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Pharmaceutical Pricing: The Intersection of Big Business and Healthcare

Until recently, Daraprim was a little known name.1 That is, until Turing Pharmaceuticals acquired the drug in August and increased the price of the drug from $13.50 to $750 per pill.2 Daraprim, known generically as pyrimethamine, is used mainly to “treat toxoplasmosis, a parasite infection that can cause serious or even life-threatening problems for babies born to women who become infected during pregnancy, and also for people with compromised immune systems, like AIDS patients and certain cancer patients.”3

Turing Pharmaceuticals acquired the drug from Impax Laboratories this past August for $55 million and raised the price.4 When Martin Shkreli, the CEO of Turing Pharmaceuticals, announced he would be raising the price to $750 a pill he quickly began to receive criticism in the media.5 However, a price increase is typical practice for a company post a merger or acquisition.6 Companies raise the price to pay for their acquisition and provide additional return on their investment.7 They use the investment return on the research and development of new drugs.8 Bringing a new drug to market is very costly, including more than $2.5 billion and over 12 years on average.9 Likewise, Shkreli defended the 5000% price hike by stating that the drug is so rarely used that the impact on the health system would be minuscule and that the money earned would be used to develop better treatments for toxoplasmosis.10

Shkreli has responded to his critics and has stated that the price would be lowered to an affordable level to allow the company to break even or make a smaller profit, but has not yet disclosed an exact price.11

Other pharmaceutical companies, including Valeant Pharmaceuticals and Marathon Pharmaceuticals, have recently received criticism for similar actions–buying the rights to drugs—older, even generic drugs—and raising their price sharply.12 Craig Garthwaite, a health economist at Northwestern University’s Kellogg School of Business whose research often focuses on America’s pharmaceutical market highlights that the principal factor driving lack of competition in the pharmaceutical industry and leading to the pervasiveess of these pricing schemes is the high cost of entry into the market.13 Garthwaiter highlights that in considering alternatives to the current American Pharmaceutical market, we must carefully consider the fixed costs of entering these markets.14 Specifically, it is important that any drug is not able to get on the market, and quality control is essential in such an industry.15 One possible alternative is price regulation, like the government does with utility companies.16 This would be “rate-of-return regulation, where manufacturers have to spend a certain amount of their returns.”17 The problem with such a method is that it is difficult to implement because it is difficult to determine when something is a natural monopoly.18 Another option would be to have some type of “public trust that produces generics, maybe a government-sponsored nonprofit.”19 Ultimately, there is no available solution that will perfectly solve the problems in the pharmaceutical industry.

  1. See Andrew Pollack, Once a Neglected Treatment, Now an Expensive Specialty Drug, N.Y. Times, Sept. 21, 2015, at B1. 

  2. Andrea Mitchell and Phil Helsel, Drug CEO Will Lower Price of Daraprim After Hike Sparked Outrage, NBC News (Sep. 23, 2015, 10:12 AM), 

  3. supra note 1 at B1. 

  4. supra note 2. 

  5. BBC News, Who is Martin Shkreli- ‘the most hated man in America’? (Sept. 23, 2015), 

  6. Brian Joondeph, When Big Business And Healthcare Collide: Behind The Daraprim Controversy, Daily Caller (Sept. 28, 2015, 1:46 pm), 

  7. Id

  8. Id

  9. Id

  10. See Zoe Schlanger, Martin Shkreli on Raising Price of AIDS Drug 5,000 Percent: ‘I Think Profits Are a Great Thing’, Newsweek, (Sept. 21, 2015, 5:39pm), 

  11. supra note 2. 

  12. supra note 11.) The recent publicity brings lights to a broader question regarding the business model for American Pharmaceutical companies: how do we regulate the price of drugs in such a market? ((See Andrew Pollack, Drug Companies increasingly Pushed to Explain High Prices, N.Y. Times, July. 23, 2015, at B1. 

  13. Sarah Kliff and Craig Garthwaite, A Health Economist Explains the Real Reason American Drugs Are Expensive (Sept. 25,2015, 7:00 am), 

  14. Id

  15. Id

  16. Id

  17. Id

  18. Id

  19. Id