted, but it also had a chilling effect throughout the drug development industry as executives wondered whether an angered public would mistake every high-priced drug for Turing-like profiteering. As an investor, I could see that many management teams were taking public opinion into account when considering future pricing strategies. Similarly, many investors pulled back from biotech after the Turing story hit headlines, making it harder for even those companies that were developing new drugs for new diseases to raise money to fund their programs.169
Public outrage—even when justified, as in the case of Turing—is a blunt instrument that can have unintended consequences on innovation. It’s important, therefore, that we close loopholes that permit bad acts such as Turing’s from giving the public cause to be upset while also making a distinction between what Turing did and other situations where an old drug’s price has been increased, but where the effect has been positive.
For example, the drug epinephrine has been available for decades to treat life threatening anaphylaxis but to make it faster to administer (since seconds count when a child’s throat is swelling) it was put into an autoinjector pen known as EpiPen. That improvement came with a price increase, which some might perceive as price-jacking an old drug (see Chapter 12).
Even without upgrades to the drug, a price increase doesn’t necessarily signal profiteering.
As diseases are treated with better drugs, the market for older ones shrinks, just as improved treatments for HIV protected patients’ immune systems, reducing their risk of becoming infected with toxoplasmosis, and shrank the market for Daraprim. When a company sells less drug but still has to cover the fixed costs of continuing to make it, the cost per patient necessarily has to go up.
Something like this may be occurring with lomustine, an old chemotherapy for glioblastoma. Lomustine is now rarely used because safer and more convenient drugs have become available. Even after a recent sharp 15-fold price increase, it still only sells around $1-2 million per year, which makes for little profit but big headlines and, in this case, even resulted in Congressional scrutiny.170 Maybe a smaller increase would have been enough to justify the effort of continuing to make it, but some increase was certainly necessary as its market shrank.
Even large price increases of an old drug might be a natural consequence of a disease’s gradual eradication. Today, HIV-infected patients have to take expensive cocktails of antivirals to stay healthy, costing payers around $25,000/year/patient.171 When they go generic, their prices will likely drop by over 90%, because there are over a million patients in the US, enough to entice many generics manufacturers to compete. Even at $500/year/patient, a generics manufacturer that wins 5% of the market would generate over $25 million/year in the US.
But let’s say that someday, after the antivirals are generic, a company develops an effective HIV vaccine that drops the rate of new patients becoming infected and, as those already infected die of old age, the number of HIV-infected people gradually falls. At some point, the market would shrink so much that it would be difficult to maintain the drug supply without at least modestly raising prices. If there were to be five suppliers, each spending $1 million to maintain their production capabilities and competing with one another to treat the remaining 1,000 patients, then the average cost per patient would need to be $5,000/year just to cover the suppliers’ operating costs. That would require a 10-fold price increase from $500/year. As we got down to 250 patients, signaling a near eradication of HIV from the United States, these companies would have to raise their prices to $25,000/year just to break even, the same as today’s branded prices. Such increases might be perceived as price-jacking, but it’s hardly profiteering when there’s no profit being made.
As with Daraprim and lomustine, a reasonable solution could be to bid out an HIV drug supply contract and allow one or two winning high-quality suppliers (those who come in with low prices) to serve the US market. If other companies figure out how to make the drugs for even less and can therefore charge even less, then they can bid for the contract when it is put out for re-bids every few years. Competitive bidding is a common practice in the public and private sectors and can be employed to meet society’s need for a steady, inexpensive supply of rarely used generic drugs.172
Compounding Pharmacies Are Not a Solution
Shortly after Turing price-jacked Daraprim, a group of enterprising high school students synthesized the drug and offered to sell it for cheap. As admirable as their effort and noble as the sentiment behind it might be, this can’t be our long-term solution to price-jacking. Society wants its old drugs to be inexpensive, but it also wants them to be manufactured reliably by professionals. And it wants drugs and manufacturing practices to meet certain standards, namely Good Manufacturing Practice (GMP), which is what ensures that therapies work as advertised, won’t be contaminated, and will provide the right dose consistently.
A more credible challenge to Turing emerged in the form of a compounding pharmacy, Imprimis, that offered to make and sell the drug for GSK’s 2010 price of $1/pill. Most pharmacies just dispense drugs that are made elsewhere by drug companies. But there are thousands of compounding pharmacies across the US, hold-overs from an earlier pre-FDA era, that are still legally allowed to purchase the raw materials necessary to make and sell a drug to individual patients. They are only allowed to do this as long as they compound the ingredients into forms and doses that are not already available in FDA-approved, GMP-manufactured forms. For example, if a drug has been FDA-approved for adults but is sold as a pill that is too large for children, a doctor can still legally and appropriately prescribe it off-label to a child (see Chapter 15), ordering a compounding pharmacy to make the drug into smaller pills or package it as a powder to be mixed into applesauce.
Compounding pharmacies basically make homemade versions of drugs, which introduces risks of dosage errors and contamination, in some cases with devastating consequences. In 2012, 76 people died of meningitis after receiving steroid injections that had been contaminated with fungus during preparation at the New England Compounding Center facilities. This prompted Congress to pass the Drug Quality and Security Act the following year, which ostensibly gave the FDA a stronger mandate and more leeway to stop compounding pharmacies from making drugs that are already available as GMP-manufactured, FDA-approved pharmaceuticals.173 However, the industry remains weakly regulated and has a disturbingly high error rate.174
So it was initially surprising to hear that one PBM, Express Scripts, would reimburse for prescriptions of Daraprim filled cheaply by Imprimis. The FDA initially took notice, but Imprimis avoided being shut down by exploiting a small loophole. Daraprim must be taken together with another drug called leucovorin to work, so Imprimis mixes the two drugs together into one pill. It’s not a significant difference, arguably a bit more convenient for patients, but it makes the Imprimis product different from FDA-approved Daraprim. In theory, were Daraprim meant to be taken on its own and were Imprimis just compounding pills of pyrimethamine that were the same as Daraprim, Imprimis would be violating the law, the FDA would have to shut it down, and Express Scripts would have had no choice but to reimburse Daraprim at the prices Turing was charging. While a loophole cut in society’s favor in this case, we should not count on compounding pharmacies to systematically offer cheaper alternatives to old price-jacked drugs, nor should we need them to.
For that, we must close the loopholes that permit price-jacking in the first place, and it is within our power to do so.
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146Made by one company.
147Carolyn Y. Johnson, “This Old Drug Was Free. Now It’s $109,500 a Year,” The Washington Post, Dec. 18, 2017, https://www.washingtonpost.com/news/wonk/wp/2017/12/18/this-old-drug-was-free-now-its-109500-a-year/.
148Jaroslav Flegr et al., “Toxoplasmosis—A Global Threat. Correlation of Latent Toxoplasmosis with Specific
Disease Burden in a Set of 88 Countries,” PLoS One 9, no. 3 (2014): e90203, accessed Oct. 15, 2019. doi: 10.1371/journal.pone.0090203, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3963851/.
149Jeffrey L. James, “Neglected Parasitic Infections in the United States: Toxoplasmosis,” The American Journal of Tropical Medicine and Hygiene 90, no. 5 (2014): 794-99, accessed Oct. 15, 2019. doi: 10.4269/ajtmh.13-0722, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4015566/.
150Jaroslav Flegr et al., “Toxoplasmosis—A Global Threat,”
James B. McAuley, “Congenital Toxoplasmosis,” Journal of the Pediatric Infectious Diseases Society 3, suppl. 1 (2014): S30-35, accessed Oct. 15, 2019. doi: 10.1093/jpids/plu077, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4164182/.
151Joseph Lykins et al., “Understanding Toxoplasmosis in the United States Through ‘Large Data’ Analyses,” Clinical Infectious Diseases 63, no. 4 (2016): 468-75, accessed Oct. 15, 2019. doi: 10/1093/cid/ciw356, https://academic.oup.com/cid/article/63/4/468/2595100/Understanding-Toxoplasmosis-in-the-United-States.
152GlaxoSmithKline, GlaxoSmithKline Annual Report 2010, accessed Oct. 15, 2019 https://www.gsk.com/media/2691/annual-report-2010.pdf.
153https://www.google.com/search?ei=XseoXdC1NOG1ggflmLoI&q=corepharma+gsk+daraprim+-turing+price+2010;