Business Ethics / Economics

Can the Free Market Beat Rising Drug Prices?

Price gouging has been a controversial issue in the pharmaceutical industry lately due to recent acts that have caught the attention of the mainstream media. Last year, the AIDS and cancer treatment drug, Duraprim was raised in price from $13.50 per tablet to $750 per tablet, after Turing Pharmaceuticals – a Martin Shkreli-led company – acquired the drug. Now a Pittsburgh-area company is in the news for a similar issue. Mylan has recently raised the price of the EpiPen – a self-injector that can save the lives of people suffering intense allergy attacks – to over $600. When Mylan acquired the rights to sell the drug back in 2007, the price was around $100.

how-to-save-on-prescription-drugsA lot of ethical and economic questions arise from these cases. One of the most significant facts in looking at them is that when these two companies bought their respective products, they were at a reasonably low price, and arguably were priced at fair market value. These buyouts have essentially created monopolies, thereby allowing these outrageous price hikes. Clearly, there will be debate to come around pharmaceutical rules and regulations, but it turns out there may be a free market solution, or at least combatant, to this problem.

Imprimis Pharmaceuticals, based in San Diego and run by Mark Baum, has already created a $1 alternative to Duraprim, and has now announced they are in the process of developing an alternative to EpiPen that will sell for $100 or less. Baum has said that one milligram of EpiPen’s main ingredient, epinephrine costs only a few dollars, and one EpiPen requires less than a milligram of it.

Baum has spun this as an ethical and moral action, but these products have the potential to be financially successful. Since introducing its alternative to Duraprim, Imprimis has gained 20% of market share for the type of drug.

The types of drugs Imprimis creates are called customizable compounds, meaning they take ingredients approved by the FDA to create a drug with the same effect as the one that is being imitated. This is usually done in response to drugs that have patent protections. Imprimis is by no means on its own in this venture; it belongs to an entire industry of drug imitators, usually referred to by the market as compounding companies.

While most consumers want to see customizable compounds succeed, controversy also surrounds these products. In 2012, a Massachusetts-based compounding company sold a drug that lead to a meningitis outbreak, killing 64 people. According to CNN Money, “Baum called the incident a “huge tragedy” and emphasized that Imprimis never compromises quality.”

How successful the compounding industry can be in combating outrageously high drug prices remains to be seen. However, the track record of Imprimis seems to indicate that compounds can effectively serve the purpose of the drug it is trying to imitate, and that producing them is financially viable.

Despite Baum’s self-proclaimed crusade against these prices, even he admits that much of the action taken by these companies is more the fault of the regulatory system than the company itself. He especially exudes this sentiment in regards to his judgment of Mylan’s CEO, Heather Baum, who has taken flak for her $19 million dollar annual salary. He explained that not raising the price of a monopolized drug such as EpiPen would be CEO malpractice, and would’ve led to legitimate grounds for her firing. Fortunately, Baum has control of his own company and can set shareholder expectations as he sees fit.

Corporate greed is a rising category in our public discourse, and those who study business ethics have followed suit by focusing more on what a company’s bottom line should truly mean. The issue of monopolized and patent-protected drug could eventually lead to changes regarding government regulation, but free-market change almost always occurs quicker. So for the sake of the consumers (and their insurance premiums), hopefully the free-market change we’ve seen here is only the beginning.


Sources:

1.) http://money.cnn.com/2015/11/10/investing/alternative-drug-daraprim-price-gouging-shkreli/index.html

2.) http://money.cnn.com/2016/08/30/investing/epipen-alternative-100-dollars/index.html

 

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