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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
When I hear the word gouging I reach for my revolver. Freedom means the asking price can be chosen by the seller, or more precisely when buyer and seller can come to terms. The patent is up; there’s no monopoly (a monopoly created by the state, btw). As noted above, if the revenue stream is so rich there will be competitors.
So there are trade secrets. How would those babies be doing if Daraprim had never been created? I find trade secrets of great utility to protect the investments I’ve made and risks I’ve taken. My desire to continue to do so is predicated on that protection. Gouging is the battle cry of the socialist, the looter, the taker by force.
If people are in distress because drugs are expensive, there are ways to help them that do not entail expropriation: charity, moral suasion, and government subsidy as a last resort. There are many worthy causes and many human miseries that cry out for relief. When the villagers come with pitchforks and torches yelling “Gouging!” then you know they just want to take, not give.
I had to go watch the video to see his argument. Here it is:
Remember, Turing paid $55 million to get the exclusive rights to this drug. At the old price it would take about 6 years of sales to recover the purchase cost. By raising the price Turing both reduces the time to recover cost, and creates competition that will eliminate their ability to sell Daraprim at all.
What if he doesn’t raise the price, and someone else does the innovation anyway? Then he loses money. The lower price makes sense only as long as you assume nobody will ever make a drug that replaces Daraprim. Given his concerns about mutation of the disease — which would provide incentives to innovate as well — perhaps he’s right.
And remember, Turing is already in the R&D game for a new treatment for toxoplasmosis.
You might as well have translated it from Italian!
I read that Mr. Shrekeli has lobbied the FDA to keep his competitors’ drugs from being approved. I don’t think he’s a free marketeer, and I’m inclined to believe he’s somehow preventing the free market from working in this case. Or maybe the free market is just responding a little slowly, and the competitors just need a little time to react. I agree with Ross C’s point.
Jerks like Mr. Shrkeli are why businessmen get a bad rap. Buying the drug and jacking up the price merely because one has a captive market is not the ideal of entrepreneurial capitalism. The US government is not helping by preventing the importation of drugs no longer under Patent protection.
Tom,
I can’t believe you link to this blog post. The guy basically is saying because poor people will be protected from the high cost of the drug and only rich people with their platinum health care plans will pay the full price that everything is ok.
It is this sort of attitude that causes pharmaceutical prices in the US to be so outrageous. Just because you subsidize the price for poor people doesn’t justify gouging rich people.
The best thing we could do to lower drug prices in the US would be to abolish the FDA, or at least the requirement of FDA approval to sell drugs. If you have a pharmaceutical company and you develop a drug that helps people, you should be able to market it to doctors and hospitals without FDA approval.
People forget that even generic companies have to get FDA approval to sell the generic form of drugs.
Just pointing out that I think Turing is helping poor people with their co-payment. The rest of the unmodified high cost is still being picked up by Medicare or Medicaid, iow by you tax payers.
Indeed. It’s no good expecting markets to make one’s moral choices for one and then being surprised when they can’t.
I saw an interview with the guy, and that was basically his explanation: the drug is very toxic and makes people quite sick, and he wants to use the profits to develop a new less toxic drug.
This situation brings up an interesting point. Publishers routinely put books “out of print” when the sales fall below a certain point. I am sure all companies take those products off the market whose sales have fallen below a certain level.
In a market economy for drugs, it seems to me that this must always be a problem for some patients.
So the ‘monopoly’ is in the paperwork to have the drug – the recipe for which is freely available – approved by the government for sale. Obviously the answer is: more regulation!
This may be the most sensible thing I’ve seen on the subject.
Or, maybe the capitalist owner should be arrested in the middle of the night, taken to prison, interrogated over a period of weeks until he confesses, and then summarily executed by a bullet to the back of the head, and his company confiscated by the workers, i.e., the government. – The ghost of J. Stalin
Francis’ boss answered a rich young man by noting that he should give away his goods and follow Jesus. That rich young man went away because he did not want to give away his goods.
The idea that Francis can take away your goods is ridiculous on the face of it. He cannot any more than his Boss would take away the wealth of the young man. Free will is involved.
We are told that the moral law is encompassed in two commandments: Love God with your entire being; and love your neighbor as yourself. How is one to understand this? There is the “feed the hungry clothe the naked” rejoinder; and there is the idea that if you have two coats, give one to someone who is cold. You aren’t being asked to give up eating or being warm, merely to share food and warmth with your neighbor who needs it.
If you want to know what is important to someone, watch what that person does. Francis is urging people to care for their neighbors. John said that whoever does not love their brother and sister who they can see, cannot love God Who they haven’t seen.
When we get to the judgment, it won’t be our bank accounts that are scrutinized.
genferei is making the point that the only reason that Turing Pharmaceuticals has a monopoly on the market in the US is that they are the only ones with the license to sell the drug in the US from the FDA.
I agree with him. I’m just taking the regulation point ad absurdum (ad Stalinum).
From what I understand, if New PharmaFirm were to produce the identical drug with a new, modern, more efficient process, regulatory approval is required. That uncertainty is a huge barrier to competition for many generics.
Worse, such regulation locks in the antiquated, inefficient processes in “Monopoly” PharmaFirm. It often becomes more and more expensive to maintain old production lines with “approved” equipment that’s 20+ years old.
There are numerous generic drugs, some critical to saving lives, with single firm and one manufacturing line creaking along. The incentive for innovation and competition is minimal.
And, of course, the FDA also makes it difficult and expensive to import drugs with identical chemical make-ups.