In 2014, only 8,821 prescriptions for the Daraprim were written. According to the CDC there are between 400-4000 new cases in the United States every year and roughly 750 people a year die from it. Also toxoplasmosis can largely be prevented by cooking meat at the right temperature. I have heard the common argument that the costs to make one pill is less than $1, however people who make this argument are not including distribution costs, FDA regulatory costs, and manufacturing costs that are not included in the marginal cost of less than $1.
According to SEC filings Turing Pharmaceuticals purchase the drug for $55 million in August 2015. The total revenue of Daraprim was about $5 million last year which is hard if not impossible to make any profit. At the previous price of $13.50 there was no one making a profit for it. The CEO claims the company will use their revenues to reinvest in developing a better with side effects. Parasitic diseases can rapidly change and a company needs to perform the research and development now in order to combat future mutations. According to this report death was reported in about 4% of patients who took Daraprim. Some patients have reported vomiting, renal failure, and Stevens-Johnson syndrome. All drugs have risks but the question is can the reward-risk profile can be improved.
It is important to distinguish the market price versus what people actually ended up paying. Even the CEO said that 50% of the customers pay less than $1 for the drug (which in this interview the CEO says in a major impediment to making money). In the original New York Times article a director of toxicplasmosis at the University of Chicago praised the company for delivering the drug to patients quickly and most of the time without charge. In essence the price that people pay is somewhere between $0-$750/pill even though the stated price is $750 per pill. The company also participates in the 340B Drug Pricing Program which guarantees that Medicaid patients and hospitals get the drug at a reduced price. Alex Tabarrok points out that the prices in India are only going for 5 cents a pill compared to $750 in the United States. Perhaps some capitalists in India could sell their supply to people in the United States for less than $750 in order to increase the supply of Daraprim which would also bring down the price.
The FDA has a burdensome process for not getting a regular drug approved by also even a generic approved. Remember drugs have to first get approved by the FDA which can cost roughly $2.5 billion and take 10-20 years to develop from the research stage to actually being available to the patient. Approval times have only been showing too. In 1960 the average time for drug approval was 3 years and then 6 years by 1965. Companies have between 5,000 and 10,000 substances that they try to turn into the next blockbuster drug but 80% will lose money.
After a drug has been approved it then usually has a patent life between 7-12 years. After this period it then becomes what is known as a generic. Once the drug becomes generic other companies can begin making the drug and as a result the price drops about 30-80%. Even though the drug company spends roughly $2.5 billion bringing a drug onto the market (liberals dispute this figure however they don't understand their is an opportunity costs in dealing with the FDA when they are slow to approve drugs and raising capital) and 10-20 years bringing the drug to market if it wants to make a generic it still has to file an application with the FDA for approval. This whole process of getting the initial drug approve is known as NDA (New Drug Application). When a company is going through getting a drug as a generic it files a ANDA (Abbreviated Drug Application). The bureaucratic organizational chart of how NDA vs. ANDA are approved can be found here.
Some of the rules for generic manufacturers can be found here which are complex and expensive to implement. Last year the FDA announced it was considering adding even more regulation that produces the drug company must work with the FDA on the chemistry, labeling, factory inspections, and testing of the generic. The FDA currently has had a growing backlog for ANDA applications in 2005 the backlog was 780 applications and recently has been as a high as 3000 applications (gee I wonder if any of those applications could be for Daraprim). The fees just associated with the ANDA can reach in the hundreds of thousands of dollars (remember the drug at one point in time was approved by the FDA). The median time of approval for ANDA is roughly 35 months however can be as long as 89 months.
The high price of Daraprim signals to people that they have to try alternatives first. Also the high prices are incentives for other companies to take a look to see whether or not it makes sense to make Daraprim. Doctors and patients will experiment with other drugs before using Daraprim. Turing has about 2-3 years before they should expect competition from other companies. Turing paid $55 million for a $5 million drug (in revenue-remember you only get to take home profit not revenue) when less than 9,000 prescriptions for the drug was written every year. If you divide out $55 million by 9,000 that is roughly $6,000 per prescription. The cost of treatment for the full course of Daraprim is roughly $63,000 however can vary depending how severe it is. Assuming 9,000 people took the drug that turns out to be $567 million of revenue. When we factor in that 50% are getting the drug for $1 we can halve the revenue number to $287 million. Remember this is revenue not profit. The average profit margin for generic drug makers is actually negative -4.2%.
A wiser approach is for people to get outraged at the FDA for increasing the time and cost to get drugs to market. If it took 10 years and $1 billion out of pocket to make a drug (this is before including cost of capital) you would be forced to charge a relatively high price. The FDA needs to be reformed to allow faster innovation to create more competition which will only drive down drug prices. Reducing the number of phases that drugs have to go through from three phases to just one phase and only requiring that a drug be safe to get approved would drastically lower the cost of drugs. Everyone has different bodies and chemistry within their body and the FDA shouldn't get to decide how effective a drug is for me since it will be obviously different for everyone.
The other obvious no brainer is to allow more prescription drugs over the counter which would increase there availability (often times patients must get pre-approved by an insurance company before taking certain drugs-which ends up wasting both time of the doctor and patient). People would have the fear that consumers won't consult their healthcare professional when the data shows 60% do when purchasing over the counter drugs. Switching from prescription drugs to over the counter drugs could save roughly $5 billion for just upper respiratory infections alone. You can easily see how doing this for many different ailments would start adding up and not require people to stand in line at Walgreens/CVS waiting to refill their prescription.
If the FDA reduced its burdensome regulation it would allow more companies to bring their products to market which would create more competition and reduce prices for everyone. Creative destruction needs to be brought to the drug development industry just like Uber has disrupted the taxi industry or Airbnb has disrupted the rental market industry. The FDA burdensome process will not only not allow patients access to drugs they want but also force consumers to pay higher prices than they otherwise would have paid under a free market system.
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