22 September 2015

Martin Shkreli might be an asshole, but he's just the symptom of a larger problem

Last month, a company called Turing Pharmaceuticals purchased the marketing rights to a drug named Daraprim from Impax Laboratories. According to Wikipedia, Daraprim (Pyrimethamine) "is a medication used for protozoal infections. It is commonly used as an antimalarial drug (for both treatment and prevention of malaria), and to treat Toxoplasma gondii infections, particularly when combined with the sulfonamide antibiotic sulfadiazine when treating HIV-positive individuals."

Turing promptly raised the price of Daraprim from $13.50 to $750 per tablet, and general outraged ensued.  Twitter-happy CEO Martin Shkreli became the asshole of the week. "Big Pharma CEO as a capitalist asshole" may make for good headlines, but in my view it's a simplistic approach that focuses on the symptom and not the root cause of the problem.

I'm not yet a lawyer, and I'm not an intellectual property expert or economist either. But I think I can explain this situation in a way that most reporting has generally missed the mark. Of course, I'm open to correction or clarification.

First, let's be clear what happened here. Turing bought the exclusive marketing rights to the name Daraprim. Turing does not have an exclusive right to manufacture the drug and the drug's patents has 
long expired. Any other company could manufacture and market a generic version of Pyrimethamine. A generic version is the same drug--identical (bio-equivalent) to the brand name drug.

The catch here is that no other manufacturer has done so. It's impossible to know precisely why someone does not enter a market, but a few ideas seem clear. The market for Pyrimethamine is very small. Other companies probably believe that the barrier to entry (costly research and development and lengthy FDA approval process) into this small market is higher than the expected return they would receive for their efforts. This may have been the case when the tablets were $13.50 each. By raising the cost to $750, Turing has made the market more enticing for a generic manufacturer to step in. Still, they may avoid to do so if the barrier to entry is prohibitive.

It's also simplistic to treat Turing's price hike as  "free market" exploitation. To be sure, the market and its participants can be ruthless. But the pharmaceutical industry is highly regulated with (as previously noted) high barriers to entry. This process makes it more difficult for generic alternative to Daraprim to hit the shelves in a timely manner.

Whether this is a problem that needs to be "solved" is another matter altogether. But even if both sides agree it's a problem, the approaches are likely to be significantly apart. For example, an interventionist approach would seek to set price controls or attempts to limit exclusivity periods. On the other hand, a different approach might be to continue to relax the regulatory burden on manufacturers so that generic alternatives are easier to bring to the market. Both approaches have advantages and disadvantages, but we haven't really had that debate yet in the scope of these types of price hikes. For the most part, we're stuck on the "asshole CEO" and we haven't yet gotten past that.

Martin Shkreli might be an asshole, but he's just the symptom of a larger problem. Understanding the roots of that problem will help us move on to a more important debate about how to approach that problem.
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