Drug Pricing: Module 3 of 5

Module 3: Drug Pricing

Profits vs. Public Interest

Like most commercial entities, the Pharmaceutical industry is concerned with the production and sale of products with the primary goal of achieving profits for its shareholders. There are, however, important distinctions between medicines and other types of merchandise. As we shall continue to see in this course, the impacts of many of the products of the pharmaceutical industry on the lives and health of its customers impart a unique set of ethical considerations on drug marketing and distribution. In the previous module, we learned about some of the limitations imposed on advertising and other methods of promoting drugs. In this module, we will continue to examine various areas of concern, with a focus on abusive pricing and antitrust issues. We also will consider a few cases of questionable drug promotion and pricing practices that have been the subjects of considerable public interest. These examples highlight some of the complexities of the commercial pharmaceutical industry and the question of whether a practice can be strictly legal while still presenting ethical dilemmas.

            Patent laws that were originally put in place to protect the financial status of inventors may not enable a drug to be profitable due to the extreme investments of time and money required for it to be fully tested and to gain marketing approval. This may embolden the manufacturer to charge exorbitant prices to maximize its profits before the patent protections expire. In addition, patents will eliminate competition during the period of exclusivity. These two factors can limit the ability of the public to access a medicine that, unlike many other commodities, may be necessary to satisfy a crucial public need. Thus, there is widespread support for the notion that “policies ought to encourage companies in this industry to keep drug prices low and to develop new treatments for humanitarian rather than pure profit motives[i].” This perceived duty of pharmaceutical companies to serve the public interest, while continuing to respect their obligation to their shareholders to pursue commercial success, presents their management with serious ethical and practical challenges.

Abusive Pricing and Antitrust Violations

Drug makers take many factors into consideration when determining what they will charge for their products. They consider the costs of developing the product and securing regulatory approvals. They evaluate the market, considering the severity of the target medical condition, the expected number of patients and the duration of treatment as well as comparisons vs. current and potential competitors. Finally, they consult with insurance companies to determine pricing for comparable drugs and with physicians about the likelihood that they would prescribe this drug vs. other options. This will enable them to get an idea about how much people would be willing to pay, particularly if the new drug provides a better option and could, therefore, demand a premium price. Pharmaceutical manufacturing is a business and the goal is to maximize profits. However, there can be legal and ethical complexities associated with the impact of pricing on the availability of medical treatments that are not typically encountered with other commodities.

The federal agency that is most closely involved in investigations of drug pricing is the Federal Trade Commission (FTC) whose mandate is to promote competition by enforcing antitrust laws. The core of this field of law is composed of the Federal Trade Commission Act, the Sherman Act, and the Clayton Act[ii]. The focus of FTC’s activities is identifying and penalizing business practices that “unreasonably deprive consumers of the benefits of competition, resulting in higher prices for inferior products and services”[iii]. Thus, while FTC cannot prosecute a drug company simply for charging high prices-which the company can often justify as the result of normal market forces or supply problems- it may do so if the high prices are associated with unfair methods of competition.

Unfair Methods of Competition

“Unfair methods of competition” may include one or more of the following:

Collusion —the pharmaceutical company entered into an agreement with one or more competitors on price or how much of the product they will produce.

Acquisition —the company illegally acquired a competing drug

Denying Access to Customers —the pharmaceutical company attempted to deny competitors’ access to customers by entering into exclusive supply arrangements with insurers, distributors, or pharmacies.

Denying Access to Inputs —the company entered into exclusionary agreements to deny competitors access to ingredients necessary to manufacture the drug.

Delayed Entry —the pharmaceutical company’s actions delayed entry of a competitor by engaging in any of the following actions:

1) the company enters into a “reverse payment” settlement with any generic competitors. That is where the branded company agrees to pay the generic company a large, unjustified payment in exchange for delaying the generic product’s entry into the market;

2) “sham citizen petition”: the company files an objectively baseless citizen petition with FDA. By law, FDA would then be prevented from approving a competing drug product until it rules on the petition;

3) “sham litigation”: The company files an objectively baseless patent infringement lawsuit to delay FDA approval of a generic competitor;

4) “product hopping”: The company discourages the development of a generic version of a branded drug by making “trivial and non-therapeutic changes to existing drugs that make generic substitution laws inapplicable to a new formulation.”[iv]

5) “refusals to deal”: As part of a Risk Evaluation and Mitigation Strategy, FDA may impose restrictions on distribution of a drug that are above and beyond those in the drug’s label due to certain safety concerns. The branded company may attempt to use these restrictions to deny access of generic companies to drug samples that they would need to conduct the comparator testing that would be required before their product could be approved.[v]

If FTC concludes that an antitrust violation- such as those described above- was the underlying cause of high drug prices, it may implement legal action against a pharmaceutical company.

There are less clear-cut cases in which a company may restrict access to medicines without violating any specific law, but, rather, by actions that many would consider out of line with the social contract. While such ethical violations are typically not grounds for prosecution under existing laws, they will often be met with public outrage that can result in negative publicity and even calls for legislative remedies. Let us now look at two examples of pharmaceutical company actions that raised legal or ethical questions, and the resulting impacts on their businesses or on the pharmaceutical industry as a whole.

Turing Pharmaceuticals and Daraprim

One of the indisputable facts of business is that the overarching responsibility of a CEO is to maximize his company’s profits and shareholder value. Less clear-cut, however, is the degree to which it should be acceptable for ethical standards to be compromised in order to achieve business success. The case of Turing Pharmaceutical’s drug Daraprim presented a dramatic illustration of this dilemma.

Daraprim was approved by FDA in 1953 and has long been the standard of care for treating toxoplasmosis, a parasitic infection that can be fatal for people with HIV or cancer[vi]. There is currently no good alternative to Daraprim for these patients. While a generic version of the drug is sold for less than 10 cents a dose in India[vii], there is no approved generic version in the US. The drug was acquired by Turing Pharmaceuticals in 2015. Shortly thereafter, Martin Shkreli- the CEO of Turing- raised the price of the drug from $13.50 to $750 per pill, a 5000% increase that was greeted with widespread indignation. Dramatic price increases for older, generic drugs has been a popular business strategy for some time, with examples such as a 20-fold rise in the cost of Rodelis Therapeutics’ Cycloserine, and 212% and 525% increases in the respective costs of two generic heart drugs (Nitropress and Isoprell) after they were acquired by Valeant Pharmaceuticals from Marathon Pharmaceuticals who had, themselves, quintupled their prices two year previously[viii]. As long as it does not violate anti-trust or other regulations, there is nothing illegal about this practice.

Why, then, the uproar about Daraprim?

Unfortunately for Turing, the “optics” of the situation quickly overshadowed the legal realities. A contributing factor was the practice of “controlled distribution” that was already put in place by the drug’s previous owner and was strongly supported by Shkreli. This strategy, while legal when properly implemented, often has the effect of limiting the ability of generic companies to get samples for the testing that would be required for them to develop a new version of the drug or to create a more effective treatment. These controls may also prevent some hospitals from readily obtaining the drug or being able to afford to keep it in stock and may result in delays in treatment[ix]. Although no anti-trust violations were established, Turing’s corporate profits were perceived as the driving force for the price hike and public reaction quickly became overwhelmingly negative. There was an added element that fueled the anger of observers and participants alike, and that was Shkreli’s conduct. His reputation was already compromised because of other problems, as he was- at this same time- being prosecuted for securities fraud in relation to activities at his previous company, Retrophin.

Now, as the Daraprim story hit the headlines, he reacted dramatically- often with insults and confrontational behavior- to the objections that were voiced by health-care experts, journalists, politicians, and stock market commentators who feared a legislative anti-pharma backlash. Shkreli sought to justify the price increase by claiming that the profits from Daraprim would be funneled into research to develop new, innovative medicines. However, possibly because of his provocative behavior, the public rejected these assertions and anti-Turing resentment increased. Thus, the company’s reputation was tainted by its CEO’s outrageous behavior and the reaction to the Daraprim price increase was more passionate than it might otherwise have been. 

Other pharmaceutical companies soon escalated their campaigns to distance themselves from Shkreli and Turing and to explain their own strategies for seeking to increase innovation and ensure fair drug pricing. Other industry leaders, including former Valeant CEO Michael Pearson, expressed regret over decisions to pursue deals whose main goal was to increase drug prices[x]. Shkreli, on the other hand, disregarded the ethical concerns of his critics and peers and maintained that he considered his obligation to increase profits for his shareholders to continue to be his primary duty.[xi]

As of 2018, Shkreli was serving a seven-year prison term for securities fraud unrelated to Daraprim, and the drug still retailed for more than $750 per pill[xii]. Turing changed its name to Vyera Pharmaceuticals. And the saga of Martin Shkreli and Daraprim continues to serve as an abject lesson in the complexities of drug pricing.

Gilead and Sovaldi

In another case, what had appeared to be an instance of abusive pricing was revealed to be based on a complex rationale that was centered on health cost vs. benefit analyses and the participation of insurance companies in the drug pricing conundrum.

In 2016, Gilead Sciences faced a congressional investigation into the pricing of Sovaldi, a drug that can, in most cases, cure Chronic Hepatitis C after administration for only 12-24 weeks. The drug was marketed at a cost of about $1,000 per pill[xiii]. In a white paper titled “The Value of Sovaldi: Societal Cost Issues of New Interventions of Hepatitis C”[xiv], authors from the Center for Healthcare Innovation analyzed the economic and societal factors related to the drug and addressed the ethical dilemma of whether the cost of treatment outweighs the economic costs to society of a large population of people suffering from a serious, chronic illness.

Considering direct and indirect costs of the disease, the average total costs were calculated to be $27,000 per untreated Hepatitis C Virus (HCV) patient. As the untreated disease progresses to end stage liver disease, the only treatment is a liver transplant, at an average cost (in 2010 dollars) of approximately $210,000[xv]. With a median recurrence of Hepatitis C infection of three years[xvi], the estimated costs per patient per year in untreated patients range from $27,000 with decompensated cirrhosis to more than $93,000 in patients in need of liver transplantation[xvii]. In comparison, a complete round of treatment with Sovaldi costs $84,000 per patient. With a very impressive success rate of 90%[xviii], treatment with Sovaldi reduces or eliminates the effects of chronic illness and associated long term costs. In summation, the white paper states:

“While Sovaldi’s price is more costly than alternate treatments in the short term, its high success rate drives increased value in the long term... Drug prices are not simple one-off costs. They reflect both immediate and future benefits in the way of increasing quality of life, reducing costly operations, and hindering the spread of future disease... Evaluating direct and indirect costs over an appropriate time horizon reveals the true value of any drug intervention. Sovaldi, at $84,000 per treatment, exhibits justifiable societal value. ”[xix].

However, while the total cost of treatment was considered reasonable, insurance companies balked at payments of such large amounts in so short a period[xx].  Insurers are not permitted to deny access to a new drug if it represents a real improvement for patients. However, faced with the widespread enthusiasm for Sovaldi, the insurers set out to try to control access to the expensive treatment by taking a hard line on which patients should get the drug based on the clinical data. Some of the tactics used to limit access are the requirement for prior authorization before using the drug or limiting access to patients with a certain genetic type of the disease. In this way, all but the sickest patients would have to wait for new therapies while insurance companies focused on negotiating lower prices with manufacturers of new, potential alternative treatments. Once again, the letter of the law was not enough to prevent the imposition of a price that effectively prevents many patients from obtaining their medication.  


The conflict between the economic realities of the business of drug development and the societal need for affordable and accessible treatments presents a range of issues that continue to confound manufacturers, regulators, medical practitioners, and patients. While it may not be against the law to greatly increase the price of an old, but effective drug, the pharmaceutical industry must continually seek to answer a fundamental question: Is it the right thing to do? As Dr. Ian Malcolm said about the creators of Jurassic Park, “Your scientists were so preoccupied with whether or not they could, they didn’t stop to think if they should”.

In the final two modules of this series, we will consider some special cases of drugs and patient populations that have led to new categories of regulations as well as scientific developments that have had unforeseen legal and ethical consequences.


[iii] U.S. Dep’t of Justice, Antitrust Enforcement and the Consumer, https://www.justice.gov/atr/file/800691/download.

[iv] Brief for FTC as Amici Curiae Supporting Plaintiff-Appellant, Mylan Pharm., Inc. v. Warner-Chilcott PLC, 838F.3d 421 (3d. Cir. 2016), 2016 WL 6137296, at *1. 

[viii] nytimes.com, op cit

[ix] ibid

[xv] Hilst, C., Ijtsma, A., Slooff, M., & Tenvergert, E. (2009). Cost of Liver Transplantation: A Systematic Review and Meta-Analysis Comparing the United States With Other OECD Countries. Medical Care Research and Review, 3-22 

[xvi] Ghobrial, R., Steadman, R., Gornbein, J., Lassman, C., Holt, C., Chen, P., Busuttil, R. et al. (2001). A 10-YearExperience of Liver Transplantation for Hepatitis C: Analysis of FactorsDetermining Outcome in Over 500 Patients. Annals of Surgery, 234(3), 384-394.  

[xvii] Chisite, op cit, p 15

[xix] chisite, op cit, p. 21