The pharma price-gouging scandal

Pharmaceutical companies have hit the headlines for hiking prices for life-saving drugs by shocking amounts. What’s going on? Simon Wilson reports.


Martin Shkreli: international hate figure
(Image credit: © 2016 Bloomberg Finance LP)

Pharmaceutical companies have hit the headlines for hiking prices for life-saving drugs by shocking amounts. What's going on? Simon Wilson reports.

What's happened?

A year of bad publicity over alleged price-gouging tactics by big pharmaceutical companies, especially in the US, was capped earlier this month with the news that Britain's competition regulator, the Competition and Markets Authority (CMA), has slapped its biggest fine ever, some £84.2m, on Pfizer. The penalty, which the US-based multinational is appealing against, comes after the price charged to the NHS for a widely prescribed anti-epilepsy drug rocketed 24-fold (from £2.83 for 100mg to £67.50) between 2012 and 2013.

The CMA has also fined the drug's UK distributor, Flynn Pharma, £5.2m for charging unfair and excessive prices. And this month the regulator accused another multinational, Actavis, of ramping up prices of life-saving hydrocortisone tablets from 70p a pack in 2008 to £88 in March 2016 a 126-fold jump.

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What's going on?

Counter-intuitively, both these cases involve drugs on which the originator's patent had recently expired, meaning that other companies if they wished were free to develop "generic" versions. Typically, the pharmaceutical industry operates within a legal-moral framework that amounts to a kind of "social contract" with governments and consumers. The industry can charge premium prices for innovative drugs (it takes billions to develop them, after all), but only for a limited period.

Once a drug maker loses exclusive rights to sell a medicine typically between five and ten years after launch much cheaper "generic" copycat versions are supposed to flood the market, reducing the price of a pill to just a few pence. But in the cases found to be anti-competitive by the CMA, that didn't happen.

Why not?

A quirk of the regulatory system in the UK, designed to protect the NHS from excessive drugs costs, means that branded drugs still under patent are subject to price regulation. But once they go "off-brand" they are not. Normally the price falls as other players enter the market and become the default prescribed medicine. Indeed, in the UK, exclusive use of cheaper copycat drugs (where available) is the norm and doctors are required to write the generic name of the drug, rather than a brand name, on prescriptions. But sometimes, where no "me-too" generic product emerges, it means the original producer acquires huge pricing power.

Why would that happen?

For a range of commercial, scientific, regulatory and clinical reasons it sometimes makes no sense for a generic producer to enter the market. For example, if a particular drug is complicated to make and/or only a relatively small number of patients take it, generic producers will steer clear. In the case of the epilepsy drug Epanutin (which are capsules of phenytoin sodium, taken by about 48,000 people in the UK), the new price charged by Flynn was far more than Pfizer was charging in other European countries, but for clinical reasons the NHS had no choice but to pay: epilepsy patients who already take phenytoin sodium capsules should not usually be switched to another medicine due to the risk of loss of seizure control.

What about other countries?

The soaring cost of prescription drugs has become a massive political issue in the US, which has just 4.6% of the world's population but accounts for a third of spending on drugs, and is easily the largest and most profitable healthcare market in the world. In October 2015 Martin Shkreli, a 32-year-old pharma entrepreneur, became an international hate figure for licensing and then ramping up the price of a drug (Daraprim) given to Aids and cancer patients from $13.50 to $750 a pill.

Then, this year, the drug manufacturer Mylan was engulfed by a firestorm over the price of its EpiPen allergy medicine, which has jumped about 600% since 2007. Then, earlier this month, the firm that sold Daraprim to Shkreli, Impax Laboratories, again made headlines over price-gouging: it put a price tag of $884 on a mebendazole treatment for pinworm which is available over the counter in the UK for £3.50.

So drugs firms are raking it in?

Not as much as they used to. An annual report published earlier this month by Deloitte found that the returns on investments in research and development (R&D) by the world's biggest pharmaceutical firms have fallen to their lowest level in six years and are set to fall further. Projected returns for the world's 12 biggest spenders on R&D have fallen from a high of 10.1% in 2010 (the first year the survey was conducted) to just 3.7% in 2016.

Meanwhile, the average cost of developing a drug has jumped from just under $1.2bn to more than $1.5bn over the same period, according to Deloitte. And they found that downward pressure on pricing meant that peak sales ie, the point at which annual drug sales are highest, following patent approval had more than halved from $816m per drug in 2010 to $394m now. Price-gouging scandals are only likely to intensify this trend: around the globe drug makers face political pressure to control prices and deliver value for money (see below).

Can Big Pharma bounce back?

Big pharma share prices got a lift in the US after the election of Donald Trump. That's because Hillary Clinton had made drugs prices a major campaigning issue and had promised to crack down hard on unfair pricing. In recent weeks though, Trump too has promised to "bring down drug prices" and slash the national bill by hundreds of billions. Investors look sanguine: biotech stocks dipped 3% but then recovered.

However, according to GlaxoSmithKline CEO Andrew Witty, "it doesn't matter too much who won the election", because the "direction is already set" for big pharma: more controls and less pricing power. "The marketplace will still pay for innovation, but it is not going to pay blindly for innovation," he says.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.