In August 2015, pharmaceutical executive Martin Shkreli made headlines when he hiked the price
of a lifesaving drug, Daraprim, by more than 5000 percent, from $13.50 to $750.
But this is not a unique case.
According to a major consulting firm, the cost of branded drugs in 2015 outpaced inflation
for the 10th year in a row.
And Americans are spending 27 percent more on specialty drugs, like those for AIDS and
Hepatitis C.
This has been so prevalent that 2015 has been dubbed the “year of prescription drug outrage.”
So, who decides how to price prescription drugs?
And why are they so expensive?
Well, there are a lot of forces in the U.S. market that influence how drug prices are
set.
Pharmaceutical companies invest an average of 2.6 billion dollars in every new drug.
And because not all drugs make it to market, drug companies usually set their prices high
to make up for potential losses.
Once a drug is developed, a patent is filed and whoever holds the patent is granted exclusivity
to sell the drug.
This means that they can charge whatever they want.
When there is competition, for example with generic, unpatented drugs, companies look
at competing medication prices and often charge somewhere in that range.
But chemical patents usually expire 20 years after they are filed.
Then, any pharmaceutical company can produce the drug.
For example, Abbvie’s patent on the rheumatoid arthritis drug Humira expires in 2016, leaving
two-thirds of their revenue under threat from competing generic drugs.
However, drug companies can take steps to retain their patent even after 20 years.
For instance, they can combine existing drugs in a new drug or change the way a drug is
taken, like from a pill to an inhaler.
But drugs can still be overpriced even after a patent expires.
That usually happens when the market for a drug too small for other drug companies to
take interest.
In the Daraprim case, fewer than 9 thousand prescriptions were filled in 2014.
But because Daraprim is unpatented, other companies were able to offer chemically similar
alternatives.
In October 2015, shortly after Daraprim made headlines, another pharmaceutical company
released a version of the generic drug for less than 1 dollar a pill.
The United States is the only developed nation that lets drug companies operate this way.
Prescription drugs in Europe are a fraction of those in the US, mainly because the government
sets a standard price for groups of drugs with similar effects.
Surprisingly, the US Food and Drug Administration does very little to regulate drug prices.
Over the last decade and a half US drug companies spent $3 billion lobbying congress to prevent
the federal government from increasing such regulation.
Perhaps for this reason, US drug prices are some of the highest in the world.
This has led many people find cheaper prescription drugs overseas or from foreign sources online,
and 72% of Americans believe that drug costs are unreasonable.
In the end, without federal oversight of drug prices, there is little preventing them from
rising higher and higher.
Besides the excessive overpricing of drugs, the process of developing them is also rather
complicated.
Find out all about it
on DNews.
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