A man died in Rennes, France last week after a clinical drug trial went disastrously wrong. Shortly before Christmas, Martin Shkreli, was  arrested on securities fraud charges.  Shkreli won the soubriquet of ‘most hated man in America ‘ after the company he controlled raised the price of the drug Daraprim from $13.50 a tablet to $750. These different events span the difficult range of issues raised by pharmaceutical regulation.

Daraprim was developed more than half a century ago and relevant patents have long expired.  But the market is relatively small, and Shkreli’s firm, Turing, acquired the only US producer.  Anyone else selling the drug in the United States would need to gain approval for its formulation from the FDA and that process would cost time and money.

But anyone who did invest that time and money would run the risk that when their product appeared  the incumbent might reduce the price  Knowing that this could happen, the prospective entrant might be deterred.  The pricing of Daraprim is a textbook example of the problematic economics of contestability – the way in which market outcomes are influenced not just by the number of competitors but by the potential for competition.

Regulation  which limits entry is the source of the economic problem; but the tragedy at Rennes is a reminder that the logic of requiring prior approval before pharmaceutical products are generally released is compelling.  The value of careful regulatory scrutiny was demonstrated when Frances Kelsey of the FDA (who died last year) blocked US approval for  thalidomide, the drug which led to the birth of thousands of deformed babies in Britain and Germany.  

       The Rennes incident occurred in a Phase 1 clinical trial, the first part of the costly three stage process for bringing a new product to market. Plainly, this drug was put into testing prematurely, and there will be pressure to strengthen regulation still further; but these approval processes are already justly criticised for being too bureaucratic and lengthy.  It is safer for a regulator to allow patients to die because a potentially life-saving drug has been held back than to allow patients to die because a dangerous drug has been released prematurely.

         So testing will inevitably be rigorous and costly, creating market opportunities for men like Mr Shkreli, and enabling the pharmaceutical industry to report returns on capital that would make a banker’s eyes water. It is tempting to conclude that where the state regulates products and market entry it must also regulate prices. But what is a ‘fair’ price for a drug? Much expenditure on research and clinical trials yields no useful result, so that winners must be rewarded in a way which reflects the losses of the losers. Prices should surely recognise the value of a drug; but it would be unconscionable to propose that beneficiaries of a life saving  product pay what it is worth to them. And Mr Shkreli has dealt a fatal blow to any belief that the issue could be resolved by appeal to the good sense and public spirit of the pharmaceutical industry.

    This is a problem with no right answer. Although most pharmaceutical spending is directly or indirectly government funded, Soviet experience  demonstrated that state control of the industry produced very little innovation. Perhaps we should make more use than we do (or once did) of prizes for discoveries of public benefit. Otherwise, a mixture of the various devices used around the world – supervision of aggregate industry revenues, monopolistic purchasing negotiations, and readiness to  undermine dominant positions when they are abused, seems the proper pragmatic course. So long as the industry understands, as Mr Shkreli did not, that its responsibilities are to a wider community than its own shareholders.  The Rennes incident is a reminder of those responsibilities.