The 5555 Percent Drug Price Hike: Who’s to Blame?

In August 2015, Turing Pharmaceuticals acquired the rights to Daraprim, a decades-old, lifesaving drug used to cure a rare parasitic infection. Shortly after this acquisition, CEO Martin Shkreli announced that the drug would retail for $750 per tablet, a 5555 percent increase over the previous price of $13.50. For weeks, this story dominated the headlines of news networks and newsfeeds on social media, causing biotechnology and pharmaceutical stocks to dip and prompting intense public outrage. 32-year-old Shkreli, a former hedge fund manager, faced blistering criticism from almost every sector of society, including patients, providers, advocates, celebrities, and political candidates across the spectrum—from Hillary Clinton to Donald Trump, who called the increase “a disgusting thing” and Shkreli “a spoiled brat.”  Insisting that the price hike was necessary because “[w]e need to turn a profit on the drug,” Turing faced what was perhaps one of the worst public relations crises in the industry. But the criticism towards Shkreli is simply shortsighted finger pointing, ignorant of the structures that allowed his perceived transgression.

Daraprim was discovered in the 1950s and was originally used for its antimalarial properties. However, researchers found it could be used to cure infections which lead to toxoplasmosis, a disease that can cause symptoms ranging from flulike symptoms to brain and eye damage. The more severe symptoms predominantly affect individuals with already weakened immune systems, such as the elderly and HIV/AIDS patients. As is often the case, this drug is most needed by traditionally marginalized groups that often face barriers accessing care. Toxoplasmosis is a relatively minor disease burden in the US; it causes about 4,400 hospitalizations each year and an estimated 327 deaths, according to the CDC. Only about 2,000 Americans are prescribed Daraprim every year, but, in those cases, it can be life-saving.

The drug received FDA approval in 1953, and GlaxoSmithKline, its original owner, made and sold it for decades. After the patent expired, generics were not developed as no drug manufacturers were interested in offering Daraprim for a lower price—primarily because the market was so small that it could not justify going through the expensive and arduous process of obtaining FDA approval for manufacture. You navigate here to learn about soldering on printed circuit boards and other methods to streamline your manufacturing process. Since the 50s, manufacturing and marketing rights for Daraprim switched hands many times before landing with Turing, which bought Daraprim for $55 million.

As executive chairman of Turing, Shkreli swiftly decided to increase the price of Daraprim and appeared on a number of television talk shows to justify his decision. His main defense was that the drug delivered a significant amount of value and ought to be sold at a price that allowed the company to make a profit. He often presented the metaphor that “[i]f there was a company that was selling an Aston Martin at the price of a bicycle, and we buy that company and we ask to charge Toyota prices, I don’t think that that should be a crime.”

The other major defense provided was the necessity of pricing drugs such that the profits can fuel future research and development. In fact, many pharmaceutical companies justify their pricing decisions by explaining that surplus revenues are needed to cover the cost of R&D, in addition to manufacturing costs. In this case, however, Turing did not conduct any R&D for Daraprim, but simply bought the rights from another company. Shkreli focused instead on the enormous amount of investment that is needed to fund the development of new and innovative therapies that Turing is working on. Many are outraged by this justification regarding future R&D costs because they believe patients should be paying for the drug they need, not for the drug and the costs associated with development of drugs in the future.

From a purely business perspective, Shkreli believed the price charged before Turing acquired Daraprim was extremely low and was not a wise business decision given the drug, its utility, and the market size. As a privately held entrepreneurial company, Turing bought Daraprim with the explicit intention of profiting from its sales. Indeed, Shkreli has a fiduciary obligation to investors and other stakeholders in the company to generate as much value as possible—a core tenant of corporate business in capitalist America. The price increase is, after all, completely legal and within the bounds of regulatory statutes governing the pharmaceutical industry, begging the question that Shkreli may have just been fulfilling his duty as CEO.

Patients suffering from toxoplasmosis are clearly impacted by the price hike. Although some of the most needy patients receive the drug at reduced or no cost, many patients—including those with employer-based insurance, private insurance, and Medicare—pay significant co-pays for prescription drugs. For these patients, the price hike made the drug much more expensive. Beyond the affordability at an individual level, the price hike has also decreased accessibility to the drug by making it prohibitively expensive for many hospitals, clinics, and other medical centers to obtain and provide Daraprim. Specifically, medical centers that serve primarily low-income patients have found themselves struggling to provide the drug to their hospitalized patients. For these reasons and the lack of an alternative to Daraprim, many have labeled Shkreli as an unscrupulous and money-minded businessman.

A number of professional organizations and patient advocacy groups have also denounced the price hike. For example, the Infectious Diseases Society of America and the HIV Medicine Association sent a joint letter to Turing calling the price increase for Daraprim “unjustifiable for the medically vulnerable patient population” and “unsustainable for the health care system.” Many HIV/AIDS advocacy groups have been similarly engaged in the controversy, as patients with HIV/AIDS comprise a large fraction of severe toxoplasmosis cases.

Although Shkreli’s price hike has been the subject of such public attention, it’s important to realize that Daraprim is not an isolated or unique case. Prescription drugs cost significantly more in the U.S. than in any other developed country. According to the International Federation of Health Plans, Americans pay anywhere from two to six times more than the rest of the world for brand name prescription drugs. Reuters London recently reported that, on average, US prices for the twenty top-selling drugs are three times higher than in the UK. There are many reasons for this, not the least of which is that pharmaceutical companies can set US prices wherever they please, largely free of government regulation or bargaining. In some ways, Shkreli and Turing Pharmaceuticals are taking the heat for a systemic flaw in the American healthcare system. The price increase was completely legal and, if we are truly as angry and disapproving as the public backlash suggests, we ought to change existing laws so as to disallow a Daraprim-like price hike.

Rafi Mohammed, a thought leader in the area of pricing, writes in the Harvard Business Review that “it’s easy to blame pharmaceutical companies.But pharmaceutical companies aren’t to blame. They’ve executed well on the rules set by the US government as well as the ‘make the most money’ dictum set by their stockholders.” He goes on to describe outrage at companies or their leadership as “short-sighted finger pointing,” his point being that we as Americans need to take responsibility and recognize that our system is set up in a way that encourages such price gouging due to our unique tolerance of free market reign. In the current system, we subsidize the cost of R&D for the rest of the world and allow pharmaceutical executives to price where they please, and if that is not okay with us, we ought to change it.

Anger is often directed at people like Shkreli and companies like Turing, but that energy could be much better spent if it were used to reform the structures which allow greater than 5000 percent price hikes. Shkreli and his team performed well within the goalposts that our government has set up for them. Personally, I disapprove of the price hike, but I prefer to focus more on where the goalposts are and how we should move them, rather than whether or not Shkreli made an unethical decision or whether or not the profit motive should be abolished in healthcare. Turing did announce their price would be decreased, so the public backlash did have an effect, but this should not satisfy us. Decreasing the price simply addresses a symptom of a flawed system without treating the underlying cause of loose governmental regulations. I would much rather see new policies that allow direct regulation and bargaining of drug prices, as exist in the UK, Canada, Norway, and most other developed countries, so that the profit motive and free market can still exist, but within more reasonably placed goalposts. Moving these posts, though, is no easy task, as the powerful pharmaceutical and insurance industries benefit immensely from the status quo.