In September 2015, Martin Shkreli hit the mainstream news when his company raised the
price of a drug used in AIDS treatment by over 5000% percent.
He became the focus point for a lot of the anger and confusion that Americans feel about
pharmaceutical companies and the healthcare system in general.
Today, we’re going to look at how Shkreli was able to make such a huge price hike and
how the pharmaceutical industry works.
Of course, we’ll need to put this in the context of the wider healthcare industry but,
as you should know, this is an incredibly complicated area so we can only cover a fraction
of it.
The US spends over $8000 per person, per year on healthcare.
That figure is split fairly evenly down the middle so half that money is public expenditure,
through government and state programs, and half is private insurance.
This $8000 total is far higher than anywhere else in the world.
The closest rival is Norway, who spends around $5500 per person, the majority being public
money.
An astonishing 17.6% of America’s GDP is spent on healthcare, which is double the average
for most developed countries.
Why is this number so high?
Well, there is no easy answer.
But we’re going to look at what some believe is the biggest factor; a marketing term we
like to call inelastic demand.
Inelastic demand is where the price of a product doesn’t affect its demand.
For most products; if you make them more expensive, you sell less, you make them cheaper, you
sell more.
Which is pretty obvious.
But occasionally you have something so vital that people will keep buying it, no matter
what.
The biggest two examples are gasoline and healthcare.
People don’t start riding the bus when gas prices go up.
No, they just swallow the cost and keep driving to work.
And healthcare is even more inelastic; you pay whatever it takes to keep your loved ones
alive.
What’s more, with gas you can maybe save a few cents by comparing petrol stations,
but you often get zero competition on healthcare, so you have no choice.
Shkreli founded Turing Pharmaceuticals in February 2015, with the main purpose of exploiting
the inelastic demand for drugs whose patent had expired.
These patents normally last about twenty years, after which anyone can make the drug.
However, that doesn’t mean you can create your own version and immediately start selling
it.
Since this is medicine, there is a long and expensive regulation process you need to follow
before any new product is sold on the market, even if it’s just a generic version of one
that’s been sold for years.
But if you buy up the old patent, you can start selling straight away.
So, Turing started by buying three old patents from another Pharma company called Retrophin,
and sold the drugs at a new, higher price point.
In August 2015, they bought the patent for Daraprim for $55 million, from Impax Laboratories.
Part of the deal was that Impax would remove all the stock from wholesalers and pharmacies
by strictly limiting distribution.
This meant that when Turing took over production and raised the price from $13.50 per pill
to $750, there was nowhere else to get the drug.
Daraprim is used to treat a parasitic infection called toxoplasmosis and for AIDS patients,
this can be a matter of life or death.
A typical course is between 1-3 weeks so it would be a minimum spend of $5000.
Most patients obviously can’t afford such a huge cost so how did Turing get paid?
Most of the time, the money either came from the patient’s insurance company or from
a government funded program like Medicaid or Medicare.
But there are a huge number of variables between states, like age, income, marital status etc.
And here we see the root of the problem.
One of the key reasons pharmaceuticals and medical equipment are so expensive in the
US is that there is no central organisation to negotiate on price.
This is how pharmaceutical companies use inelastic demand to make a huge profit.
If you look at the UK, the government owns the hospitals and employs the doctors, making
healthcare basically one big, centralised system, called the NHS.
They can go out a negotiate a good price on drugs because if you want to sell pharmaceuticals
in the UK, the NHS are basically your only option.
But in the US, hospitals are privately owned so they don’t hold a lot of leverage against
giant pharmaceutical companies.
Medicaid is varied between the states so again, not much leverage.
And Medicare is actually pretty centralised so, you know what, they often do get a better
price than everyone else.
Turing knew they could set a very high price because there is no one group with the power
to say no.
And they knew that the regulatory laws made it unlikely that a competitor could produce
a similar product and beat them on cost.
And finally, they knew that even when the story blew up and got in the media, 99% of
people would not understand the industry well enough to realise that regular people always
pay these costs, whether it’s through higher taxes or higher insurance premiums.
Some drug research is incredibly long and expensive so pharmaceutical companies do need
to cover these costs, and the government need to support innovation by offering tax breaks
and patents and so on.
However, often the research comes out of government funded universities and then the pharma companies
step in and take over, funding a drug that’s already promising.
There’s no easy fix and there’s a lot of aspects we couldn’t cover today but I
hope that’s given you an insight into some of what is happening.
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