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By MoneyTips
October 21, 2015
Andrew Unangst—Getty Images

In the world of prescription drugs, “generic” does not necessarily mean “inexpensive.” In fact, it can be quite the opposite as new manufacturers acquire the rights to older generic drugs.

The recent case of Turing Pharmaceuticals and Daraprim brought the issue into sharp focus. Daraprim is the standard method of treatment for toxoplasmosis, a parasitic infection that can be life threatening to people with weakened immune systems and to the babies born to infected pregnant women. The condition is thankfully rare so Daraprim is seldom used, but to those who do need the drug it can be a life-or-death situation.

Turing’s CEO Martin Shkreli raised the price of the drug from $13.50 per pill to an outrageous $750 — an increase of 4,000%. While acknowledging a greedy appearance, Shkreli said the price increase had “altruistic properties to it,” alluding to using the profits to find and create an alternative to Daraprim. Great…except that Daraprim has manageable side effects and is an effective and safe standard.

Turing also added, “Any company selling it (at the original price) would be losing money,” which may well be true. The drug has been made for 62 years, so there are no research costs associated with it, but production costs and regulatory approvals can be disproportionately costly for drugs with limited use. Thus, few other companies are willing to invest and provide competition. In this case, Turing made the task more difficult by continuing with a limited distribution model, making it hard for potential competitors to gain the necessary reference samples.

Turing is not alone with price hikes, nor is Daraprim the only generic drug to rise sharply in price after a purchase of manufacturing rights. Valeant Pharmaceuticals drastically increased the prices of two heart drugs after acquisition. The price for Nitropress increased by over 200% and Isuprel increased over 500%. Rodelis Therapeutics acquired cycloserine, a tuberculosis treatment drug, from a non-profit organization with ties to Purdue and promptly raised the price for a thirty-capsule dose from $500 to $10,800.

The Rodelis case gives insight into the pharmaceutical side of the story. Rodelis agreed to give cycloserine back to the non-profit group, who had to raise the price to $1,050 to cover longer-term manufacturing costs. The group has lost approximately $10 million since 2007 because of the limited demand for the drug and the high regulatory costs required to maintain production.

Eli Lilly had made cycloserine for decades until it dropped the line in 2000. The rights were mostly transferred to drug manufacturers in countries where the need was greatest such as India and China, while North American rights were given to the Purdue non-profit group. Cycloserine is readily available overseas for around $20 per 100 capsules, yet the expensive US regulatory approval process keeps foreign manufacturers from supplying the US market — they would never see a positive return on investment.

The situation calls out for a common sense middle ground, where FDA recognizes the economics of the situation and works with foreign manufacturers to expedite approvals. Otherwise, why should we be surprised that those willing to serve the market charge outrageous prices?

Daraprim is not likely to follow the path of cycloserine. As of this writing, the backlash had Shkreli pledging an unspecified price drop, but rest assured there will still be a tidy profit for Turing. Rest equally assured that Congress will turn their attention to this issue with an upcoming election year. There are not many fans of Shkreli, at least not publicly, and the fact that he was previously a hedge fund manager does not help his case. With Halloween approaching, perhaps this year we will see children dressed up as Mr. Shkreli attempting to resell their candy bars for $1,000 each.

Humor aside, expect increased scrutiny on generic drugs. Pharmaceutical companies should not be expected to lose money on the deal, but nobody should be forced to risk death for lack of a lifesaving drug that has been in production for many years at a previously reasonable price. Drug manufacturers are well advised to seek a reasonable middle ground, and perhaps the FDA should take a look in the mirror as well.

Read Next: Why Some Retirees Will Have to Pay a Lot More for Prescription Drugs

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