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What Martin Shkreli Is Counting On

So now that a compounding pharmacy group is moving in on Martin Shkreli’s business model for Daraprim, he’s got problems, right? I would like to think so, and I certainly hope so, but there’s a very similar example from the recent past that makes a person wonder. Remember Makena? That’s the progesterone ester formulation given to women at risk of preterm labor, and it made headlines a few years back. The FDA has a program wherein it encourages old drugs to be brought into the modern regulatory framework – if you’re willing to run the trials, you’re rewarded with several years of market exclusivity. My take on this is that the reward is excessive, and the FDA is overvaluing its regulatory powers in these cases. This system led to a steep rise in the price of colchicine, and it led to the same thing with Makena. In that case, it was a 100x price increase, even worse than Shkreli’s own plans.

There was all kinds of an outcry, and the FDA ended up by saying that they would not intervene if compounding pharmacies offered the same drug for less money. Makena’s owner, KV Pharmaceuticals, ended up going through bankruptcy (this wasn’t their only issue), and emerged as Lumara Pharmaceuticals, which was bought last year by another company. So how’s Makena doing now, four years after all the outrage? Matthew Herper points out that it’s doing just great, thanks. The compounded versions still have two-thirds of the market, but that leaves annual sales of nearly $250 million for Makena itself, at over 40x the price of the compounded formulations.

That might serve as an example of how far the drug business is from a free market. If rational economic actors were truly making decisions in their own interest, like the textbooks say, the same stuff could not sell for forty times the price and still command that much market share. The closest things you can imagine are luxury goods, the purchase (and display) of which are designed to signal “I have money to burn”. But Makena is not a luxury good. Its patients are not casually letting the package be seen as they pull it out of their purse, or dropping the brand name into their conversations. It’s the same drug.

As Herper says, that whole business model depends on some fraction of insurance payers rolling their eyes and just paying up, because, y’know, it’s just this one small drug and like whatever. I’m going to go all free-market and start quoting Milton Friedman. He said that there are three levels of economic decision making: when you’re spending your own money on yourself, when you’re spending your own money on someone else, and when you’re spending someone else’s money on someone else. Your care and attention decrease in that order. This situation, to me, looks like what happens when things end up in that third category. Some insurance companies may just automatically approve only the brand of the drug that has the explicit FDA paperwork rather than the one that the FDA says that they’re just going to allow anyway, or just not deal with compounding pharmacies (which have had their own problems). But it’s for sure that anyone spending their own money would be very unlikely to buy Makena. Or Daraprim. But it also seems depressingly sure that some insurance payers and health systems will just shrug and pay up. They shouldn’t. The fact that they do is a sign of a broken market.

Update: here’s Friedman’s framework for spending money. And I did leave out the category of “spending other people’s money on yourself”, which is surely everyone’s favorite.

21 comments on “What Martin Shkreli Is Counting On”

  1. Anon says:

    “spending someone else’s money on someone else”

    Isn’t that what every employee of every company does?

  2. MS says:

    It goes back to the fact that FDA regulation creates monopolies. Like it or not, that is the consequence of regulation. Companies spend money to get drugs through the regulatory pathway and to provide drugs with proven safety and efficacy, and then receive the power to charge any price. Of course, in this model they at least spend money to develop something- very different from Turing. Other than the price increase, Turing and Makena are not very comparable.

  3. anon too says:

    I guess Shkreli falls into the fourth category, spending somebody else’s money on himself.

  4. Anonymous says:

    I think bringing an old drug into the modern regulatory framework has got to be worth something. I mean how much cost/work/risk does that entail? If the exclusivity is not proportionate to that effort then the FDA rules simply have to be rewritten.

    I guess the other question is do we care about if these drugs are in a modern regulatory framework or not. They’ve been in use for decades and shouldn’t that be enough of a endorsement? On the other hand you might want to find out about the 2% patients who have cardiac problems in a specific subset population you were not aware of before.

  5. Hap says:

    Makena was worth something, but because of the large body of prior work, the regulatory data probably wasn’t worth what it paid. In T%@*&%’s case, the problem is the ability to close distribution, to deny other suppliers the ability to perform bioequivalence studies for approval. In that case, no one other than T&%#$* is getting any benefit at all. In both cases, the FDA probably doesn’t have the power to change the loopholes – they would have to be changed by Congress.

    The balance to strike for Makena would be harder than for Daraprim, The benefits for Makena are larger than they merit, and that probably should have been anticipated. On the other hand, no one intended ( I think) that generic drugs) would be rendered unavailable for bioequivalence studies. It seems to me that this would be a good idea for Congress to deal with – Republicans would be more likely to like the for-profit system as it is, and dealing with the ability to close distribution would remove some of the most obvious black eyes for pharma. (It infringes business’ right to not sell to who they don’t want to sell to, but if you wanted to be able to not sell stuff to who you don’t want to sell to, you should not be selling stuff in a regulated market.) Democrats might, but at least some would prefer to use the sins of T%&$* as an indictment of pharma in general. I don’t know why Congress hasn’t tried to fix it.

  6. Andy II says:

    Re a quote: “He said that there are three levels of economic decision making: when you’re spending your own money on yourself, when you’re spending your own money on someone else, and when you’re spending someone else’s money on someone else. Your care and attention decrease in that order.” There is one more, and that is what people cares most: spending someone else’s money on yourself. That is the model some companies have been doing if you replace “someone else” and “yourself” with pooled insurance money and your companies, respectively.

  7. anchor says:

    There are many pimps in the pharma business out there but this Martin Shkreli fella is way at the top! It is fair to say that he set the bar very high for pimping!

  8. flem says:

    you hit the nail on the head: criticism of drug pricing should be focused on the behavior and motivation of “payer” rather than the “pricers” . Furthermore these payers are in most cases not bearing the cost of their payments as they pass these on in one form or another to the end user. After all, drug are priced like any other products…. pricers will price what the payer will pay.

    1. Jons says:

      Your comment is wrong. If you leave paying decisions to the user, the user will pay whatever amount they need for drugs, because these allow the user to not die. How much would you pay to the person holding a gun to your head to put it down? You would pay not only all the wealth you had, but also what you could borrow. How much money would you pay for blood pressure medicine that would guarantee you would continue to live, even if only for one more day? The answer is the same as above. That is the problem with treating the healthcare industry as a regular market. Drugs end up in the hands of a few, and will buy out any competitors who spring up, because the profit potential is huge. The answer is price ceilings by the government for all medicines. They do it everywhere else but the US, and we rank lower on nearly every health category, including infant mortality, than any developed country, despite paying many times more per capita on health care.

  9. Do we know how insurance companies dealt with Makena vs compounded hydroxyprogesterone caproate? One-third of the market is still a minority of the market, and Turing probably couldn’t survive that kind of minority share of the Daraprim market, even at $750/pill.

    But the KV-Turing analogy is not exactly apples to apples. OB/GYNs have a history of using compounded formulations, and they used them BEFORE Makena received FDA approval. That’s not the same for Daraprim/pyrimethamine. There’s no compounding precedent for Daraprim, AFAIK. And, as a result, ID docs and/or their patients may not be particularly comfortable using compounded formulations of pyrimethamine, especially if 1) a patient’s insurance picks up the $60K+ tab for a course of Daraprim treatment, and 2) sick patients can get access to Daraprim before a compounded pharmacy comes through with a customized version of the drug.

    Drug equivalency and the perception of drug equivalency get at the heart of comfort with compounded formulations. I suspect that the API pyrimethamine in Daraprim and that in the compounded version actually come from a same or similar source.* But whether that probability resonates with prescribers and patients is another matter. It’d be a very nice public service if the FDA performed an analytic comparison of Daraprim and Imprimis’s compounded pyrimethamine like the agency did with KV’s Makena and compounded hydroxyprogesterone caproate (see here: http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm308546.htm). In that case, compounders came out looking pretty good.

    *According to the FDA’s DMF database, there are 2 active suppliers of API pyrimethamine: Fukuzyu in Japan (Daraprim’s source) and IPCA Laboratories in India.

  10. PorkPieHat says:

    So…..is there anything to stop Fukuzyu and IPCA from raising their prices, even a little bit? Might they be incentivized to receive a proportional benefit as an API producer as Tu-friggin-ring would receive for jacking up prices? What’s good for the Tu-friggin-ring should be good for Fukuzyu and IPCA. [Fukuzyu could fukuz-Tu-friggin-ring….heh,heh…sorry].

  11. Wile E. Coyote, Genius says:

    There is another way that the FDA can make it hard on Txxxxg. They have a compliance division. Frequent and intense visits to their GMP manufacturing by auditors can make it very unpleasant and expensive to do manufacturing of these very expensive, overpriced pills. If they dig hard enough, they could have reason to suspend manufacturing, such that the only drug available is that of the compounding pharmacies.

    it could be a very hazardous proposition for the rest of us, if the FDA took this approach and set that precedent.

  12. NJBiologist says:

    “Some insurance companies may just automatically approve only the brand of the drug that has the explicit FDA paperwork rather than the one that the FDA says that they’re just going to allow anyway…”

    Isn’t that a direct consequence of the insurance companies spending the past few decades disallowing reimbursement for non-approved uses?

  13. PorkPieHat: “So…..is there anything to stop Fukuzyu and IPCA from raising their prices, even a little bit?”

    Beats me, Beats me. (Since we both seem to be having trouble with double-posting at Derek’s blog.)

    I suspect that Fukuzyu and IPCA have other global customers for pyrimethamine, so maybe they have to set a consistent price across their global client roster. I really have no idea. At present, API pyrimethamine is cheap, though–like an average of $56/kg. That’s 0.14 cents per 25 mg (which is the quantity of pyrimethamine in Daraprim). In one listed importation of the API drug via Bangalore Air to Miami on September 25th (info via PharmaCompass), the per-kg price was $31.

    To your point, though, there have been significant price increases for Daraprim/pyrimethamine pills offered by online Canadian pharmacies, since the T-word’s price hike.

  14. Oblarg says:

    “That might serve as an example of how far the drug business is from a free market. If rational economic actors were truly making decisions in their own interest, like the textbooks say, the same stuff could not sell for forty times the price and still command that much market share.”

    I have a slight bone to pick here, in that there’s no reason that this sort of behavior would be restricted to markets that aren’t “free.” Markets are /not/ filled with rational actors, regardless of the regulations imposed on them. We see evidence of this everywhere. And even if the market were filled with rational actors, that says nothing of perverse incentives and dishonesty, which pop up pretty much orthogonally to regulation (of course, these can be induced by regulations – but they can be induced by the lack thereof, as well).

    I’ve also never quite understood what the standard for a “free” market is supposed to be, or how one measures “quantity of regulation” in general, given that the space of potential economic regulations is rather mind-bogglingly huge and there’s really nothing at all in common between markets with /different/ regulations (rather than “more” or “less”). After all, any market in a non-anarchic society has rules, so which rules can we deem the bare minimum for that market to be “free,” and why should we privilege those rules over others? I’m not sure that this idea is all that useful, to be frank.

  15. Emjeff says:

    I’m glad that Makena is doing well ( although called something else) because I thought what was done to them by the FDA was despicable. If data from two adequate and well-controlled trials is needed to market an old drug for an indication for which it has been used for decades, then, surprise!-the company marketing it is going to have to charge more. Trials cost big money, folks, so if the data are worth something,then pay up.

  16. Derek Lowe says:

    Emjeff, KV Pharmaceuticals actually didn’t have all that much to do with Makena getting back through the FDA – see http://blogs.sciencemag.org/pipeline/archives/2011/03/24/more_on_kv_and_makenas_pricing. As that post says, KV bought the drug program from someone who bought it from someone who used a study by the National Institute of Child Health and Development to get their clinical data. The FDA did ask them to do two post-approval studies, but they paid more to the earlier owner for the rights to the drug than they did for these studies. Trials of new drugs with new mechanisms cost big money – but these didn’t.

  17. Andy II says:

    ” here’s Friedman’s framework for spending money. And I did leave out the category of “spending other people’s money on yourself”, which is surely everyone’s favorite.” Thanks Derek for clarification. There is always something to learn….

  18. Oliver H says:

    If spending someone else’s money on someone else makes people so reckless with that money, how come that plenty of drug companies consider NICE anything but nice? With all due respect to Milton Friedman, his models keep running into problems upon empirical verification…

    I’d rather see it the other way round – insurance companies have an interest in being attractive to potential subscribers. As such, they sometimes decide to pay for things they shouldn’t pay for to appeal to customers who are seeking for someone who will cover it. Hence some health insurance companies in Germany have caused some dropped jaws among the scientific community when they decided to cover homeopathic remedies – but of course, plenty of people who believe in that nonsense flocked to them. And the US insurance companies paying for Makena likely tell their subscribers “We’re not cutting any corners – we’ll not be forcing you to take any drugs that haven’t been explicitly approved by the FDA.”

  19. Fat Old Man says:

    You are forgetting 2 important points that will negatively influence this jerk’s future market share:

    1. Makena is parenteral (injectable) and compounders have problems with sterility, so fear of another scandal could be driving its revenues. Daraprim is oral, no sterility problems.
    2. Daraprim has no market exclusivity or patent protection, no barrier to generic incursion, so I expect to see a generic approved at some point soon.

  20. Barry H. Levine says:

    A period of market exclusivity is the lever the USPTO uses to induce innovators to share our innovations with competitors. The FDA has no proper authority to offer it. Once a patent has run out, the matter is open by definition.

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