September 14, 2016

Any Solution to Pharma Price Increases Must Tackle Regulations

Sherzod Abdukadirov

Former Research Fellow
Summary

If we want to avoid similar drug price increases in the future, we need to reduce regulatory barriers in order to encourage innovation and foster greater competition in the pharmaceutical market. Otherwise, we will remain at the mercy of the big pharma companies charging monopolistic prices.

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A recent decision by Mylan, a drugmaker, to raise the price of its popular EpiPen auto-injector to $600 for a pack of two led to a backlash from both consumers and lawmakers. Company CEO Heather Bresch found herself in the hot seat as several members of Congress called for hearings into the potential price-gouging. Under pressure from lawmakers and the general public, the company had to backtrack from its original price increase.

In an interview, Bresch tried to blame the "broken system" for the company's decision. While many remained unconvinced by her argument, she does have point. Our drug development system is broken: It is extraordinarily expensive, and it takes almost a decade for a new drug to be brought to market. This deters investment and reduces competition, which allows big pharmaceutical companies to enjoy monopolistic powers in many classes of drugs. While this does not absolve Mylan and its CEO of responsibility for exploiting the situation at the expense consumers, any long-term solution to the problem must deal with the complex regulatory system that enables unscrupulous actors in the first place.

What happened with EpiPen is both typical and unusual. First, Mylan's decision to jack up the price of its pharmaceutical product is not out of the ordinary. A recent Government Accounting Office (GAO) report found over 300 incidents when drugmakers dramatically increased prices between 2000 and 2008. While most of the extraordinary price increases ranged between 100 percent and 500 percent, a few increases were as high as 10-fold. It's easy to see how pharma executives could look at this data and decide that they can drastically increase their prices with little controversy. So Mylan's decision fits into a broader trend of drug pricing strategies among pharmaceutical companies.

What is unusual in Epipen's story is the anger and severity of the backlash that this particular drug increase engendered. The company attracted both public and congressional scrutiny. It was forced to take numerous measures to appease the public. It announced that it would subsidize the drug's cost, increase co-pay assistance for low-income patients and finally introduce a generic version of its branded product. Since Mylan's decision to increase prices was in large part driven by the threat of imminent competition from a generic version of EpiPen, the last measure seems to be especially ironic. In hindsight, Mylan's decision was clearly a mistake.

Second, it is quite common for many pharmaceutical products to face little competition and enjoy monopolistic pricing powers. The GAO report indicates that lack of competition was behind many extraordinary drug price increases. In large part, such lack of competition is caused by the high drug development costs, which, according to a recent estimate, exceed $2 billion. These high development costs, driven in large part by complex regulations, deter many would-be entrepreneurs from developing new drugs. Consequently, for many drugs, there are few competing alternatives.

What is also unusual in the EpiPen's saga is the combination of both artificially increased demand and reduced competition. On the one hand, the federal and state legislation have dramatically increased the demand for EpiPens. Congress passed a law in 2013 incentivizing schools to stock up on EpiPens. In addition, 11 states require schools to stock epinephrine.

On the other hand, a series of events led to reduced availability of alternatives to EpiPen. In October of last year, Sanofi recalled and later discontinued Auvi-Q, the main competitor to Epipen. Then in February of this year, the Food and Drug Administration denied Teva's application to produce a generic version of Epipen. These events gave Mylan a virtual monopoly on the market. With no competitors to challenge it, Mylan was in a position to charge considerably higher prices.

Public backlash led Mylan to reverse its actions and reduce EpiPen prices. The same did not happen for many other drugs. If we want to avoid similar drug price increases in the future, we need to reduce regulatory barriers in order to encourage innovation and foster greater competition in the pharmaceutical market. Otherwise, we will remain at the mercy of the big pharma companies charging monopolistic prices.