By Radhika Akhil
Although drugs have become an increasingly immutable linchpin of public health, not all consumers have access to affordable drugs. Several recent news stories have highlighted how much leeway companies are allowed in setting drug prices. The EpiPen price hike scandal of 2016 provides an especially clear example of such lack of regulation surrounding drug pricing. Efforts by the Food and Drug Administration (“FDA”) to curb the trend of high drug prices have resulted in only a few regulations. Given the 2018 midterm elections and the resultant Democratic control of the House, there is more of a spotlight on regulating drug prices. A new proposal to create a ‘price-gouging enforcer’, i.e. an agency to monitor and regulate drug prices specifically, may on the surface seem like an efficient method to combat the drug price issue, yet such a suggestion comes with its own caveats that must be further analyzed.
High Prices of Drugs
In creating new and marketable drugs for consumers, millions of dollars are invested by big pharmaceutical companies into research and development vis a vis clinical trials. The process of clinical trials provides innovative drugs for the public to consume, yet drug research is an inherently costly process. Drug companies therefore set drug prices based upon their need to make a return on their investments; after all, the basis for most business decisions is to have a margin of profit. To understand why drug companies are able to market such high prices on their drugs, we need to look at how intellectual innovation interacts with basic principles of business and with federal drug regulation.
To motivate intellectual innovation and investment into drug research, regulatory laws allow for some protection from competition of other companies. In other words, when a company creates a new drug, it can file for a patent on that drug. Obtaining a patent serves the dual function of protecting the innovation/design of the drug, as well as rewarding the company for investing into its research. How exactly innovation is rewarded is best explained by examining the role of the FDA in this process. After obtaining a patent, the company can file for FDA approval. Obtaining FDA approval allows the company to initiate the marketing and sale of the innovative drug to consumers to make a profit on investment. Giving approval on that patent also prohibits the FDA from approving a generic version (a biochemically similar version) of that drug during the life of the patent. In other words, other drug manufacturers may only create and sell generic (therefore cheaper) versions of the drug after the life of the patent’s protection. The specific time period of patent protection on that innovative drug is known as the period of “exclusivity”; this can also be understood as the time period that the innovator company enjoys a monopoly of selling (and profiting from) the innovative drug in the market. To be concise, innovator drug companies are rewarded for their investment in innovative drug research via market exclusivity.
Although the FDA regulates the safety of drugs that enter the market, there is much less regulation surrounding the pricing of drugs. The true risk in this whole process is that drug companies essentially have the freedom to set drug prices themselves. Naturally, drug companies have a bias in setting drug prices, and as previously mentioned, there are several companies who have abused this lack of regulation and set exorbitant prices on drugs. There have been efforts by the FDA to curb this trend over the years, yet not enough regulation exists to truly change the current status quo.
The United States passed the Federal Food, Drug and Cosmetic Act in 1938, giving authority to the FDA to oversee safety measures regarding food, drug, medical devices and cosmetics. While it was beneficial to finally have a central source of regulatory authority to oversee drug manufacturing, marketing and safety for human consumption in the United States, the early 1980s proved that very few generic drugs were entering the consumer market. Further analysis of the scenario revealed that the problem lay in the patent system. Innovative pharmaceutical companies could easily prevent generic manufacturers from utilizing the Abbreviated New Drug Applications (“ANDA”) pathway successfully. ANDAs are applications to obtain approval for existing licensed drugs in order to manufacture the generic version at a cheaper cost. This affected consumers who were then unable to purchase the cheaper, generic versions of these drugs.
In 1984, the Drug Price Competition and Patent Term Restoration Act (informally known as the “Hatch-Waxman Act”) was passed to combat this barrier to entry via a two-pronged plan of attack. Two notable provisions allowed for the protection of innovation as well as the incentivization of other companies to manufacture generic versions. One provision allowed for the right to exclusivity for up to 5 years after approval. The second most notable provision regarded ANDAs. The Act sought to incentivize the filing of ANDAs by only requiring companies to provide information regarding their plan to manufacture the drug, to ensure the drug is of acceptable quality, and to prove, via scientific studies, that the generic version is bioequivalent to the innovator drug (i.e. that it affects humans in the same way as the innovator drug). Both provisions were able to protect innovation and reduce the barrier for entry for generic drugs to enter the market. This benefitted both companies, in terms of profits, and consumers, in terms of access to more affordable drugs.
Despite several efforts by Congress, drug prices have continued to rise to the detriment of consumers. Recent news highlights the regulatory loopholes that companies utilize to set high prices for their drugs. For instance, the famous drug manufacturer Mylan came under fire for utilizing such loopholes when they dramatically increased the price of EpiPens from about $249 in 2012 to over $600 in 2016. EpiPens contain medication necessary for life-threatening syndromes and conditions such as anaphylactic shocks and epilepsy. To provide another example, the famous case of Martin Shkreli, ex-CEO of Turing Pharmaceuticals, highlighted a similar issue with the price hike from $13.50 to $750 overnight for a single pill of Daraprim, a drug used often in patients with weak immune systems.
PhRMA’s “Come-To-Jesus Moment”?
With the 2018 midterm elections, the Democrats have taken control of the House of Representatives. Prior to the elections, current Speaker Nancy Pelosi met with the Pharmaceutical Research and Manufacturers of America (“PhRMA”). PhRMA is an organization representing various biopharmaceutical research companies. In their meeting they detailed a plan to lower drug prices in the industry. One of the proposals made was to install a Senate-confirmed “price-gouging enforcer” to monitor companies’ financial models and fine those who increase drug prices in an unreasonable manner.
While on the surface a ‘price-gouging enforcer’ seems like it would act as a check against ‘dramatic’ and ‘unnecessary’ price increases, there are several variables in the entire framework of the pharmaceutical industry that can affect its efficacy. For instance, market prices for drugs are not simply influenced by companies within the United States. In fact, globalization has resulted in a greater market interconnectedness for modern medicine, to the point that countries as far as India and China affect the United States drug market. Having a domestic regulatory authority may protect domestic interests, yet the global influence cannot be ignored. Along the same point, it is easy to see that domestic regulation could impact global markets as well. Drug companies in the United States do not operate only within the four corners of the country but are well-established globally. Domestic regulation causing lower drug prices could therefore result in greater demand for a company’s cheap drugs both domestically and overseas. In order to satisfy a potentially higher demand, companies will need to find more resources to ramp up production. With Pelosi and PhRMA’s proposals, though the details of the consequences are currently uncertain, business models for drug companies would certainly be affected in some way.
How a ‘price-gouging enforcer’ could affect the business of pharmaceutical companies is only one major unknown factor to regulating high drug prices. Further research on the economics of businesses, resources and marketing needs to be done in order to understand the full impact of introducing another regulatory measure such as a ‘price-gouging enforcer’. Regardless of the ultimate decisions made, having affordable drugs is a public health concern that cannot be easily ignored.
Radhika Akhil is a second-year law student at Suffolk University Law School. She is a staff member in the Journal of Health and Biomedical Law, currently working on a note regarding the international IP regulatory framework surrounding clinical trial data and its conduciveness toward preparedness for global epidemics. Radhika is interested in pursuing international, corporate and health law.
Resources & Further Information:
Brad Tuttle, 21 Incredibly Disturbing Facts About High Prescription Drug Prices, Money (Jun. 22, 2016), http://time.com/money/4377304/high-prescription-drug-prices-facts/.
Brad Tuttle, Why the EpiPen Price Scandal Sums Up Everything We Hate About Big Business & Politics, Money (Sep. 21, 2016), http://time.com/money/4502891/epipen-pricing-scandal-big-pharma-politics/.
Colleen Kelly, Article, The Balance Between Innovation and Competition: The Hatch-Waxman Act, the 2003 Amendments, and Beyond, 66 Food Drug L. J. 417 (2011).
Garth Boehm, et al., Development of the Generic Drug Industry in the U.S. After the Hatch-Waxman Act of 1984, 3 Acta Pharmaceutica Sinica B 297 (2013), https://www.sciencedirect.com/science/article/pii/S2211383513000762.
Grace Heinecke, Pay the Troll Toll: The Patent Troll Model is Fundamentally at Odds with the Patent System’s Goals of Innovation and Competition, 84 Fordham L. Rev. 1153 (2015).
Lev Facher, Pharma’s ‘come-to-Jesus’ moment: the industry braces for a Pelosi speakership and Democrats’ drug pricing agenda, STATNews (Oct. 30, 2018), https://www.statnews.com/2018/10/30/what-happens-to-pharma-if-democrats-take-the-house/.
Zoe Thomas & Tim Swift, Who is Martin Shkreli – ‘the most hated man in America’?, BBC News (Aug. 4, 2017), https://www.bbc.com/news/world-us-canada-34331761.