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.