Why One HIV Drug Costs 5,000 Percent More Overnight

One story that has everyone outraged is that of Turing Pharmaceuticals, run by a scoundrel -- by all accounts -- named Martin Shkreli. He took the price of the 62-year-old drug Daraprim, used to treat toxoplasmosis in HIV patients, and raised it to $750 a tablet. How is he getting away with this?

Of course, a chorus of commentators is screaming about vagaries of the "free market," "lax regulations." Shkreli whines, "This isn't the greedy drug company trying to gouge patients, it is us trying to stay in business." Who to believe? Maybe neither one.

The New York Times report on the issue doesn't even come close to explaining why this is happening. The only reference is from a doctor complaining: "This seems all profit-driven for somebody and I just think it's a very dangerous process."

The patent on Daraprim expired long ago. So what prevents others from selling this drug? The free market? Surely, other companies are also greedy and would be willing to sell the drug at half the price as Shkreli. Others would find they could make a hefty profit at 10 percent. The price of Daraprim would soon decline to what it is in the rest of the world. Outlets in Canada, the U.K. and South Africa sell it for between ¢50 and $1.50 per tablet, not $750.00.

We also were told this drug is rarely used in the U.S. That is true. Its primary use is for malaria, so this drug is actually rather widely used in those regions.

The Guardian, a left-of-center-publication, came close to nailing down the cause when it said, "It is not uncommon for companies to use inventive interpretations of government regulations and loopholes in the law to corner the market for certain drugs, especially ones that were developed a long time ago and have only a limited market, then relaunch them at higher prices they believe the market will tolerate."

It appears that Mr. Shkreli is one of those regulatory "entrepreneurs" using the power of the state to manipulate things in his favor. It has been alleged his investment fund shorted various pharmaceutical stocks and then filed complaints against the companies with the Federal Drug Administration, thus causing an investigation. The investigation would then negatively impact the price of the stock, and Shkreli would profit.

The watchdog group Citizens for Responsibility and Ethics in Washington wrote, "Mounting evidence suggests Wall Street investors are intruding into the regulatory processes in order to manipulate the markets to move stock prices," said CREW Chief Counsel Anne Weismann. "While it is perfectly legitimate to thoroughly research companies before investing, it is reprehensible to inveigle federal agencies into action just to make a profit."

Bloomberg Business reported in 2014, "Shkreli developed a reputation for using a stock-gossip website to savage biotech companies whose shares he was shorting. This was not a path to popularity in biotech. In 2012 the nonprofit Citizens for Responsibility and Ethics in Washington (CREW) publicly accused him of trying to manipulate the U.S. Food and Drug Administration for financial gain. Once again, Shkreli emerged without facing government charges."

Shkreli is not a true entrepreneur. He is not operating in the world of markets, but in the world of regulations, using them to create artificial profits, not real ones, which brings us to Derek Lowe, a blogger at Science Transitional Medicine. Lowe reveals how Shkreli games the regulatory system to create these profits.

Lowe explains:

"So here's the conflict: companies do (and should) have the right to charge what they think their market will bear. But ordinarily, you'd think that most markets wouldn't have enough slack in them for a price increase like that one. What we're seeing is a peculiar part of a generally peculiar market, though. Drug companies are granted a temporary monopoly by the patent system, in recognition of the value of new therapies. Arguing about this tradeoff does not cease, but overall, I think it's a reasonable system (although one can imagine others, which would involve tradeoffs of their own). But one feature of the existing order is that patents expire (and you'd be surprised how many loud anti-pharma activists don't seem to realize that). And once they expire, the price comes down as the generic manufacturers get into the market.

That's how it's supposed to work, anyway. But in recent years, another strategy has emerged, and Retrophin/Turing are just the most dramatic examples of it. Entire companies have sprung up to take advantage of this sort of leverage - not by discovering their own drugs (too expensive, too risky!) but by buying up existing ones. And the most egregious examples have come in the generic sector. By various means, old generic compounds have ended up as protected species, and several companies have made it their business to take advantage of these situations to the maximum extent possible. The FDA grants market exclusivity to companies that are willing to take "grandfathered" compounds into compliance with their current regulatory framework, and that's led to some ridiculous situations with drugs like colchicine and progesterone."

Lowe says, "in any functioning market, someone else would jump in and offer this compound for less," but, of course, no one else can because the FDA shackled the market by granting exclusivity.

It would appear the villain, at least in this case, is not the non-existent free market, but the controls imposed by the FDA granting a regional monopoly. Lowe says it is time to rethink the federal policies that made this possible--something that couldn't have actually happened in a depoliticized market. "The regulatory framework for bringing old drugs into modern compliance has had unintended consequences, and it's time to rethink it. The regulatory framework for taking a drug into closed distribution has had unintended consequences, and it's time to rethink it."

The irony of all this is that the people most outraged are so woefully uninformed as to how this happened they call for federal regulations creating further profit opportunities for the parasites who use regulations to line their own pockets.