Martin Shkreli and the State of the U.S. Pharmaceutical Industry

February 1, 2016

Martin Shkreli, former CEO of Turing Pharmaceuticals, is famous for raising the price of a life-saving drug from $13.50 to $750 overnight. The drug is used to treat patients with a dangerous parasitic infection. Unfortunately, Martin Shkreli is not alone. Shkreli’s price increase for Daraprim is just one example of a business strategy that consists of buying old drugs and transforming the drug into a new and improved version, referred to as “specialty drugs.”

 

Pharmaceuticals claim that the prices of drugs are determined largely by the costs of researching and developing (R&D) the drug. However, drug companies spend much more on marketing drugs than developing them. According to a chart from GlobalData, Johnson & Johnson spent $8.2 billion on R&D and $17.5 billion on marketing and sales. Pfizer spent 6.6 billion on R&D, and $11.4 on marketing and sales. Patents for new drugs generally last for twenty years, but at least half of that time is spent researching and developing the drug. Due to the short window of opportunity, Companies claim that because they only have a short time to make a profit before the drug becomes fair game for generic drug companies, the price of drugs can be quite high.

 

However, pharmaceutical companies have a knack for increasing the price of drugs beyond the inflation rate. One example is the drug Avonex. The demand for this drug has decreased each year over the last decade, but the drug company Biogen Inc. has risen the price of Avonex about 16 percent a year over that same period. Drug companies have unbelievable pricing power unchecked by consumer demand. According to the Wall Street Journal, the pricing power of US drug companies has resulted in the top 30 profitable US drugs to create revenue that has outpaced the market demand just within the past five years. More astonishing, the growth in net profits for 20 of the leading drug companies around the world was caused by price increases within the United States.

 

The United States as a whole spends 40 percent more on pharmaceuticals than Canada, the next highest spender. However, on average Americans use more medicines than most other countries. Moreover, Americans have access to new drugs sooner than most patients in other countries. These facts do not completely explain why the U.S. spends more on pharmaceuticals, as drug prices for patented drugs are twice as high in the U.S. than in the U.K. Prices are much lower in other countries because the government has the power to regulate prices. The government can agree only to pay for a drug if they feel that the price is fair. More importantly, the governments have bargaining power over the drug companies.

 

Contrastingly, U.S. insurance companies generally accept the prices set by drug companies for each individual drug. When there are no competitors, insurers have almost no bargaining power. However, when there are competing drugs insurance companies have enormous bargaining power. The lack of consistent bargaining power has cost many Americans their medications. Almost one in five adults in the U.S. did not fill out their prescription or skipped doses due to the costs. Compared to Germany with one out of ten citizens not being able to afford their medications, the United States has a problem.   

 

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