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When a company invests in research and development (R&D) and introduces a breakthrough drug into the market, it has the right to use a pricing strategy that provides them some return for their investment. However, the drug should also have the features and benefits to command such a price and even then, there is a certain limit that cannot and should not be exceeded when it comes to pricing a product.

Price is generally assumed to be an indicator of quality. While this may hold true for electronics, apparel and other consumer related products, it does not completely apply to the pharmaceutical industry. That is because two drugs that contain the same molecule will typically have the same effectiveness and safety profile. Even if there are differences in efficacy and safety, there is still very little justification for charging outrageous amounts for medicines that might be critical for patients.

A case in point is the recent controversy with EpiPen. The dramatic price spike of EpiPen has outraged healthcare leaders, media and patients alike. EpiPen (epihnephrine injection USP, 0.3 mg – EpiPen Jr or epinephrine injection USP, 0.15 mg)  is an anaphylactic auto-injecting drug, which is believed to be a critical drug in any emergency medical kit. The drug is used in patients who are allergic to anything from bee stings, food, certain medicines or active components and excipients thereof. In other words, it is a medicine that can be required at any point in time and that should be easily accessible for patients.

The controversy revolves around the unjustified price increase of the drug despite the manufacturer’s official announcement of a series of measures to make it more accessible to patients. Twelve years ago, the cost of a 2-dose pack of EpiPen was $100. Since then, the price of the drug has risen steadily to $600 in 2016. This equals an increase of about 400 percent. This seems outrageous keeping in mind the use of the product.

Due to this dramatic increase, patients started a social media campaign against the manufacturer, Mylan, urging them to cut down the price. Critics believe that the actual cost of the epinephrine dose is no more than a humble $1. To price it at $600 is taking price gouging a bit too far and clearly shows how far some companies can go in their exploitation of the market.

In light of all the hue and cry, Mylan reacted in various ways and put forward a so-called ‘zero-pay’ card aimed at adjusting co-pays significantly for those who have a good insurance plan However, the card only reduced the price by $100 for those that have high deductibles or are not enrolled into any insurance plan.

On August 29, 2016, Mylan announced it would launch a new, more accessible version of EpiPen. Heather Bresch, Mylan CEO said in a statement published on the company’s website that the company wants to ensure this product is accessible to anyone who needs it and will thus launch a generic alternative to EpiPen. The company claims that the high price was due to the supply chain system of the pharmaceutical industry which forced Mylan to shift the cost to the patients.

Pharma and pricing experts however, do not buy this argument. Timothy Holbrook, who is a patent law expert and Emory University law professor, expressed his doubts about the legitimacy of the dramatic price increase of EpiPen. He claimed that while The Affordable Care Act (ACA) may have generated a price increase trend in the cost of the treatment but it still does not justify such a huge price hike.

Holbrook also points out that Mylan’s decision to release its own generic alternative to EpiPen is not exactly unique. To keep a top position in the market, it is a common strategy for a brand-name drug to come out with an ‘authorized generic’. This simply allows the company to not only price its brand higher than other similar drugs but also enter generic market claiming to offer the best of the lot. In this case, all this has done is allow Mylan to create an authorized generic drug version to the brand-name medicine without having any generic competition.

Dr. John Meigs Jr., MD, President-Elect of the American Academy of Family Physicians argues that such price jumps are signs of a bigger problem. Nowadays, there are too many cases of drugs that hold a monopoly on production which eventually leads to price gouging and unfair pricing strategies.

The EpiPen case is not unique nor is it new to the pharma industry. It was only last August when Turing Pharmaceuticals purchased the rights to Daraprim from Impax Laboratories Inc. Daraprim is a standard recommended therapy for parasitic infections, toxoplasmosis that can be fatal for immunocompromised patients. Once they had the rights to Daraprim, Turing Pharmaceuticals increased the price of the drug from $13.50/tablet to $750/tablet. This is a price hike of about 5,000%.

Doctors and infectious disease specialists immediately reacted to the overnight price jump, concerned that the outrageously high cost of the medication would practically force hospitals to use other less expensive but not as effective treatments. This type of price gouging was quite surprising since the drug was not a breakthrough product but a molecule that had been available in the market for the last 62 years.

Pharmaceutical companies also resort to price gouging when a drug is in short supply. Some buy patents to already existing drugs and turn them into ‘specialty’ medication. They then reintroduce them into the market at exorbitant prices.

Generally, the pharmaceutical industry invests a lot in research and innovation. This may in some cases justify the high price of a drug. However, this is not always the case as we have seen. Disturbing though is that pharmaceutical companies tend to maximize and prioritize profits as compared to focusing on new drug development and production.

Another similar price gouging tactic was initiated by Valeant Pharmaceuticals. They increased the price of Nitropress, a drug used to treat blood pressure, by more than three times to $805 per vial and more than six times to $1346 per vial for Isuprel, a drug that addresses heart rhythm problems.

These companies have been able to exploit the distortions in supply and demand within the pharmaceutical industry to their advantage. But what they don’t realize is that these tactics can severely damage a company’s reputation. Due to public outrage, both the CEOs of Turing and Valeant had to resign; Valeant’s share price declined drastically and there was a great deal of negative publicity for the organizations. Not only that, the companies faced significant congressional outrage and investigations thus completely destroying their reputation within the industry and shattering the trust of patients.

In addition, these exploitative companies also have a negative impact on the healthcare system and its ability to manage costs and provide quality care. For example, the 600% price increase for Isuprel would have translated into a $1.6 million annual increase in hospital costs as pointed out by Erin Fox, Director of University of Utah’s Health Care Drug Information Service. It would have also forced the hospital to remove it from its emergency crash carts.

Already the healthcare system in the U.S. is facing significant challenges. Americans spend more than $1000 a year on prescription medicines. This is much higher as compared to other countries such as Canada and Germany

While there is no doubt that pharmaceutical companies should be compensated for the amount they invest in research and development but increasing prices of generic drugs by such large margins is surely not justified.

However, there is a need to implement some form of accountability to ensure that the product indeed justifies the price. The FDA should be allowed to evaluate the R&D data and other factors and should be given the authority to decide whether a drug is truly innovative or not. If they deem that a drug only serves the same purpose as other drugs already available in the market, the company will have no justification to exploit their product. The provisions of the Orphan Drug Act have been used by companies to their advantage but it is high time the provisions of ODA were only provided to those who come up with really innovative and breakthrough products.

The above discussion clearly demonstrates that we still have a long way to go when it comes to better transparency and accountability in the pharmaceutical industry. The pharmaceutical lobby is quite big and they have a huge financial backing which means that it is difficult to tackle the exploiters and control these unfair practices. Pricing in the pharma market is mainly used to recoup the high investment cost in R&D but there has to be some type of system in place that can actually confirm the accuracy of the cost companies’ claim they incurred during the drug development process.

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