On Drugs: Creative Business Models

Stories have flown around the internet on wings of outrage and indignation at the profiteering of entrepreneurs who increase the cost of life-saving drugs astronomically overnight. Is this capitalism gone wrong? Obviously, many would answer. While I understand such a visceral reaction, I want to explore why it might have looked like a good idea at the time, even though the public outcry doesn’t make it look very attractive now.

What started the furor: Reports of two examples of small companies (Turing Pharmaceutical and Rodelis Therapeutics1) abruptly increasing the price of certain drugs by factors of 50 or more. These drugs are for serious illnesses (toxoplasmosis or drug-resistant tuberculous, respectively) where there is little choice in therapy, although only a small fraction of the population needs treatment. Both medicines had been around long enough that any patents would have expired so generics could be made if there was interest from another manufacturer. A primer on the intricacies of the business of drugs is in this2 footnote.

I can imagine how the reasoning might go in a decision to jack up the drug price (I’m not defending the decision, just trying to imagine a credible strategy). In order to keep the drugs in the company’s inventory, to make them a product that contributes to the bottom line in the way that investors like to see, the price could be increased. By ensuring the drugs remained on the company’s product list, the price increase would ensure the drugs were available when people needed them. Another rationale is the purely economic perspective: if the price is increased and people still buy the product then there is additional value in the product and the increased price is justified. Good old fashion capitalism.

Something about this argument doesn’t feel right, perhaps because of the nature of the business of healthcare. In many cases, it’s possible the price increase will be paid by insurance or government programs, so there’s ethical impunity for the company. People will still get the medicine they require regardless of the price. Drug prices skyrocket, because they can.

Certainly there are a number of drugs for rare conditions that cost hundreds of thousands of dollars per year, that are approved and paid for by insurance companies3, a model the small pharmas may have been trying to imitate.

Are recent events merely a symptom of the business of medicine? At first glance, drug development looks like a business with the potential to bring much good to many. Consider:

  • A tremendous effort is required to develop and test drugs to be sure they are effective.
  • Testing new drugs is risky business: Risk that all of the investment will evaporate into proving the drug is not useful and risk for the patients and their loved ones (that the drug will not improve their health or make it worse). There is the potential for greater good too, as a new cure, or better treatment, may be discovered which helps many more people.
  • Approved drugs improve the lives of many, but some cause serious side effects in a fraction of those who take the drug. The regulatory bodies (such as the FDA and HPFB) endeavour to weigh the benefits with the risks and ensure there is full disclosure of the potential side effects. Most of us have benefited from prescription drugs at some point in our lives, heaving a big sigh of relief when the antibiotics overthrow a bladder infection or a painkiller make a nasty broken ankle bearable.Unfortunately, drug development sometimes unintentionally violates the ‘do no harm’ principle, because it investigates the unknown. Some might argue that this is unacceptable, no one should be subject to the potential of such danger. However, look into the eyes of someone with an incurable disease, and suggest there is an untried drug that might bring relief, and tell me ‘no harm’ is being done by denying hope.

Is the pharmaceutical industry really for the greater good?

  • Do they profit from people’s misfortune or provide relief from suffering?
  • Do they over-promise on the benefits of their products? We have laws and regulations on disclosure of efficacy and side effects. Few medicines are 100% effective or without side effects.
  • Side effects happen, sometimes very severe side effects, like death, occur in a very small segment of the population that takes the drug. Is it acceptable to offer someone a potential cure with a small chance of mortality? The philosopher Kant might say no.

Am I off topic? The controversy was, after all, about the price of the drugs. How do we determine an appropriate price?

  • Some countries do price drugs on pharmaco-economic grounds – the price must be justified by indirect indicators of the suffering it relieves.
  • Orphan drug prices are justified by costs, an argument that might be applied in the current cases. The price is required to make a good business case for continuing to provide the drug. Full rigorous disclosure of all the costs of testing, manufacturing, selling, and distributing the drugs might make it easier to swallow the pricey pills.
  • Selling drugs is business, so it should be measured up against the same standards as any business.

The drug-selling business is fraught with controversy, because it combines two ingredients that often don’t mix well: capitalism and human well-being. The complexity of the healthcare system, with disconnected consumers, providers and payers, makes any analysis of the rightness or wrongness of a situation difficult. In a moral world, each person would get the best care modern medicine could provide, but never at the expense of anyone’s well being. A fantastic ideal, a hard thing to provide.

1 For example http://www.cbc.ca/news/health/turing-clinton-prescription-drugs-1.3238202 (Turing) and http://www.cbc.ca/news/health/tb-drug-price-cycloserine-1.3237868 (Rodelis). From the reports I’ve seen, since the news stories broke on Sept 22, Rodelis rescinded most of the cost increase and may no longer sell the drug, while Turing has announced a price decrease.

2 Prescription drugs are complicated from a business perspective. Some general concepts:

  • The right to sell a drug may be protected by patent, but even with the patent, approval to sell the drug is needed.
  • Approval comes from a regulatory board on a country by country basis, and requires significant clinical testing to prove the drug does what it is supposed to and is safe.
  • In addition, the drug may have a trademarked brandname (e.g. Viagra) initiatlly owned by whoever registered the trademark.
  • None of these three rights to a drug need to be held by the same entity. They aren’t very useful one without the other, but each right can be sold or licensed. When the patent expires the other two rights remain.
  • Generic drugs have the same active ingredient as a name brand, and are sold without the name brand after the original period of exclusivity has expired. Generic drugs must be proven equivalent to the approved name-brand but aren’t required to go through the testing again to prove effectiveness because they are the same active ingredient as the name brand. Once patent protection on the name brand drug expires, other drug makers can apply to sell generics. If multiple generics enter the market, the price comes crashing down.
  • Then there’s the ‘buying’ decision – it isn’t the consumer (the patient), nor is it usually the payer (insurance or government), it’s the physician who decides which drug to prescribe, although often insurance companies and government formularies limit what they pay for.
  • A single prescription drug, such as Lipitor to control blood cholesterol, brings in annual revenues of billions of dollars. This is the sort of business the pharmaceutical companies deal in typically.
  • In order to encourage companies to make drugs for rare conditions, there are programs like the FDA’s which offer tax breaks and waive fees. However, many orphan drugs cost hundreds of thousands of dollars a year for one patient.

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