Protecting Off-Patent Sole-source Drugs from Price-Jacking

Peter Kolchinsky, Ph.D.

This is the third in a series of articles that aim to define the biopharmaceutical industry’s social contract with America, to examine practices that deviate from that contract, and to propose refinements to healthcare policy to ensure that our continued investment in scientific progress ultimately yields affordable, effective therapeutics for future generations.

Article 1: America’s Social Contract with the Biopharmaceutical Industry
Article 2: What happens when a drug won’t go generic?
Article 3: Protecting Off-Patent Sole-source Drugs from Price-Jacking
Article 4: Why wait for Generics? In praise of me-too drugs
Article 5: False Heroes — How PBMs Add Insult to the Injury of Insurance Cost-Sharing

Op-Ed: Let’s Throw a Patent-Burning Party

Article 6: The favors they do us: Charging less in other countries makes drugs more affordable in America
Article 7: Hard Negotiating Tactics: Compulsory Licensing and Willingness to Deny
Article 8: Unintended Consequences of “Fairness”: Critically examining the idea of the US referencing EU prices
Article 9: Direct-to-Consumer (DTC) Advertising: misnamed, misunderstood, and underappreciated
Article 10: The strange and special case of epinephrine

Please see Important Disclosures for Readers at the end.

A tenet of the biotechnology social contract is that once a drug has gone generic, it should stay inexpensive for the rest of time. It’s like paying off the mortgage on a house and knowing that you now own it and can pass it on to your children and their children to live in inexpensively. But companies are sometimes able to exploit regulatory loopholes and quirks in certain commercial markets to raise prices egregiously on old, off-patent drugs. This practice undermines the social contract and should be eliminated. Here I examine how companies are able to price-jack what are essentially generic drugs and what can be done about it.

Ripping off society

It’s likely that people with scant knowledge of the pharmaceutical industry are familiar with this practice, thanks to a recent and high-profile example, one that is merely representative of what happened before and since with dozens of other drugs. When Turing Pharmaceuticals acquired the old, off-patent drug pyrimethamine (more commonly known by its brand name Daraprim), long used to treat people infected with various pathogens, it raised the drug’s price roughly 55-fold. It’s as if they stole the title to your house and offered to sell or rent it back to you. But like a vaccine that leaves our immune system stronger, Turing illuminated loopholes that regulators are now working to close.

As with the case of non-genericizable drugs discussed in “What happens when a drug won’t go generic?”, price-jacking of sole-source, off-patent drugs has a small impact on total drug spend. Certainly this effect is smaller than its proportion of headlines might suggest, with all known examples likely adding up to less than 1% of the >$300B of US annual expenditure on prescription drugs. But whether a drug is innovative and high-priced or off-patent and price-jacked, affordability to the patient is a function of cost-sharing, not the price of the drug. Therefore for patients to find drugs affordable, cost-sharing for unsubstitutable drugs must be eliminated. Companies engaging in price-jacking are trying to rip off society, not the individual patient, to whom they often extend co-pay assistance or even supply free drug if there is a risk insurance won’t pay¹. Eliminating cost-sharing would allow patients to access any necessary drug without worrying about how its price got to be what it is, but society still needs to set policies that preclude price-jacking to protect the biotech social contract from abuse.

It’s worth exploring what about the Turing/Daraprim case is applicable and not applicable to keeping generics inexpensive. For example, why don’t we see anyone price-jacking atorvastatin, the statin sold by Pfizer as Lipitor, once the most lucrative drug in the world? Because it’s still used by millions of patients, creating a market that can sustain many generic manufacturers all making the same exact drug and competing with one another on price for market share. So were a company like Turing to acquire the rights to sell one of those generics and jack up its price, it simply wouldn’t be used, losing out to all the other manufacturers.

Off-patent, Sole-source “generics”

Turing was able to price-jack Daraprim because that drug, despite being off-patent and readily genericizable, was being produced for sale in the United States by a single company. That makes this case special, but not unique, and it’s essential to understand the reasons only one company was selling Daraprim to understand how Turing was able to raise the drug’s price so incredibly. To be clear, Daraprim was not and is not a generic drug; it is still the original branded version. Because it’s been off-patent for years and was for a long time sold at a low price, it may as well have been a sole-source generic before it was price-jacked, so we’ll consider it an exemplar for this type of chicanery.

Daraprim was discovered and launched in the 1950s by a predecessor company of what is now the British big pharma GlaxoSmithKline, presumably at a price that garnered an attractive enough profit. The drug targeted a variety of pathogens, including the parasite that causes malaria, which eventually became resistant to Daraprim, and the drug’s uses narrowed. Today the drug is used primarily to treat toxoplasmosis, a disease caused by a fairly common but usually harmless parasite. Though as much as half of the world’s population and up to 23% of Americans already carry the parasite (commonly picked up from cats), most people see no readily observable symptoms and do not require treatment.² But the drug is still valuable in certain situations. People who are immunocompromised (i.e. those with weak immune systems) and young children are more likely to develop acute toxoplasmosis, which may lead to encephalitis and organ damage.³ Pregnant women can suffer a congenital infection that may cause a miscarriage or stillbirth or could lead to a number of issues in childhood including microcephaly, epilepsy, and deafness.⁴ Still, cases of acute and congenital toxoplasmosis remain fairly rare in the US.⁵

In various parts of the world, such as India, there are multiple suppliers of pyrimethamine, which keeps the price low, as one would expect of a typical generic market. But in the US, until 2010, GSK remained the sole supplier, though charging just $1/pill. By that point, there were few prescriptions for Daraprim in the US, roughly 8,000–12,000 per year, which usually just requires 20–60 pills taken over a few weeks, so sales would have amounted to less than $1 million per year. It’s understandable that, for so small a market, no other generic company would have cared to compete. It’s also understandable that GSK, making so little money and possibly little or no profit on Daraprim, was willing in 2010 to sell the rights to distribute Daraprim in the US to a small generic drug company called CorePharma. CorePharma immediately raised the price of the drug to $13.50/pill, quickly boosting sales but attracting almost no media scrutiny⁶. In 2014, Impax, a larger generics company, acquired CorePharma; at the time Daraprim sales were a little over $9 million, still too modest to attract competing generics. Impax sold the rights to Daraprim to Turing in 2015 for $55 million, a price that Turing likely could not have justified unless it knew that it would immediately raise the drug’s price, as CorePharma had done. Indeed, upon securing Daraprim from Impax, Turing raised Daraprim’s price by 55-fold to $750/pill, dramatically increasing sales and attracting tremendous media scrutiny and public outrage⁷.

In theory, Daraprim’s newfound profitability would attract other generic manufacturers to launch pyrimethamine generics and compete down the price. The drug isn’t difficult to manufacture and FDA approval could be garnered in about a year.⁸ Since drug prices tend not to collapse until there are several generics on the market, one might expect that, in theory, Turing could have enjoyed a year or two of high sales before they started to erode, which would still have generated a windfall of several hundred million dollars at $750/pill. The public — and indeed many in the biopharma industry — would have frowned upon Turing’s tactics, and moved on.

But Turing used an interesting maneuver to keep other generics away by making it hard for anyone but a patient to get. Citing side effects that warranted management through a Risk Evaluation and Mitigation Strategies (REMS) program, Turing sold Daraprim from a specialty pharmacy that tracked every bottle, matching it to only those patients prescribed the drug. So instead of being able to fill one’s prescription at a pharmacy, a patient would get pills directly from Turing. This strategy makes some sense for distributing certain drugs, such as cell therapies that are personalized to a particular patient, or opioids and other drugs that are closely monitored by the DEA to ensure against diversion to abusers.

When a generic company wants to make its own version of a branded drug, it has to purchase some of that branded drug as a reference from a pharmacy to run small bioequivalence studies, potentially as many as 5000 doses⁹, showing that its copy behaves similarly to the original. But because Daraprim was sold through Turing’s specialty pharmacy and not distributed to anyone other than patients, generic companies would not be able to do the bioequivalence studies required by the FDA. Similar tactics have been employed by others to delay the launch of generics, but they can be foiled with a small regulatory tweak.

Indeed FDA is now in the process of trying to close this loophole¹⁰, requiring that companies provide enough drug to would-be generic competitors so they can run proper equivalency studies and requiring that companies implement shared REMS programs to ensure that patients do not get prescriptions filled redundantly (less an issue for a drug like Daraprim than for opioids).

Stopping the next Turing

But even if Turing couldn’t count on keeping competitors away indefinitely, their tactic still would have enabled them to generate a high profit for at least a year. According to FDA statistics, there were nearly 100 sole-source off-patent drugs in the US in 2016 (though, if one were very specific about particular formulations, the number is over 300).¹¹ Imagine if each were price-jacked, eventually attracting several competitors that would bring the price down after a year or two until the market was too small to sustain multiple suppliers (since there are fixed costs to maintaining production capability), devolving back down to a sole-source generic market, that would then set the stage for another price-jacking. In theory, that’s how the free market might keep price in check in the long run. And yet, it’s not hard to imagine a few adjustments to the rules of this game that would discourage this kind of profiteering in the first place.

For example, the US government could mandate that manufacturers whose products do not undergo natural genericization (either because their markets are too small to be attractive to generic companies or because their product is too complex to genericize) must agree to sell their drugs under synthetic generic contracts whereby the price is set at a fixed premium to the cost of production, which simulates the market price that it might go for if there were several generic manufacturers. BARDA, the government program charged with ensuring that we have medicines relevant to biodefense, already use similar contracts to make sure that companies produce pandemic flu and smallpox vaccines and treatments at reasonable prices. GSK might have continued to sell Daraprim for a low price if it could have been assured profitability under a synthetic generic contract. Arguably, instead of selling the drug to CorePharma, GSK could have raised the price of Daraprim just enough to keep it profitable to manufacture. But sometimes it’s easier for a large company to off-load an unprofitable, off-patent product to a smaller company than to risk negative publicity (i.e. if a large pharma is going to risk negative publicity for taking a price increase, it may as well be to raise a large, branded drug’s price by 10% to make it more profitable than to incur the public’s wrath by raising the price by 100% of an old, poorly-selling, unprofitable drug to bring it to break-even).

The danger with simply using price controls to extract value from a sole supplier is that patients remain vulnerable to a supply shortage in the event of a manufacturing problem. An alternative defense against price-jacking would be to allow the immediate importation of generics from other countries as soon as a sole-source generic’s price goes up in the US. Many Daraprim generics are still being made and sold cheaply in India and other countries. Essentially, the US toxoplasmosis treatment market could be consolidated with the global market. There are millions of people who need pyrimethamine treatment in India, Africa, Indonesia, and South America, which is why there are multiple manufacturers competing on price in those markets. The FDA or other government agency might need to proactively court international generic suppliers, helping them with documentation and waiving application fees, to entice them to also serve the tiny US market, which might be cheaper than granting incentives to US companies to develop generic competitors to sole-source products, as Congress has proposed.¹²

Or perhaps public outrage is enough to deter future Turings. Arguably it may be. The backlash against Turing and nearly everyone associated with Turing had a chilling effect throughout the drug development industry as executives wondered whether an angered public would mistake every high-priced drug for Turing-like profiteering. As an investor, I could see that many management teams were taking public opinion into account when thinking about their own pricing strategies.

So outrage does work as a deterrent, but it’s a blunt instrument. Raw public outrage has unintended consequences on innovation that involves the improvement of older drugs, such as the packaging of epinephrine into faster-to-administer autoinjector pens such as the EpiPen, which can sometimes be perceived as price-jacking. Better to vaccinate society against the predation of generic price-jacking through faster generic approvals (already the case), requirements to share REMS programs (in process), strategic use of re-importation (already done in cases of drug shortages), and government contracts to keep sole-source generics cheap (a solution not yet being discussed), clearing the field for innovators to work on new drugs and improvements to old ones that, per the biotechnology social contract, will eventually upgrade our generic armamentarium.

Sole-source generics occur when a market is too small to attract multiple suppliers, as was the case with toxoplasmosis in the US. But if Daraprim had been a new drug launched in 2005, it would have likely launched at a very high price point, let’s say $300,000 per course of treatment, as is common for orphan indications with so few patients needing treatment each year. That would have allowed a company to generate approximately $300 million per year for the patented life of the drug, after which several generic companies would have competed to grab a portion of that sizable market. Ultimately, maybe Daraprim would have devolved into a sole source generic market when the price came down so much that it no longer supported two suppliers. Something similar happened in the anti-parasitic treatment market when Teva discontinued sales of its drug mebendazole, ceding the market to albendazole (which CorePharma licensed from GSK and subsequently price-jacked 20-fold)¹³. But the fact that no Daraprim generic even bothered to come to market in the first place to compete with GSK is because Daraprim came to market in the 1950s. Compared to today’s prices, it was never expensive and, likely overlooked for decades within the bureaucracy of a large pharma that rationally focuses on its biggest products, stayed inexpensive after its patent expired; its already low sales represented a market too small to attract generic competitors. That made it vulnerable to a Turing-like price-jacking. All that was required was a small company to come along with seemingly nothing to lose by legally exploiting every available loophole.

What is, and isn’t, profiteering?

But not all price increases necessarily represent pure profiteering. An old drug might be displaced by newer, better ones, shrinking the market of patients for whom the old one is appropriate, and yet the cost of production has to be covered and may require some price increase.

Something like this may be occurring with lomustine, an old chemotherapy for gliobastoma. Lomustine is now rarely used because of the advent of safer and more convenient drugs. Even after a recent sharp 15-fold price increase, it still only sells around $1–2 million per year, which makes for little profit but big headlines.¹⁴ Lomustine would have been a good candidate for a government synthetic generic contract to keep it priced at little more than the cost of production; due to the shrinking market, that still would have likely necessitated a price increase over time but maybe a more modest one than what we got by letting enterprising price-jackers steward the supply.

Price increases of old drugs might also be a natural consequence of a disease’s gradual eradication. For example, if there were ever effective HIV vaccines, the number of HIV-infected people would gradually fall. By that point, several effective HIV drugs would be generic and hopefully available for pennies a pill. But if the market were to shrink to a few thousand patients in the US, it would be challenging to maintain the drug supply at such a low cost per patient. If there were to be five suppliers, each spending $5 million to maintain their production capabilities and competing with one another to treat the last 1,000 patients, then the average cost-per-patient would need to be $25,000 per year just to cover the suppliers’ operating costs. That’s roughly the same as the cost of treating a patient today with branded HIV medications and yet includes zero profit for our theoretical generics suppliers. In this case, it would be more efficient to consolidate the US HIV market with the larger international market, allowing international suppliers to sell into the US markets at their global prices, or else enter into a synthetic generic contract with one or two US suppliers. Even then, as the number of patients shrank below 1,000, the cost per patient would climb. Price increases in this scenario might be perceived as price-jacking and yet, absent any profit, could hardly be called profiteering.

It would be a welcome sign of progress if we were to see the cost-per-patient of generic Daraprim around the world climbing in response to the dwindling of the toxoplasmosis market. But until then, emerging fixes to our regulatory framework and maybe even some of the solutions proposed in this article could help to keep off-patent, sole-source drugs inexpensive in accordance with the biotech social contract.

Epilogue: Why Compounding Pharmacies are Not a Monopoly-Busting Solution

Shortly after Turing price-jacked Daraprim, sparking public outrage, high school students synthesized the drug, claiming they could sell it for cheap. That reflects a noble sentiment, but is obviously not a solution: the problem is not how much it costs to make Daraprim, but how unrewarding it is for enough generic companies to bother making it to the FDA’s specifications to keep the price in check with natural market forces. But there was a more credible challenge to Turing in the form of a compounding pharmacy, Imprimis, which offered to make and sell the drug for GSK’s 2010 price of $1/pill. Compounding pharmacies purchase the raw material for a drug and formulate it in small batches into forms and doses that are typically not otherwise commercially available. For example, a drug that might be FDA-approved for adults and sold as a large pill that most adults can swallow would need to be transformed into a smaller pill or powder to be mixed into apple sauce for a child.

Compounding pharmacies generally run clean operations and try to be precise in their work, but they are basically making home-made versions of drugs, which introduces the risk of dosage errors and contamination. By comparison, most drugs that patients get from standard pharmacies come from companies that are FDA-licensed to sell the drugs that they manufacture to an FDA-standard called Good Manufacturing Practice (GMP). GMP manufacturing is what ensures that therapies we take will work as advertised without contamination and provide the right dose consistently. In 2012, 76 people died of meningitis after receiving steroid injections that had been contaminated with fungus during preparation at the New England Compounding Center facilities. This incident led Congress to pass the Drug Quality and Security Act in 2013, giving the FDA a stronger mandate and more leeway to stop compounding pharmacies from making drugs that are already available as GMP manufactured, FDA-approved pharmaceuticals.¹⁵

So it was initially surprising to hear that one payer, Express Scripts, would reimburse for prescriptions of generic Daraprim filled by Imprimis. The FDA initially took notice, but did not shut down Imprimis due to a small loophole that Imprimis exploited. Daraprim must be taken together with another drug called leucovorin to work, so Imprimis mixed the two drugs together to make its pills, sparing patients from having to take a second pill. It’s not a significant difference, arguably a bit more convenient, but it makes the Imprimis compounded product different from anything that is FDA-approved (i.e., Daraprim). In theory, were Daraprim meant to be taken on its own and were Imprimis just compounding pills of pyrimethamine, Imprimis would be violating the law, the FDA would have to shut it down, and Express Scripts would have had no choice but to reimburse Daraprim at the prices Turing was charging. While a loophole cut in society’s favor in this case, we should not count on compounding pharmacies to systematically offer cheaper alternatives to old price-jacked drugs, nor should we need them to.

Acknowledgements: I’m grateful to Aaron Hiltner and Chris Morrison for their invaluable and substantive thought-partnership and drafting/ editing, to everyone who engaged with me in the constructive debates that led up to these articles, and to Erin Clutter and the RA Capital graphics team for creating artwork that so astutely captures the essence of each core concept.




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Peter Kolchinsky, Ph.D.

Peter Kolchinsky is a founder, Portfolio Manager, and Managing Director at RA Capital Management, LLC, a multi-stage investment manager dedicated to evidence-based investing in healthcare and life sciences. Peter is active in both public and private investments in companies developing drugs, medical devices, diagnostics, and research tools, and serves as a Board Member for various public and privately held companies, including Dicerna Pharmaceuticals, Inc. and Wave Life Sciences Ltd. Peter also leads the firm’s outreach and publishing efforts, which aim to make a positive social impact and spark collaboration among healthcare stakeholders, including patients, physicians, researchers, policy makers, and industry. He authored “The Entrepreneur’s Guide to a Biotech Startup”, written on the biotech social contract, and served on the Board of Global Science and Technology for the National Academy of Sciences. Peter holds a BS from Cornell University and a Ph.D. in Virology from Harvard University.

Important Disclosures for Readers

The contents of this publication are intended for informational and educational purposes. The views and opinions expressed are those of the author and are subject to change. They do not necessarily reflect the views or opinions of RA Capital Management® or any other person the author is affiliated with.

Nothing of the content should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or product. The author and/or RA Capital Management® may hold or trade securities of the companies named in this publication or that manufacture the drugs discussed.

Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this article are trade names, service marks, trademarks or registered trademarks of their respective owners.

The author’s opinions are based upon information he considers reliable, and there is no obligation to update or correct any information provided.

© 2017 Peter Kolchinsky, Ph.D.

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