Yes, that $750 generic pill is a pure artifact of regulation

As you probably know if you follow the news, a man named Martin Shkreli in charge of a startup firm called Turing Pharmaceuticals bought the rights to a drug called pyrimethamine (brand name Daraprim), used in the treatment of AIDS and malaria, and announced that he was jacking up its price from $13.60 to $750. Massive outrage resulted, which has echoed through social media for the past week.

Pyrimethamine is long since off patent. It is not difficult to manufacture, and sells cheaply in Europe. But under the distinctive food and drug laws of the United States you can’t just start turning out pills in your factory to compete with Shkreli, at least not without compiling and submitting a huge pile of regulatory paper with the U.S. Food and Drug Administration. This calls on the services of lawyers and scientists, costs a lot of money, and takes time, and you might or might not be able to recover the costs from the relatively small pool of users.

Alex Tabarrok and commenters explain, and pharmaceutical blogger Derek Lowe has much more detail in a series of posts:

The FDA grants market exclusivity to companies that are willing to take “grandfathered” compounds into compliance with their current regulatory framework, and that’s led to some ridiculous situations with drugs like colchicine and progesterone. (Perhaps the worst example is a company that’s using this technique to get ahold of a drug that’s currently being provided at no charge whatsoever).

Among laws that used the “marketing exclusivity” technique to award monopolies on older drugs, on the logic that otherwise no one would step forward to handle the heavy costs of getting those drugs regulatory clearance, were the Drug Price Competition and Patent Term Restoration Act of 1984, better known as the Hatch-Waxman Act, originally introduced by Sen. Charles Mathias (R-Md.), and the Orphan Drug Act of 1983, introduced by Rep. Henry Waxman (D-Calif.) (We covered the issue briefly in this 2011 post.) In various ways that backers appear not to have foreseen, opportunistic actors have succeeded in seizing the legal-monopoly status made available for various compounds without always providing as much public benefit in return as had been expected. To enforce their legal monopoly, some of these companies sue rival drugmakers to force them to pull their competing offerings off the market.

Underlying it all — but seldom asked — was whether the gigantic costs of regulatory approval are really a necessary evil. Libertarian-minded critics were especially inclined to question whether hugely expensive studies and paperwork should really be required in the case of grandfathered or “generally recognized as safe” drugs, many of which have been familiar to the medical profession for decades or even centuries, allowing for a collective sense to emerge of their safety and effectiveness. But the view that progressives tended to champion — which prevailed — was that older compounds and those used for rare diseases should be held to no less stringent a standard than any other, and should either be withdrawn from the market or have their safety and effectiveness proved at someone’s expense.

At the Niskanen Center, Will Wilkinson ties together several of these themes. “Martin Shkreli… bought himself a monopoly made entirely of health-and-safety red tape,” he notes. The most-hated businessperson of the year is “cashing in precisely because the American pharmaceutical market is so far from free.”

Meanwhile, today’s moralistic politicians denounce the resulting fiasco without acknowledging the role of yesterday’s moralistic politicians in helping to bring it about (cross-posted in adapted form at Cato at Liberty).

More: “if another company wanted to compete to sell the same medicine [Daraprim], it would need to apply for a new generic drug approval, by submitting an ‘Abbreviated New Drug Application’ to the FDA. Filing one of these applications with the FDA used to cost as little as $1 million; today it can run as high as $20 million, sometimes more. …On average, it takes about 50 months for the FDA to approve a single generic application.” [Scott Gottlieb, WSJ] To clarify what I should have spelled out above: while exclusivity grants under the 1983 and 1984 laws have been associated with price jumps for a range of older drugs, the ANDA obstacle to entry by itself accounts for Shkreli’s monopoly position, which he cleverly amplified by sharp practices described by Ronald Bailey: “First, he apparently talked Impax [a predecessor holder of the sole FDA rights to market Daraprim] into starving the wholesale market of the drug, so that when Turing completed its purchase of the rights there were no extra pills floating around. Next, he set up an exclusive distribution network as a way of preventing potential competitors from obtaining enough Daraprim to conduct [the equivalence] trials for the FDA” necessary to develop an ANDA so as eventually to challenge his regulatory monopoly. And Scott Alexander at Slate Star Codex adds the Daraprim episode to a list of calamitous failures of generic drug regulation.


  • Totally agree regulatory constraints are bad for a free market and a truly free market could have prevented this. However, it does not change the fact that Shkreli is an ass. Plain and simple. Companies (most at least) balance their profit with community good. The cost hike on this pill will likely place it off use for every insurance provider and out of the reach of most individuals. Free markets help the consumer and highly regulated markets are a consumer’s enemy. Also, companies that take advantage of monopolies at the expense of the consumer are also the enemy. Look into Shkreli’s background. He is a patent pariah. his isn’t an exception, it is the norm of how he does business.

    Shkreli is still an ass and deserves the wrath of the internet.

    • I don’t think anyone’s out to defend Shkreli here.

    • Indeed, an ass he is. But that is not the point. There are several instances where perverse incentives created by terrible laws bring out the worst in people. One example that always comes to mind (not trying to compare the two situations, just drawing a parallel) is the illegality of drugs. Can anyone defend drug lords who order the murder of people willy nilly? of course not. That does not change the fact that the violent drug lord would most likely not exist at all if drugs were not illegal in the first place, and that is why many people do not focus on the crimes of an individual monster, but instead on how the broken system lends itself to the worst individuals in society. So yes, Shkreli deserves all the rage coming to him. However, it is sad that most of that rage is also directed at a “broken free market system” and the “greed” of pharmaceutical companies. This wouldn’t be happening if it weren’t for some seriously questionable policies that have nothing to do with free markets.

  • Oh.

    Somehow this information did not stand out in the barrage of righteousness that exploded when this story first broke. I am glad you told me.

    I am just so sorry that I did not figure it out for myself, even though I think myself to be a well-informed Libertarian.

    Thank you. Cato, you rock !

  • Government-created monopolies create winners and losers. Most winners don’t get the negative publicity Shkreli did, so they make their millions and nobody is he wiser.

    No point being PO’ed at Shkreli. Put the blame where it belongs” squarely at the feet of the FDA. This is HARDLY the worst thing they’ve done to all of us.

    With a functioning free market in place, we would’t NEED to worry about “rules” to keep people from taking advantage. Guys like Shkreli would know that a big increase would invite competition, so they’d be more reasonable.

    No, this is nobody’s fault but our government.

  • […] is the FDA to blame? As Walter Olsen of the Cato Institute explains, federal regulations that prevent competition between drug companies are what really allowed Shkreli […]

  • […] He couldn’t do it if our drug regulations weren’t so screwed up. […]

  • […] A rejoinder worth reading on labor markets by George Mason economist Bryan Caplan to the pseudonymous “Scott Alexander,” who writes the popular Slate Star Codex blog [Caplan first, second, third posts, all responding to this critique-of-libertarianism FAQ] If you don’t read Alexander, some of his top posts are here (especially strong on questions of medicine/health care and the way social justice language has developed into a tool of power). Also check out his recent post on the Daraprim mess and the wider failure of generic drug regulation [earlier on which]. […]

  • So, the companies have managed to make the FDA their unwitting associate in fleecing the Public, and people are blaming GOVERNMENT Reguation for this?! Why not blame the monopoly minded “Free Enterprisers” who are primarily responsible?

  • ” Why not blame the monopoly minded “Free Enterprisers” who are primarily responsible?”

    Because they are not primarily responsible. Your suggestion that the FDA is somehow an unwitting participant in this is outright laughable. The FDA created the regulations which makes obtaining a monopoly on an off patent drug possible in the first place.

    The monopoly could not be either created or sustained without the actions of the FDA.

    Also, calling the monopoly minded “Free Enterprisers” is just plain ignorant.

  • Yes, since its gov’t regulation that closes our borders off to off-shore mfgs, absent lengthy and (in the case of low volume generic/off-patent drugs) prohibitively expensive testing regimes which require the tacit cooperation of the company you intend to compete against in order to be successful. AND since its gov’t regulation that gives companies monopolistic protection for lengthy periods on-patent, allow patent extensions for flimsy reasons (in addition to writing on paper, we’ve just discovered that our patented medicine “pencil” also writes on cardstock – please extend our patent), and allows exclusive distribution rights for some off-patent medications.

    The first step is admitting the gov’t made a mistake, then going back and adjusting the legislative incentives and penalties to drive new (and hopefully, preferred) behaviors. That’s not to celebrate the companies who, perfectly legally, engaged in some of the most morally repugnant examples of crony capitalism in recent history – but it is more effective long term than sternly worded moral reproach and 15 days of infamy on Facebook.

    The legislators responsible pander to the mob with their public shaming of a few egregious examples, all the while pretending they didn’t benefit from or help create the situation in the first place. That’s either an admission of incompetence on their part in the drafting, or a wink and a nod while lining their pockets. Either, I feel, is a valid basis to vote someone else into their chair, assuming there is some better candidate available, but at some point, I’m willing to take my chances with an unknown instead of continuing the corruption.

  • […] on the Daraprim episode and the fiasco of FDA generic-drug regulation [Watchdog, earlier here and here] More: Ira Stoll/N.Y. […]

  • […] $750 generic pill, it might be on the way to generating a $1 alternative [Bonnie Kristian/Rare, my earlier take] Still, it’s a little more complicated than that, as Alex Tabarrok […]