Rising Drug Prices

Courtesy of Clint Isom
Courtesy of Clint Isom

By Matthew vonAllmen

Staff Reporter

Iclusig is a leukemia drug. Approved by the FDA in 2012, it inhibits the growth of cancerous cells. It could save lives—if anyone were wealthy enough to afford it. Since Iclusig’s launch its price has increased by seventy-two percent, from $9,580 to $16,560 per monthly prescription. In response, Senator Bernie Sanders and Representative Elijah Cummings sent a public letter to Ariad Pharmaceuticals, the company which holds Iclusig’s patent. The two politicians demanded an explanation for the price hikes, and requested that Ariad justify its decision.

For the popular press, this is nothing new. Martin Shkreli infamously hiked the price of Daraprim, an expensive AIDS medication. Mylan raised the price of EpiPens, used to protect those with life-threatening allergies. Both hikes drew the nation’s attention over the course of 2016. Public discourse tends to conflate these price increases, condemning each as the actions of greedy executives. This does an important issue a disservice. The United States healthcare system is a complex beast; blaming individual companies for their price changes risks mistaking the trees for the forest.

Iclusig, for example, is a brand-name variant of ponatinib, a kinase inhibitor. At present, there is no generic version of Iclusig. Ariad enjoys a legal monopoly until 2026, when its patent expires. This makes Iclusig price hikes par for the course; without competitors, there is nothing to stop Ariad from charging consumers whatever maximizes its profit margins.

There is an economic rationale for granting these legal monopolies. Most goods—hamburgers, chairs, and houses—are both rival and excludable. Rivalry refers to whether one person’s consumption of a good prevents its consumption by another. Two different people cannot eat the same hamburger. Excludability refers to whether it is possible to prevent others from consuming a good. If a wealthy individual constructs an especially scenic house, he or she cannot stop a passerby from viewing it. Merely owning the house does not make one sole possessor of its benefits to the community.

Drug development is, under ordinary circumstances, neither rival nor excludable. If one company invents a life-saving medicine, the formula can be shared among infinite other companies without the original inventor forgetting how the drug is made. This demonstrates nonrivalry. Furthermore, if this hypothetical drug is marketed to consumers, a second company which does not know the formula can purchase some of the drug for itself. With a bit of reverse-engineering, this new company can discover how to produce the drug on its own—without investing countless dollars into development. This marks drug development as nonexcludable.

Goods which are both nonrival and nonexcludable tend to be underprovided by private institutions. There are simply too many incentives for companies to leech off the actions of their competitors. It is possible to fix this problem in a variety of ways, but only the lottery of history decides which solution becomes dominant. The United States’ historical lottery selected the patent system. It grants exclusive marketing rights to a single company, turning a nonexcludable good into an excludable one, which incentivizes drug development to move closer to a social optimum.

Given that patented drugs can be expected to carry weightier price tags, Senator Sanders and Representative Cummings’ letter seems out of place. Surely these elected officials understand the system over which they preside. The congressmen’s protest makes more sense, however, when one considers their circumstances. Senator Sanders is currently supporting California’s Drug Price Relief Act, which would require California’s state agencies to purchase prescription drugs at prices no higher than those faced by the Department of Veterans Affairs. Californian voters will decide whether to adopt the Drug Price Relief Act by way of referendum this November, via Proposition 61. Any public outrage Sanders can direct toward the pharmaceutical industry could increase turnout in his favor. During a recent rally for the upcoming referendum, the US Senator joked that a single tweet about Ariad’s Iclusig pricing caused the company’s share prices to fall fifteen percent. Sanders sent the tweet on October 14th; his joint letter with Cummings was sent on October 20th. This is political theater, albeit very effective political theater.

However, Mylan’s EpiPen price hikes are another matter. Unlike Ariad Pharmaceuticals, Mylan only holds the patent to a specific type of epinephrine autoinjector; epinephrine itself is off-patent. It was first synthesized in 1906, and costs 10 cents per EpiPen injection. Yet prior to its infamous five hundred percent price hikes Mylan charged $50 per EpiPen. That EpiPens are so expensive should be no surprise; Mylan controls ninety percent of the market share for epinephrine autoinjectors. Mylan maintains this near-monopoly by strategically locking out competitors. The company has several tools at its disposal. Mylan has repeatedly shot down potential competitors with litigation, typically by claiming that the competitors’ designs are too similar to that of the EpiPen to avoid patent infringement. Those that escape this legal sledgehammer are dismissed by the FDA, making it illegal to market a generic alternative.

One such company, Adamis, attempted to avoid the patent on injectors by simply marketing pre-filled epinephrine syringes. The FDA noted that Adamis had performed several studies proving safety and effectiveness, but ultimately rejected the product. The agency claimed Adamis’s tests were inconclusive. Another company, Teva Pharmaceuticals, was sued by Mylan and several collaborators after submitting an application to the FDA for a generic alternative to the EpiPen. The companies settled in 2012, allowing Teva to market its product pending FDA approval in exchange for undisclosed sums of cash. The agreement only permitted Teva to sell its generic alternative after 2015, but the FDA rejected Teva’s application earlier this year.

Some companies manage to make it past both the FDA and Mylan’s crack team of litigators, but nevertheless cannot compete effectively. Sanofi is a prime example. The pharmaceutical company only managed to receive approval from the FDA after changing the name of its product from “e-cue” to “Auvi-Q”—the former was apparently too aesthetically unappealing for the FDA’s tastes. Unfortunately, Sanofi then proceeded to recall all its products after unconfirmed reports of incorrect dosage delivery. Other companies, such as Sandoz, fail to overcome either the FDA or Mylan. Sandoz remains in a legal wrestling match with Mylan that started in 2010, in a familiar argument over patent infringement.

There is only one EpiPen competitor that has survived these brutal trials: Adrenaclick. This alternate system doesn’t infringe on the epinephrine autoinjector patent, received approval from the FDA, and is still on the market today. Unfortunately, Mylan has one last trick up its sleeve. Ordinarily, pharmacists in the US have the authority to substitute a generic version for a requested brand-name drug—similar to how someone might provide a tissue of any brand when asked for a Kleenex. EpiPens, however, are not treated as interchangeable with Adrenaclicks. Unless a doctor explicitly prescribes an Adrenaclick, pharmacies are legally required to provide an EpiPen to a patient with an EpiPen prescription. This hamstrings Adrenaclick as effectively as any of Mylan’s more overt methods.

The list of dispatched competitors is endless. Mylan’s crude legal tactics are not only aimed at drug companies, however; in 2012 Mylan launched EpiPen4Schools, a program that sold EpiPens at a discount to the American educational system. The catch? Each participating school was banned from purchasing EpiPen competitors for the next year.

If it is any consolation, at least one group of people has benefited from this legal nightmare: Mylan’s shareholders. In 2015 forty percent of Mylan’s profits came from EpiPen sales, and Mylan’s stock prices had risen to over twice their pre-hike value.

The situation is less bleak than it appears. Recently, EpiPen4Schools came under fire for violating anti-trust laws, Auvi-Q announced a return to the market by 2017, and Adrenaclick stepped up its advertising. If Adrenaclick can gain a foothold in the market during this turbulent time, it might stand a chance against the EpiPen in later years.

In the meantime, the American public needs to do some serious introspection. Ariad’s price hikes are a sign of a smoothly functioning healthcare system. Mylan’s are the result of legal abuse. In an ideal world, politicians and citizens alike would be able to differentiate between the two. Unfortunately, political expediency makes this impossible. It is impractical to ask the American people to remain ever vigilant, poised to publicly shame companies whenever they act in dubious ways.

The alternative to popular discretion is consistent institutional rules. It’s about time we designed some.



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