As you wandered around the Internet last week, you might have noticed an astounding story in the medical field; this time by an amazing group of five Australian, talented students, who successfully recreated pyrimethamine, the main ingredient of Daraprim. This medicine, as its designated function, should be able to prevent parasitic development in the human body, taking HIV as one of the most noticeable treatments. The main storyline did not actually spotlight on the lone efforts of the students; only more so was it at the cost that they were able to reproduce it. 3.8 gram of pyrimethamine, equivalent to $110,000 sold in pharmaceutical retailers and hospitals, is now possible to be duplicated at only $20. As astonishing as the students’ achievements are, the media (and the public, in general) is actually more overwhelmingly discontent on how exorbitant the price discrepancy is. The pharmaceutical industry is also notoriously known for its abusive pricing behaviors, which begs the question of how the pharmaceutical industry is able to successfully replicate these inequitable acts, and why is it difficult to find a common resolution for the situation onwards?
THE CASE OF TURING PHARMACEUTICALS
Daraprim was the medicine created during the 1950s and was commercialized in the early 21st century by GlaxoSmithKline. The company later sold its marketing rights to CorePharma in 2010, a move that would see its price increasing from merely $1 a tablet to its retail price of $13.50. Impax Laboratories purchased its exclusive distribution of the medicine again before Turing Pharmaceuticals, making the final transaction to date in 2015, which realizes its selling price rocketing way up to $750 per tablet, summing up almost a four-digit price increase in a matter of just two decades.
Turing Pharmaceuticals (Turing) was founded by a hedge fund manager Martin Shkreli, who has no academic background in the medical field, but showed interest in pharmaceuticals as a kid, owing to his parents’ career. Before founding Turing, he also started an entity, which focuses on innovation for biotechnology technologies, but announced his departure shortly after that. His business strategy for Turing into “doing things differently”, as the company’s vision implies, revolves around multiple acquisitions of out-of-date medicines with expired patents, and little expenses were focused on research and development for improving its quality product. After each transaction was completed, the company push the selling price of the product in accordance with its own evaluation of the “fair” value and distribute it within its closed network. This strategy makes perfect business sense, as the acquisition of generic medicine distribution from the FDA is expensive and there is little competition in this segmented market. Turing is in a promising position to potentially be a monopoly and hence reap enormous profits.
The price hike on Turing Pharmaceuticals’ products was heavily criticized by domestic health organizations around the United States, with further accusations from the then US presidential candidates, including Bernie Sanders, Hillary Clinton and Donald Trump. Despite the immense public pressure, Turing eventually decided not to lower its retail price, rather placed commitments on price discounts on bundled products and co-purchases with their other medicines sold in hospitals. However, as Daraprim is also necessary for post-hospitalization treatment, patients will still need to purchase the medicine at its original price after that. Turing’s response was deemed incompetent by antitrust representatives.
Turing is only an outstanding example of, sadly, many more pharmaceutical companies operating based mainly on private interests. Of course, it is understandable that, as a private company, its obligation is to comply with shareholders’ interest; but one must realize that a significant amount of its funding originates from public money or, stated differently, the tax contributions of individual citizens, in the form of subsidies and grants. Therefore, it is the responsibility of each pharmaceutical firm to create affordable and quality products for the benefits of the citizens, with equitable pricing strategy. However, according to what the past decades have shown us, they have done an excellent job of satisfying their stakeholders, but have failed miserably to accomplish fair pricing. So, how did the market for pharmaceutical products cease to function properly?
The misuse of patents by companies and the incapability of regulatory institutions, coupled with its complexity of the pharmaceutical industry itself, would be the primary breakdowns of the market. Turing Pharmaceuticals is a perfect example of abusing use of patents. Theoretically, as most university textbooks indicate, the imposition of patents on products should encourage future development and innovations of that particular product. Technically speaking, although there has been concrete evidence to show that this argument is justified, the extent to which it has contributed to the common/public benefits is unclear, and whether these positive effects actually outweighs their negative counterpoints are highly questionable. Below are some practical failures of the patenting system in pharmaceuticals, as highlighted by the arguments of Teresa Forcades i Vila:
- Patents cause barriers of accessibility and availability to patients: countries without strict regulations on intellectual property rights have been more effective in combating epidemics than countries with such regulations on patents.
- Patents encourage artificially excessive pricing practices for companies: geographical comparisons showed that Canada enjoyed significantly cheaper drug prices than the United States, and statistics show that the US paid 93% more on drugs compared to the world average.
- Patents discourage competition: this contradicts with the points that a patent should encourage other firms to be original and innovative, so as to obtain as many patents as possible. However, the consolidation of the pharmaceutical industry, with most private funds available only to big corporations, has made this progress extremely difficult for smaller enterprises, pushing out competition and placing more barriers for future entries.
- Patents are unfair for developing countries, especially for countries suffering adverse socioeconomic impacts: this creates two simultaneous effects. Firstly, without the access and available money to purchase the medicine, it is likely that a disease or an epidemic would not be mitigated, and thus social consequences could be devastating. Secondly, as developing countries are able to reproduce the same medicine at a much lower manufacturing price due to material costs, it would enable more accessibility and affordability of the medicine to the common public, effectively pushing down the market price. Imagine how many life-saving opportunities would be created if the medicine has been made available to more African and Asian people.
There is also public criticism on the lax legislation on tackling the abuse of power of the pharmaceutical industry. In principle, it is totally appropriate not to restrict them into complicated requirements that potentially hinder innovative progress in producing better medicine, with the intention of serving the public good. However, pharmaceutical companies, more often than not, misuse these privileges for private benefits. Therefore, more restrictions should have been enforced to mitigate undesirable consequences for the public.
- Tax breaks: it is justified that some privileges should be granted to parties that enhance public interests, including tax holidays. The pharmaceutical industry enjoys enormous tax benefits as research expense are subject to tax credits. Therefore, the pharmaceutical industry easily exploits the benefits and cater their tax expenses to leverage their financial performance.
- Ambiguity in accounting standards: When pharmaceutical companies falsify their figures on the financial statements, for example, overstating research and development expenses (which, unlike other expenses, is subject to tax breaks), it is unfair. The current accounting principles, however, are not yet effective in distinguishing all items: for instance, if a company gives doctors free samples for their patients, should this be categorized as an R&D expense (for the company), or a marketing expense (to patients)?
- Blockage market movement: the United States deliberately restricts the distribution of imported medicines from overseas, in order to protect its domestic sales. There is also a regulation that allows US citizens to get insured only if the purchased medicine is originated from the United States – this makes imported medicines from foreign countries less appealing to local consumers, despite being inherently cheaper. Domestic pharmaceutical companies, therefore, enjoy their exclusive territorial distribution rights and, thus, artificially escalate its product unit selling price.
- Patent: the active patent system in the United States allowed companies to enforce their exclusive intellectual property rights for 20 years, increasing from 17 years before 1995. There was clear opposition to this idea, deeming that the active period of patents is far too beneficial for private firms. Some proponents (with their credible evidence) of this patent period assert that pharmaceutical research is more sophisticated compared to other scientific fields, hence the duration of the patent system is fair.
- Inequitable treatment of partnering countries: multiple US-based pharmaceutical companies are enjoying enormous benefits in countries where they are doing research. Some of the political measures conducted by the US government itself, such as economic sanctions, would force these countries, especially developing ones, to comply with unfavorable terms.
- Information disclosure: in the United States, information disclosure in the pharmaceutical sector is not required. Many pharmaceutical companies argue that only when their technological advancements are fully developed should they be obliged to announce their achievements to the public. The argument absolutely makes perfect business sense, as the company would not fancy disclosing uncertainty to the public, especially investors, who sponsor their projects in monetary terms. However, it gives companies the opportunity to delay, even not to disclose information about their progress. Therefore, it incentivizes scientific researchers to use the funds inefficiently.
c) Other reasons
Besides patent and regulatory problems, there are also some evident market failures that are of equivalent importance that obstruct the desirable functionality of the pharmaceutical market.
- Unethical business practices: private businesses, as their main target is achieving the highest monetary returns, are also met with public criticism due to their malpractices when it comes to moral issues. One of the more apparent discussions was the use of aggressive advertising campaigns to promote their pharmaceutical products, with detailed catering to each customer segment. For example, by using the university as a means for companies’ representatives to communicate, pharma exposes students to advertising and induces them to consume more drugs. An analysis showed that 11% of US citizens consume antidepressants, more than any other country.
- Conflicts of interests: although scientific researchers would be interested to develop cures for diseases in developing countries, few investors would be committed to sponsoring such projects – it does not bring about favorable returns for investors. Therefore, most R&D attempts are concentrated on more profitable projects, even if it does not yield societal benefits – this destroys originality, creativity and freedom for scientists.
- Consolidation of the pharmaceutical industry: despite the fact that the industry is growing in terms of monetary value, many large pharmaceutical companies are attempting to execute as many acquisitions of smaller enterprises as they can, in order to minimize competition. The power of these companies is so gigantic that the market is getting monopolized and the largest ones can even exercise political influence.
The pharmaceutical industry, in general, has been largely unsuccessful in delivering when it comes to the needs of the global community and, as highlighted here, the United States has allowed companies to breach numerous social responsibilities. Earlier this week, Pfizer was also accused of artificially increasing their selling price by the UK Competition and Markets Authority. However, without abusive actions, the global market is still large enough for pharmaceutical firms to accommodate the demand of hungry shareholders. The corporations need to be more accountable, and the regulatory bodies should step up to the game.