Science & Research

Article outlines strategies to lower generic drug prices

Licenses, contract, futures market among suggestions for making generic drugs affordable

Staff Writer
Tuesday, November 10, 2015

The pharmaceutical executive Martin Shkreli made headlines this summer when he raised the price of a generic drug by over 5,000 percent. Led by Clay Wiske MD ’16, a team of researchers presented strategies to prevent such price spikes and increase competition in the markets for generic drugs in the United States. Their article was published online Oct. 29 in the Journal of the American Medical Association.

When a pharmaceutical company patents a drug, the company enjoys 20 years of exclusivity to manufacture and sell it. After the patent expires, another company can enter the market and reproduce the same drug, which is then referred to as a generic drug.

The first generic manufacturer has a monopoly on the generic label during a 180-day period, after which other firms can rush into the market in an effort to make money while the price is high. An increase in the number of suppliers causes the price of the drug to drop and firms to start leaving the market, according to the article.

“Prices spike when a number of firms exit, leaving only one or two to dominate the generics market,” Wiske said.

Shkreli, who runs Turing Pharmaceuticals, raised the price of the drug Daraprim overnight from $13.50 to $750 per tablet in August. The drug is used to treat the disease toxoplasmosis, which is caused by a parasitic infection that is particularly life-threatening for those without strong immune systems and is commonly used as treatment for malaria. After resulting public outcry, the price was lowered.

This incident stood out from others due to the magnitude of the price spike and because “there was sort of a villain everyone could point to,” Wiske said. Price spikes “will continue to happen until we have better policies around generic drugs,” he said.

The article outlines three potential strategies for avoiding situations like the Shkreli case by keeping drugs affordable and available.

The first potential strategy entails the U.S. Food and Drug Administration issuing a limited number of licenses to suppliers of a generic drug. Under this system, “drug companies know exactly how much competition they’re going to have, so they’re more likely to enter the market and stay because there’s not this risk of an influx of other competitors,” Wiske said.

But Ruth Lopert, adjunct professor of health policy and management at George Washington University, who was not involved with the paper, said “restricting the number of entrants in the market doesn’t actually control the prices.”

“I would argue that rather than restricting the number of suppliers you should stagger them,” Lopert said.

The second possible strategy involves incentivizing long-term contracts with manufacturers. “From the perspective of the drug company, long-term contracts are more attractive because you can lock in price over time and therefore take some of the risk out of operating in the market,” Wiske said, adding that these long-term contracts might also be “most politically viable.”

“Policies that would give an incentive for entry or long-run presence in a market that are tailored to these really small markets is something that could lead to better competition,” said Jeffrey McCullough, assistant professor of health policy and management at the University of Minnesota, who was not involved with the paper. “You could argue a bunch of different mechanisms, but the underlying idea here — there’s a decent argument for it.”

The last strategy calls for the establishment of a futures market in which contracts for a commodity — in this case a generic drug — are traded and delivered later to avoid volatility. “It often tends to stabilize prices by again locking in prices over a long period of time,” Wiske said, noting that this solution functions much like long-term contracts to increase transparency in the market.

Regarding a potential futures market, Lopert noted that all manufacturers would need approval from the FDA, which she described as a “regulatory hurdle.”

McCullough said a futures market is an “interesting” idea, but it likely is “not going to do a lot to address the kind of pricing problems that have been in the media lately.”

Lopert raised the consideration of product differentiation as another potential strategy. “The concept of a branded generic may afford an environment in which direct manufacturers can compete more effectively because they can be identified,” Lopert said.

McCullough suggested subsidies but recognized that it would be challenging to target them toward suppliers in an effective way.

Both Lopert and McCullough said putting money toward the FDA evaluation process could be helpful, and price controls have the potential to be beneficial.

Wiske said we “need to be creative” in solving this problem. Proposals from Democratic presidential candidates Hillary Clinton and Bernie Sanders are not “super well-developed,” he said, adding,  “Simply taxing generics companies is actually going to exacerbate some of the underlying issues.”