The strange case of off-patent drug price gougers

(Bloomberg View) — There’s a conflict at the heart of pharmaceutical pricing in the United States: On the one hand, it’s in the public’s interest for pharma companies to get a good return on the huge investments they often make in developing new drugs. On the other, it’s in the public’s interest to be able to afford those drugs.

We try to resolve this by granting companies temporary monopolies (aka patents) on the drugs they develop — letting them effectively set the price unilaterally — but then allowing competition from generic substitutes once the patents expire. Lots of people have strong opinions about whether we’ve struck the right balance, or should regulate drug prices as most other wealthy countries do — although regulating prices appears to depress spending on research to develop new drugs.

Related: Clinton’s attacks on drug prices leave health stocks reeling

So … that’s a tough one. I’m not going to resolve it for you today, or probably ever. But here’s an interesting and too-little-emphasized fact: Most of the recent high-profile controversies over drug pricing don’t have much of anything to do with this seemingly intractable conflict. For example:

Epinephrine, the substance delivered by those EpiPen allergic-reaction injectors that drugmaker Mylan has been selling for more than $300 a dose lately, is a human hormone (also known as adrenaline) that was first isolated by a Japanese chemist in 1900. You can buy a vial containing half as much of the substance as an EpiPen does for $4.49 from Ace Surgical Supply. Pyrimethamine, the anti-infection drug that under the brand name Daraprim made Martin Shkreli infamous when his company, Turing Pharmaceuticals, jacked up the price from $13.50 to $750 a tablet a year ago, was developed in the 1950s at Burroughs-Wellcome, which later became part of GlaxoSmithKline. It has been off patent for decades. Many of the drugs subjected to the biggest price increases by Valeant, the once-high-flying serial acquirer that ran into trouble about the same time Shkreli did last year, were similarly developed many decades ago and unprotected by patents.

None of the products mentioned above were developed by the companies selling them now. Mylan doesn’t even make the EpiPen (Pfizer does); it just acquired the marketing rights nine years ago. It’s able to charge so much because the design of the injector is proprietary. Competitor Sanofi did get Food and Drug Administration approval for its Auvi-Q injector in 2012, but abandoned the product early this year because of dosage problems.

With Daraprim, meanwhile, the market for the drug is quite small, so no one ever bothered to develop a generic competitor. And one of the (many) issues at Valeant was that it effectively controlled a specialty pharmacy, Philidor, that altered doctors’ orders to substitute more expensive Valeant drugs for their generic competitors.

What’s going on, basically, is that a new breed of pharmaceutical company has emerged (Valeant is, or at least was, the archetype) that doesn’t develop drugs but identifies business opportunities in existing drugs —many of them with expired patents — that the previous owners were too lazy or timid or decent to fully exploit. So they acquire them, and jack up the prices. One should take the price increases I’ve cited above with a grain of salt; as Peter Coy explained in Bloomberg Businessweek last week, rebates and other incentives mean that most insurers pay nowhere near list price. But still, the general idea has been to extract more money out of old drugs than was being extracted before.

There is clear business logic to this, of course. And increasing the value of off-patent drugs presumably gives drug companies at least a little bit more financial incentive to develop new drugs. But sudden big price increases in off-patent drugs also feel like a violation of the long-standing contract between the pharmaceutical industry and society — and they have invited a political backlash that may end up costing the industry far more than Mylan, Turing and Valeant’s price hikes have gained.