Pharma responsibilities are to a wider community than its own shareholders

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Two recent events have served to highlight the range of difficult questions raised by pharmaceuticals regulation. Last week, a man died in the French city of Rennes after a clinical trial of a painkiller went tragically wrong. In New York last month, Martin Shkreli, a former hedge fund manager, was arrested on securities fraud charges; Shkreli, who denies wrongdoing, won the sobriquet of “most hated man in America” after the company he controlled raised the price of the life-saving drug, Daraprim, from $13.50 a tablet to $750.

Daraprim was developed in the 1950s and the patents expired a long time ago. The market, though, is small and Shkreli’s company had acquired the only US producer. Any other company that decided to sell the product would need to gain approval from the Food and Drug Administration, which would cost time and money. Anyone taking that path would face the risk that, when their product appeared, the incumbent might reduce their price in predatory competition, and this knowledge may deter prospective entrants

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 that limits entry creates the possibility of price-gouging, but the death in Rennes is a reminder that the logic of requiring approval before drugs are put on sale is compelling. The value of careful regulatory scrutiny was demonstrated in the 1960s, when the FDA blocked US approval for thalidomide , the drug that led to the birth of thousands of babies with physical impairments in Britain and Germany.

The Rennes incident occurred during the first phase of a clinical trial in the standard (and costly) three-stage process for bringing a product to market. Plainly, this drug was put into testing prematurely and there will be pressure to further strengthen regulation. However, in the industry and outside, some already justly criticise these approval processes for being too bureaucratic.

It is politically 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 early.

Such rigorous and costly testing creates market opportunities for people such as Shkreli and, industry complaints notwithstanding, enables the pharmaceuticals sector to report enviable returns on capital.

It is tempting to conclude that, where the state regulates products and market entry, it must also regulate prices. What, though, is a fair price for a drug? Prices should surely include acknowledgment of the value of an effective drug but it would be unconscionable to propose that beneficiaries of a life-saving product pay what it is worth to them. The Daraprim price rise dealt a fatal blow to any belief that the question could be resolved by appeal to the good sense and public spirit of the pharma industry.

This is a problem with no right answer. Although much pharmaceuticals spending is directly or indirectly funded by government, state control of the industry in the Soviet Union 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 mix of 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.

The industry has to understand, as Shkreli did not, that its responsibilities are to a wider community than its own shareholders. The Rennes incident is a reminder of those responsibilities.

 

This article was first published in the Financial Times on January 20th, 2016.

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