When I read about how the price of Daraprim, a drug used to fight a parasitic infection called toxoplasmosis, which is potentially life-threatening for people with weakened immune systems, such as those with AIDS or cancer, went from US$13.50 a tablet to US$750 a tablet after Martin Shkreli, a former hedge fund manager who runs Turing Pharmaceuticals, purchased exclusive rights to the drug, I knew that the pitchforks would be out in full force.
The Unique Problems of the Case
When I first heard this story, I immediately thought was that this was clearly a problem with the way patent laws are set up. Therefore, this had to be a government failure, rather than market failure. When I read more about the subject, I realized that I was only partly right.
Typically, prices serve as a type of flare gun. It informs people where supply and demand lies and where the most and least profits lie. Therefore, a 5000% profit margin is bound to attract competitors.
However, this is not one of those typical cases. Unlike markets for other goods like cars or smartphones, the market for Daraprim is too small for there to be enough room for competitors to create generic drugs. Also, the costs of manufacturing new drugs is prohibitively high. That is because there are fixed costs associated with building a new plant. There could also be lost revenue from having to discard the production of other (more profitable) drugs, getting samples of the drug, and figuring out how to make the generic product.
Therefore, even a 5000% profit might not be sufficient motivation for another drug manufacturer to jump into the business. To paraphrase an old saying, this town ain't big enough for two corporations.
|This is NOT enough gold!!!|
Then there is also a problem with the common public perception of medications and what it takes to manufacture them. Not all drugs are equally easy to create. A good example of this is the drug known as Hyate:C. This drug is so difficult to manufacture that one person can end up causing a world-wide shortage of it if they use too much, as it actually almost happened in 2001 when a man's tragic 34-day treatment at Duke Medical University Center cost approximately US$5 million.
Hyate:C is also another example of a drug where the market is so small that it does not become profitable for there to be too many competitors. Back in 2001, Hyate:C's wholesale price came to about US$1000. I did a bit of Googling and I found that Advate, one of the dozen or so brands of Hyate:C, goes for a little under US$5000 today.
If investors buy up tech products that delay the next iPhone release, it may cause inconveniences, but no one dies from it. However, if you mess with drugs like Daraprim or Hyate:C, people will die.
The Not-So-Unique Solutions
(A) Leave the Market Alone
However, not all is gloom and doom. That is simply because in the real world, the sticker price is seldom what is actually paid. For example, let's say that I have invented the next big thing. I think it is the greatest thing in the world and that it will save humanity. Therefore, I decide to charge US$1 million for it.
But the story doesn't end there. Just because I say it will cost a million dollars does not mean that I will get a million dollars. That is because if there is no demand for my next big thing at that price, then it doesn't matter what the sticker price is. In reality, the actual price, as far as earnings go, is zero.
Supply and demand always wins.
The same is true here. When Shkreli announced that he was going to sell the drugs at US$750 a tablet, the first thing that I thought was that this just was not going to happen. No matter how much people might need the drug, if it costs that much, people would not be able to afford them. Shkreli would then have a pile of useless medicine that he does not need or can sell.
Therefore, the first solution is to let the market be. After all, unlike the Hyate:C drug I mentioned earlier, pharmaceutical companies have gotten better at making AIDS medication to the point where AIDS is no longer an automatic death sentence. Therefore, missing a few doses no longer spells out your death.
As I typed this, I learned that Shkreli announced that he would lower the price of the drug, though no specifics have been given.
(B) The Invisible Hand of Twitter
Adam Smith is widely known for his book “The Wealth of Nations.” However, he wrote another book, which I don't think people given enough attention – “The Theory of Moral Sentiments.”
Long story short, Moral Sentiments is Smith's other theory that people should not act like dicks because acting like a dick has consequences.
The fact of that matter is that people are more considerate of our fellow human beings than we get credit for. That is why it was not surprising when social media exploded with outrage at this drastic price hike. When the most vulnerable members of our society are perceived to be harmed by the actions of a few sociopaths, people will rise to their defense.
Twitter is a double edged sword. It can needlessly ruin the lives of good men and it can also raise mediocrity to the stars. However, it can also lead to awareness of the plight of the unfortunate. Exposing what Shkreli did was one of those good things.
(C) Shkreli Will Quit
Everything that I read about the man behind the story reeks of a Gordon Gekko-wannabe who, unlike his hero, has not read The Art of War.
Being a corporate vulture, I highly doubt that Shkreli plans to stay in the pharma business for very long. He strikes me as the type of person who will take off as soon as he gets his thirty pieces of silver. And all the better for it. More businesses (perhaps one or two at the most) that want to take advantage of the profits that he exploited (which probably will be profitable even if the pills do not fetch up to US$750) will enter the market, which will in turn increase choices for consumers (it seems choice is something that AIDS patients have lacked thus far); and the choices will inevitably lower prices.
But that's assuming that he makes his money back. The fact of the matter is that he's a commodities speculator and when it comes to any kind of speculation, any activity which harms the public automatically harms the speculator. In other words, if he makes a profit, he would have shown successfully that there is a market that was ready to be exploited, which will benefit everyone involved.
To explain, though this is probably not realistic, we have to play a “what if” game. Let's say that Shkreli's asking price of US$750 is not unreasonable. Let's say that people CAN actually afford the pills at that price. If that were true, then people would immediately think that those AIDS patients are spending a lot more money, and therefore, they are the clear “losers.”
But that depends on how far we look ahead. If we are talking only about immediate results, yes, those patients would be losers. However, in the long run, if other pharmaceutical companies realize that there are profits to be made because people are able to afford the hefty price tag, they will more than happily jump into the market. This will result in more competition, more choices, higher (though perhaps marginal) quality, and lower prices. The businesses will benefit, the consumers will benefit, and the speculator can take home a big fat paycheck.
But if he fails, an incompetent speculator would be driven out of the market and (maybe) prices will return to what it was.
|Good riddance to bad rubbish!|
What Not To Do
The worst thing that anyone could do is to pass a law against this sort of behavior. The fact of the matter is that whenever governments get involved, there is usually unintended consequences. For example, if an artificial price cap is introduced, it would force drugs to be cheaper. However, it will seriously disincentivize pharmaceutical firms from producing much needed drugs like Hyate:C.
Oops. I spoke too soon. Oh well. That's politics for you.
Oops. I spoke too soon. Oh well. That's politics for you.