11/18/2015 06:04 pm ET Updated Nov 18, 2016

Big PhRMA: Blatant Greed and Disregard for the Public Interest

The recent 5,000 percent overnight price increase of Daraprim brought the crisis of drug costs once again to the front burner of public discussion and outrage. Daraprim is a 62-year-old drug that is the standard of care for treating toxoplasmosis, a life-threatening parasitic infection. It was acquired a month earlier by Martin Shkreli, a former hedge fund manager turned CEO of start-up Turing Pharmaceuticals. Shkreli has admitted that the drug costs less than $1 a tablet to make, and that it sold for $13.50 a tablet until he increased the price to $750 a tablet. At 32, Shkreli had a checkered past on Wall Street, having started MSMB Capital, a hedge fund in his 20s, after which he lobbied the FDA not to approve drugs that he was shorting, then starting Retrophin, another pharmaceutical company in 2011, from which he was fired by its board last year for allegedly using it as his personal piggy bank to pay back angry investors. He remains unrepentent, now saying that "This isn't a greedy drug company trying to gouge patients, it is us trying to stay in business." (1)

This is not an isolated example, just the latest of a longer-term problem -- pharmaceutical companies buying up rare drugs, then making huge price increases. Of the 25 drugs with the fastest-rising prices over the past two years, 20 are owned or have been acquired by firms that were involved in hedge fund, private equity or similar speculative attacks during that time. As pharmaceutical companies, speculators and investors pocket enormous profits, patients lose as this pattern gets repeated time after time:

• "Speculative capital is used to acquire an existing branded drug
from an established pharmaceutical company.
• Because the drug is branded, no generic exists and the producer is
granted a monopoly on the sale of the drug.
• Once the acquisition is completed, the company drastically
increases the price of the pharmaceutical.
• Because no generic exists, customers who need the drug are forced
to accept any price dictated by the companies." (2)

As Dr. Marcia Angell, former editor of the New England Journal of Medicine, has documented in her excellent book, The Truth About the Drug Companies: How They Deceive Us and What to Do About It, Big PhRMA has a long history of exploitive pricing and business practices. Here are some of the ways by which they serve themselves with total disregard for the public interest:

1. Buy up drugs to avoid generics -- "pay to delay." Pay for delay agreements are frequently made by brand-name pharmaceutical companies to pay a generic competitor to hold its competing generic product off the market for a specified period of time, thereby avoiding competition for a lower-priced generic. The Federal Trade Commission has investigated many of these agreements and brought enforcement actions against some; overall they are estimated to cost American consumers $3.5 billion a year. (3)

2. Combine two old drugs and charge much more. Duexis is a pain-reliever that combines two old drugs, the generic equivalents of Motrin and Pepcid. When prescribed separately, the two together would cost no more than $40 a month, but about $1,500 a month as Duexis. Horizon Pharma, its manufacturer, has developed a system, "Prescriptions Made Easy" to circumvent efforts by insurers or pharmacists to switch patients to generic components, or even to over-the-counter versions. (4)

3. Exaggerate the costs of research and development. Although the drug industry claims to spend an average of $1.3 billion on R & D to bring out a new drug, an exhaustive 2011 study put that number at $98 million in U. S. dollars (5); moreover, about 85 percent of the industry's products are not innovative, just "me too" drugs, with a slight change in structure intended to replace a drug that is going off patent. (6)

4. Oppose price controls. The drug industry has long lobbied against price control and importation of drugs from Canada or other countries. As one example, Billy Tauzin, a former Democrat turned Republican Congressman from Louisiana, played a leading role in the design and passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA), which turned the prescription drug benefit over to the private sector and prohibited the government from negotiating drug prices. (7) As a result, the prices the government pays for prescription drugs under Medicare Part D is 73 percent higher than for Medicaid and 80 percent higher than for the Veterans Administration, (8) while the prices for the 30 top-selling drugs in the U. S. have risen almost four times as fast as the volume of prescriptions between 2010 and 2014. (9)

5. Deceptive direct to consumer advertising ((DTC). Although banned in many countries, DTC has burgeoned in the U. S. since the later 1990s, typically hyping the benefits of drugs and often selling us new "diseases," such as erectile dysfunction and low testosterone, and even the risk of disease, such as osteopenia for osteoporosis. DTC has led to exponential increases in drug sales and profits, encourages patients to engage in self-diagnosis and to seek specific medications from their physicians, who often respond to their requests. (10)

6. Phase IV drug trials, also known as "seeding trials," lack scientific credibility. They are typically run by drug companies' marketing departments, with harmful effects not publicized, as in the case of Pfizer's seizure drug, Neurontin, where later litigation documents showed that this "study" was more marketing than research. (11)

7. In an effort to reduce costs and increase profits, many drug companies outsource manufacturing of their drugs to other countries. In many cases, the quality of their products is thereby compromised. (12)

As a result of these kinds of pricing and business practices, Americans are forced to pay the highest prices in the world for pharmaceutical products. Gilead's new drug Sovaldi, combined with another agent into a single once-a-day pill for hepatitis C, will cure most patients over a 12-week course, but its cost of $94,500 will break the bank for patients, families and government payers at both federal and state levels. (13) Many newer cancer drugs cost more than $100,000 a year, with some priced even higher, such as Bristol-Myers Squibb's latest melanoma treatment at $250,000 over a year. (14) As a consequence of these costs, one in five Americans forgo treatment with these drugs. A recent poll by the nonpartisan Kaiser Family Foundation found that Americans across the political spectrum believe the cost of prescription drugs is their number # 1 health concern, with 63 percent calling for government action (even including 56 percent of Republicans). (15)

The cost of prescription drugs is becoming a campaign issue in the 2016 presidential election cycle. So far the Republican candidates have been mostly silent on the issue. Senator Bernie Sanders, who for many years favored Medicare using its bargaining power to negotiate drug prices, has introduced a bill in the Senate, the Prescription Drug Affordability Act of 2015, that would: allow importation of drugs from Canada, end "pay-for-delay," require more transparency from drug companies about their R & D and impose stricter penalties for fraud convictions of major branded drug makers. (16) Hillary Clinton is competing with Bernie on this issue by recently calling for capping out-of-pocket drug expenses at $250 a month, drug makers to spend a defined portion of their profits on R & D, allowing importation of lower-cost drugs from other countries, allowing Medicare to negotiate drug prices and ending tax breaks for pharmaceutical advertising. (17)

The cost of prescription drugs has reached crisis proportions in this country. Patients, families and government payers can no longer afford the outrageous costs by an out-of-control drug industry that puts greed over the public interest. This problem can be fixed with broad non-partisan support and political will that challenges PhRMA.

1.Pollack, A. Drug goes from $13.50 a tablet to $750 overnight. New York Times, September 20, 2015.
2. Hedge funds attack American health care. Hedge Clippers, September 30, 2015.
3. FTC Staff Study. Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions. Federal Trade Commission, January 2010.
4. Pollack, A. Drug makers sidestep barriers on pricing. New York Times, October 19, 2015.
5. Light, DW, Warburton, R. Demythologizing the high costs of pharmaceutical research. BioSocieties, 2011, pp. 1-17.
6. Light, DW (ed) The Risk of Prescription Drugs. New York. Columbia University Press, 2010.
7. Adamy, J, Hitt, G. CEOs tally health-bill score. Wall Street Journal, October 19, 2009: A3.
8. Gower, K. Big PhRMA price-gouges Medicare Part D, study shows. Public Citizen News, September/October 2015, p. 13.
9. Walker, J. Price increases drive drug firms' revenue. Wall Street Journal, October 6, 2015: A1.
10. Rosenberg, M. Fourteen years of deceptive television drug advertising. Reprinted from Public Citizen's Health Research Group in Health Letter 27 (5): 7, 9, 2011.
11. Krumholtz, SD, Egilman, DS, Ross, JS. Study of Neurontin: titrate to effect, profile of safety (STEPS) trial. Arch Intern Med 171 (12): 1100-1107, 2011.
12. Loftus, P. New lapses at J&J's Doxil supplier. Wall Street Journal, December 9, 20122: B4.
13. Rockoff, JD. Once-a-day hepatitis pill approved. Wall Street Journal, October 11-12, 2015: B1.
14. Loftus, P, Winslow, R. Melanoma treatment will cost $250,000. Wall Street Journal, October 2, 2015: B2.
15. Perrone, M. Drug prices top Americans' list of health care concerns. The Washington Post, October 28, 2015.
16. Sanders, B. Statement. The Prescription Drug Affordability Act of 2015. September 10, 2015.
17. Healy, P, Sanger-Katz, M. Hillary Clinton proposes cap on patients' drug costs as Bernie Sanders pushes his plan. New York Times, September 22, 2015.