In his terrific book, The Great American Drug Deal, Peter Kolchinsky talks about one of the most common surgical procedures – hip replacements. There are over 400,000 such procedures done in the U.S. annually. In fact, given my age, I now have a handful of friends who have had at least one hip done. Hip replacement surgeries were first carried out in the 1940s and, while the methodology has improved, the procedure is essentially the same today and costs about $40,000 (not including extended nursing and rehabilitation). This surgery cost the U.S. healthcare system about $16 billion in 2019 - a figure that will undoubtedly continue to grow.
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Contrast this with the important heart drug, Lipitor. This Pfizer product had peak annual sales of almost $13 billion. Yet, once the patent for Lipitor expired, there was almost a 95% drop in U.S. revenue. Today, atorvastatin, the generic name of Lipitor, is the THIRD most prescribed drug in the U.S. and, depending on the pharmacy you choose, you can buy a thirty-day supply of the 10mg dose for a mere $8. It is believed that statins have contributed to a 50% decline in deaths due to heart attacks and strokes. That’s a pretty good deal for a pill that costs about a quarter a day.
This is the basis of Kolchinsky’s Great American Drug Deal. “Doctors and hospitals don’t go generic……Drugs going generic is the cost-containment mechanism we have long had.”
But, despite the great value of generic drugs, the system isn’t foolproof. Sometimes it breaks down. Take the case of Daraprim (generic name, pyrimethamine), an old antimalarial drug still used to treat toxoplasmosis, a parasitic infection that can cause life-threatening issues for people with a depressed immune system. GSK sold Daraprim for decades but at $2 a pill, it wasn’t a big money maker and so in 2010 GSK sold the rights to Daraprim to CorePharma. CorePharma promptly raised the price of Daraprim to $13.50 a pill. (CorePharma was later bought by Impax.) Yet, despite this increase, nary a complaint was raised. This was such a minor part of hospital budgets that the increase was simply accepted. Even after this price increase, Daraprim sales were less than $10 million annually.
Enter Martin Shkreli whose company, Turing Pharmaceuticals, next bought the rights to Daraprim. Shkreli claimed that, since this was a life-saving drug, Daraprim merited a much higher price – and immediately raised the cost to $750 a pill. The outrage was instantaneous. CorePharma, Impax and Turning had done nothing to justify these increases. There had been no new research done that justified any of these increases. It was simply a case of corporate greed. And, as Turing at the time was the only manufacturer of Daraprim, it had the market to itself. (A generic version was finally approved by the FDA in early 2020.) The promise of a low cost generic was no longer being realized for Daraprim. While it was a generic company that created this scandal, the blowback to big drug companies was also severe. Most people don’t differentiate between generic companies and innovative ones. Martin Shkreli was referred to in the media as a pharmaceutical company drug executive and was dubbed the “Pharma Bro”. Big companies had to come out and publicly dissociate themselves from Shkreli. Merck’s CEO, Ken Frazier spoke for all of Big Pharma when he said: “I think it is really important to our industry to make it clear that he is not us. We are a research-based pharmaceutical industry.”
While the Daraprim is the most notorious example, there are others. Drug prices don’t always drop dramatically as happened with Lipitor once its patent expired. Like in any business, the cost of generic drugs is dependent on competition and availability. If a certain generic drug has low margins, there often will be little competition and so prices rise. But now, billionaire entrepreneur Mark Cuban plans to change the generic drug business paradigm with his newly announced venture: “The Mark Cuban Plus Drug Company”. For his first act, Cuban plans to produce albendazole, another antiparasitic drug which retails for $222 per pill, for a cost to patients of $15. Cuban plans full transparency for the cost of developing and manufacturing generic drugs and will charge a flat 15% margin on the 100 drugs he plans to be producing by the end of the year.
Cuban is taking an important step in helping to realize Kolchinsky’s “Biotech Social Contract” – the deal that drug companies has with society in which innovative life-saving drugs have finite proprietary lifetimes and then evolve into inexpensive generics. Obviously, Cuban’s enterprise will benefit patients and healthcare systems. But it will also benefit those research-based biopharmaceutical companies whose image should no longer be plagued by future “Pharma Bros”. Hopefully, these companies will be recognized as the discoverers and developers of new medical breakthroughs that they truly are.
