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Anatomy of a Market Failure
Despite all the pushback Pope Francis has been getting from free-marketeers, two important stipulations are in order: markets are not equally good at solving all problems, and many of their best features can be undermined by the greedy or immoral. They can work miracles like nothing else, but they’re also somewhat dependent on flawed human beings
As David Sussman notes on the Member Feed, the Interwebs are currently awash with news of alleged price gouging by Turing Pharmaceuticals. The drug in question, Daraprim, was developed decades ago and is used to treat toxoplasmosis, a parasitic infection that’s a minor problem (at worst) for the healthy, but a serious one for the immunodeficient or babies whose mothers were infected while pregnant. The drug was developed decades ago and has a tiny market — currently, under 9,000 prescriptions per year. It had been available for as little as $50 per prescription as recently as five years ago. After being sold to another company, the price of the drug rose to $500 per prescription in 2011, then to $1,100 last year. Assuming everything remains constant, the same prescription under the newly-announced price would cost just shy of $63,000. I’m not sure about babies, but the Mayo Clinic reports that the immunodeficient may need treatment for life.
As Megan McArdle wrote a few weeks ago, drugs that are in fierce demand by a small number of people are an inherently difficult problem for markets — or, really, any system — to solve. When you also factor in the regulatory costs, the fact that most drugs are actually purchased by third parties, and the fact that drug manufacturing is relatively inexpensive, you’ve got what looks like a perfect storm of grossly unfair and exploitative price gouging. Even if it’s genuinely the best a market can do under difficult circumstances, it sure looks bad.
Still, this case doesn’t seem to quite fit the usual narrative. First, Daraprim’s already been developed, so some of the cost issues don’t apply in the same way they might to a new drug. Second, while the drug’s patent has long since expired, the information about testing and customers necessary to bring a generic to market are closely-held secrets, so even though other companies have the legal right to manufacture Daraprim, they lack the knowhow. Third, Martin Shkreli, the former hedge fund manager and CEO of the company that purchased Daraprim, looks like someone you’d cast as a heartless young tycoon if Jesse Eisenberg were unavailable. Fourth, his rationale — that the company needs to raise the price this much in order to fund future development — doesn’t quite add up.
On the other hand, the leftist calls for justice seem wildly misplaced. First, it’s noteworthy that about 4,000 fewer prescriptions were filled last year (after prices rose to $500/prescription) than they were a few years ago. I don’t know for sure, but I highly doubt all those people died because of an inability to pay; notably, there are at least four other antibiotics that can be used to treat toxoplasmosis (a good factual background is available here). Second, Shkreli has said that he will make the drug available to those who need it but can’t pay the full sticker price. In short, the chances of thousands of people dying on the streets in the near-term are next to zilch, and — over the long-term — the demand may spur competition from others.
Over the medium term, however there’s another solution: if Shkreli’s really just interested in making money, we can always just buy him out.
Published in Culture, Economics
Can’t Bernie Sanders work this out?
Until he runs out of our money.
Other than Heaven, name a single other institution that isn’t.
Mrs. Clinton said that a monthly prescription should never cost more than $250. Not sure what factors went into that calculation . . . arbitrariness?
a) Doesn’t the patent itself detail the composition of the drug?
b) Maybe the reason a generic version doesn’t exist is because the manufacturer was selling it for below-market rates as recently as five years ago. (In any other industry, that would be called “dumping”.)
As the price of a good increases, the incentive for a competitor to develop a generic version also increases.
Pharmaceuticals are a market? Were it a market free of the FDA and other government controls there’d be other problems, some of which might be serious, but with time these things get solved, innovations occur, people learn and new challenges arrive. With tight government control the problems don’t go away and tend to get worse, there is less innovation, more consolidation, ultimately corruption, not to mention price gouging to exploit short term monopoly positions which government helps extend. So no, nothing is perfect, nothing becomes perfect, but market is a word we use for free people working things out through exchange, trial and error and it is how civilizations flourish.
:D
Could well be.
Additionally, my understanding is that the costs of getting the drug approved for sale in the United States would still be high and the fact that distribution is closely held and that recreating it would be expensive doesn’t help. Those, of course are not free market problems.
In a case like this where a monopoly exists, why can’t the government regulate it the same way it regulates public utilities? How can we expect market forces / competition to set the price for this product if there is no substitute and therefore no competition?
I understand the need for Patents so that inventors can reap the benefits of innovation but in this case you are saying the Patent has expired.
I believe in the benefits of the free market but not when it means we withhold medical care (a product with inelastic demand) because a company has a monopoly and is price-gouging.
a) I chose my words carefully. I don’t consider Nature to be an institution.
b) The glow and the red dot in the distance of that video: Who created them? As long as humanity exists, the nature of Nature will depend on flawed humans.
Just to be clear Daraprim is the generic. It is just the name it is currently trading under. As I said in the other post it was being made by GSK for $1 a pill. At that price you can imagine why others weren’t really all that eager to start making it. You can also see why they were eager to sell it and why subsequent “owners” of the drug each charged more.
Perhaps the real solution here is to allow importation of the drug from India where it is still selling for $.50 a pill.
Thanks for the link Tom.
There is a definite need to ensure abuse of the system is contained. The issue here is that we have a system created by the ones who benefit from it.
Big Pharma, for all of it’s publicity problems, do create a product that is needed and valuable. However, their oft mentioned R&D justification which may apply to some expensive medicines, but certainly not in this case. This is an antiquated and (relative to the population) little used medication. The R&D concluded 65 years ago.
The question is, without a Hillary big government solution, are there not already laws (anti-trust) that can be used here to prevent what isn’t the first and won’t be the last pharma price gouge?
Were that I had more than two thumbs to put up.
Those were crickets chirping, my friend. I was saying I agreed.
Oh…
It seems that laissez faire capitalism is the answer to all questions, except when it is not the answer to all questions. Which question is this? What is the value of Daraprim in a small market based on those in need of it or a like drug? Mr. Shkreli thinks it is a lot more valuable than his predecessors.
Why are you such a racist?
With only 9,000 scripts each year it is likely losing money.
Not racist. Just hate poor people with aids.
No worry though the Pope is giving a speech at the UN and all wealth will be confiscated for them to distribute as they see fit.
(Apropos of Nothing: That clip is from 1996, just in case people thought the SJW crowd was a new thing.)
This story is not about a market failure, it’s about the failure to allow a free-market to function or even exist. It’s frustrating to read about the failures of markets and capitalism when the failure is caused by government regulations which distort and corrupt all market.
It’s not that markets “fail”. If they’re making money, then they are by definition succeeding. It’s more that markets are amoral. Markets don’t care if needy people go without lifesaving drugs, just as markets don’t care that you can now buy more food than ever. This is why I’ve grown uncomfortable with the almost religious attitude the right has toward markets. The right holds that markets are a moral good, when they are objectively no such thing. They’re a practical good. In practice, markets are mostly the best way for consumers to get variety. Price is actually a secondary benefit, not a primary one, as some markets depend on price gouging. As with all things human, markets are imperfect and in this case, the lesser of all evils in terms of human economic activity. There isn’t a better way to do things, so this is the system we choose. But that doesn’t make it good in the moral sense.
There is a lot we don’t know here. 1) What did the new owner pay for the drug? 2) As an investment, they want to recover their cost and make a profit. Will the price go down then? 3) Was the drug prescription under priced before? 4) What other drugs are in the pipeline that might take business away from the new owners? How long do they have?
It can’t be declared a market failure, if the market is simply correcting a price.
I would not give up on the market too soon. Certainly $63,000/year is a lot but if there are 4,500 prescriptions per year at $63,000 each that produces a revenue stream of $283 million per year. Surely that is enough to get a generic manufacturer in the game.
On the other hand, you mentioned there are other drug choices and the number of prescriptions have fallen substantially as prices have risen.
So it looks like the market is responding but maybe not where we want it to be yet.
That is, reportedly, a very big “if”.
According to reports, the last time the price was increased the number of prescriptions dropped significantly. Apparently not as many people “needed the drug to live” as was believed. They took it because it was cheap.
Exactly.
BTW, I threw things off with a poorly chosen title.
The price is the price. If people can’t or won’t pay it, they should buy the next best drug.
The R&D explanation is not as bogus as some have suggested. Sure, this drug was developed long ago, but the company needs to profit from its current drugs to be able to fund newer, better drugs. In fact, there is a strong likelihood that the artificially low price of this drug all those years was in impediment to the development of better drugs to treat toxoplasmosis, since there was no incentive for competitors to justify developing other drugs.
As the price has gone so high, obviously fewer units are being sold. If the current price is the profit-maximizing price it is the right price. Drug companies are not in business to provide charity. If we think that it is sad that some poor people can’t afford the drug, we should give them welfare so that they can afford it. It’s not for the drug company to make those determinations. The company is already going beyond the call of duty to provide it to poor people at no cost.
If there is market failure here I can’t see it.
I don’t think so, but respect your self-critique.
As if it needs to be stated again, Drug Company R&D would be significantly cheaper if the federal government were less stringent in it’s regulations.