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Price Gouging and the Dangerous New Breed of Pharma Companies

July 06, 2016

I met Tony in 2001 when he was sent to me with severe muscle weakness. Confined to a wheelchair and unable to care for himself, Tony had been told he had amyotrophic lateral sclerosis, or ALS, a fatal neurodegenerative disorder. It turned out Tony actually had Lambert-Eaton myasthenic syndrome, a rare but treatable neuromuscular disorder. After starting the drug 3,4 diaminopyridine (3,4 DAP), he regained most of his strength and, significantly, his ability to walk and care for himself.

For 78-year-old Tony, 3,4 DAP — which can be obtained at low cost from compounding pharmacies or for free through a compassionate-use program supported by a small privately held company, Jacobus Pharmaceuticals — is a lifesaver. But for Catalyst, the pharmaceutical company that purchased the North American rights to a slightly modified formulation of 3,4 DAP (Firdapse) in 2012, the drug represented a market opportunity to the tune of $300 million to $900 million annually ($60,000 to $100,000 or more per patient).

Although the FDA found Catalyst’s application insufficient and requested additional studies, approval remains possible. Tony and other patients like him live in fear that they will no longer be able to afford the treatment that has returned their quality of life. Sadly, Tony’s story is becoming an increasingly common and alarming refrain as countless patients, their insurers, and our health care system are literally paying the price.

There are, of course, many other examples of the emerging drug strategy in action, from Turing (whose actions under then-CEO Martin Shkreli provoked a backlash) to Valeant (whose moves sparked Congressional outrage and investigations that led to its CEO’s downfall) to Questcor. In 2001 Questcor bought the rights to Acthar Gel, which is used to treat infantile spasms, a rare form of childhood epilepsy. In 1950 two Mayo Clinic researchers were awarded the Nobel Prize in medicine for discovering ACTH, the active ingredient in Acthar. Half a century later, a company that did not contribute to the medicine’s creation raised the price of a vial from $40 to $23,000.

Pharmaceutical companies traditionally invest heavily in research and development. The costs required to bring a new drug to market vary widely — anywhere from hundreds of millions to upwards of $2.6 billion, as estimated by the Tufts Center for the Study of Drug Development in 2014. In many cases drug pricing justifiably reflects this investment. What’s troubling is that the emerging breed of pharma companies prioritize profits over drug discovery and manufacturing. They legally acquire the rights to existing drugs and charge exorbitant prices following FDA approval, all without ever having made meaningful research or development investment. In some instances, as is the case with 3,4 DAP, companies like Catalyst take advantage of other companies’ and scientists’ drug research and development without even manufacturing the product.

The number of companies using this model has not yet been quantified, but there’s evidence that the practice is particularly prevalent in the drug market for rare diseases. There are 7,000 rare disorders, affecting 25 million to 30 million Americans, and in many cases identifying an effective treatment for them is easier than for common illnesses, since the discovery of a specific genetic or molecular cause leads to targeted therapy. Ionis Pharmaceutical has been especially successful in creating a pipeline of these drugs, such as Nusinersen, a promising therapy for spinal muscular atrophy.

Yet the main reason the new kind of pharma companies has taken an interest in this market is that the Orphan Drug Act (ODA) substantially increases the potential profits. Since its passage in 1983, the ODA has governed approval of drugs for rare diseases and has incentivized pharmaceutical innovation via multiple tax breaks and seven years of market exclusivity. Now, though, pharma companies are taking advantage of these incentives to profit from individual patients and private and government insurers. According to EvaluatePharma’s 2015 Orphan Drug Report, this market makes up 20.2% of total global prescription drug sales and is growing by 11.7% annually, nearly double the growth rate of the global prescription drug market overall. Strikingly, 44% of new drugs approved in 2014 had orphan status, with seven of the 10 best-selling drugs being approved under the ODA.

The business model of the exploitative companies profoundly impacts our health care system’s ability to manage costs and provide care. My colleague Erin Fox, director of University of Utah Health Care’s Drug Information Service, recently provided an excellent example in her testimony before the U.S. Senate Special Committee on Aging. In 2015 Valeant acquired the heart drug Isuprel and promptly raised the price for a single vial from $440 to $2,700, citing a responsibility to shareholders to maximize profit. This 600% increase would have cost our hospital $1.6 million each year and forced us to remove it from emergency crash carts.

Our nation is confronting a crisis in health care costs. We spend $3 trillion annually on health care, 10% of which is for drugs. The average American spends more than $1,000 a year on prescription medications, 40% more than the next highest country, Canada, and double what Germany spends. Many people assume cost translates into quality care, but among developed nations our health care ranks in the lower half on measures of quality, access to care, and efficiency. In this context, the potential impact of the new breed of pharmaceutical companies is significant. When patients are unable to access treatments and when health care systems are forced to modify pharmaceutical supplies due to arbitrary and egregious price hikes, the quality of care suffers.

Hillary Clinton has proposed a $250 cap on out-of-pocket payments for prescription medications, and other presidential hopefuls have proposed speeding up the FDA drug-approval process. Surprisingly, Donald Trump endorsed a proposal that would allow government-run Medicare to set drug prices, an idea long supported by President Obama. But while these proposals each have their merits, they do not specifically address the costs of orphan drug pricing. Senator Bernie Sanders has proposed a particularly radical idea where manufacturers of innovative products would receive a substantial financial “prize.” This proposal would eliminate patents and exclusivity, which critics suggest would significantly hamper pharmaceutical investment in R&D.

But the ODA has been very successful in incentivizing pharma. The problem is not the prize itself but a failure to offer it only to the innovative companies that deserve it. The FDA should be freed to make this decision. The FDA must also be allowed to use R&D cost data and other relevant factors to determine whether a new drug is truly innovative or whether it merely repurposes an existing approved compound or monetizes an agent that has been available for decades (such as 3,4 DAP). The beneficial provisions of the ODA should be made available only to companies that have both invested and innovated.

In addition, the FDA should be permitted to sunset ODA incentives for a particular drug based on future performance. One of the reasons seven of the 10 best-selling drugs were approved under the ODA is that pharmaceutical companies seek approval for a rare disease even when a drug is primarily used for a common disorder. (Such “Trojan applications” are particularly common among cancer therapeutics.) The pharma companies behind the Trojan applications end up receiving the same incentives, for proportionately minimal investment, as true innovators who have invested billions of dollars in R&D on treatments for extremely rare disorders. In 1990 a proposal that orphan drug status be removed for drugs with annual sales of $200 million or that are approved for populations of more than 200,000 people made it through Congress but was vetoed by President George H.W. Bush. This idea deserves reexamination.

Finally, the United States is one of the only nations in the world that does not regulate drug prices. The federal government must be empowered to have a larger influence in this process.

The American College of Physicians (ACP) recently published a position paper in the Annals of Internal Medicine that calls for the government to take steps to curb drug prices. In addition to advocating for transparency in pricing and R&D costs, the ACP recommends many sensible potential solutions to the larger drug cost issue, including the need for professional societies and patient advocacy organizations to engage in the national discussion on drug pricing.

ACP also suggests that the Patient-Centered Outcomes Research Institute should be empowered and funded to study drug costs and their impact on patient outcomes. The results of such comparative-effectiveness research would be invaluable in informing drug pricing decisions. Another regulatory strategy to ensure that medications are priced according to their effectiveness is to create a post-FDA approval review mechanism to propose fair prices based on value to patients. We may consider borrowing a page from the United Kingdom, which has a government agency, the National Institute for Health and Clinical Excellence, tasked with determining whether medications are cost-effective.

The time has come for our nation’s drug approval process to respond to the thrilling era of drug discovery and value-based care. Behavior that has an inarguable role on Wall Street should not be allowed in health care.
