Before his recent arrest, Martin Shkreli, the former CEO of Turing Pharmaceuticals, gained notoriety for increasing the price of the AIDS drug Daraprim® (pyrimethamine) from about $13.50 to about $750 per pill. He also was reported to be considering a similar price hike for benznidazole, for which his new company, KaloBios Pharmaceuticals, was going to seek FDA approval for treating Chagas disease. Complaints about Shkreli’s drug price hikes often turn into complaints about the supposed pernicious effects of pharmaceutical patents, but you can’t blame patents for Shkreli’s conduct because the patents on pyrimethamine and benznidazole expired long ago. Rather, the recent developments surrounding these drugs illustrate how the market functions without patents.  

The Small Patient Population Problem

Pyrimethamine is extremely potent against toxoplasmosis, but the number of people with that disease are (fortunately) few. With such a small potential market and off-patent prices, there was little incentive for generic drug companies to invest the at least $400,000 it can take to obtain FDA approval of a generic drug. Thus, even though the relevant patents expired decades ago, there is only a single FDA-approved supplier of pyrimethamine. Once Turing Pharmaceuticals bought the rights to pyrimethamine and raised the prices to $750 per dose, the missing market incentive suddenly appeared. Express Scripts, the largest U.S. pharmaceutical benefit manager, quickly reached a deal with generic company Imprimis to provide pyrimethamine for $1 a pill.

Like pyrimethamine, benznidazole is an old drug used for a relatively rare infectious disease. Benznidazole treats Chagas disease, which is seen in the U.S. in fewer than 300,000 people. Prior to KalBios, the only way to obtain the drug was through the Centers for Disease Control, which provided it for free. As with pyrimethamine, the small potential market and lack of patent protection to limit market entry make it unsurprising that no generic drug company had sought FDA approval for benznidazole. KaloBios exploited that market vacuum by applying for  FDA approval, which would give it market exclusivity and the ability to raise prices, at least temporarily.

Therefore, in both cases, the spike in drug prices was not caused by monopoly power supported by patents, but by monopoly power stemming from the barrier to market entry associated with the requirement for FDA approval.

Patents As Pricing Solution, Not Pricing Problem

The pharmaceutical industry says that patent protection–and the profitable drug pricing patents support–is necessary to provide a return on the significant investment it takes to bring a new drug to market, and to provide resources for investing in further research and development to generate new drugs. Those who advocate for the abolition or curtailment of pharmaceutical patents often do so on the assumption that patents permit unjustifiably high drug prices and prevent competition. But anti-patent advocates forget that patent protection only lasts for a limited time and that the ANDA statutes provide a framework for generic drug companies to enter the market as soon as patents expire or are invalidated.

The recent stories about pyrimethamine and benznidazole show that eliminating patents does not guarantee increased competition and lower drug prices, because no generic competitors emerged in the decades since the patents expired, contrary to the assumptions of anti-patent advocates. If there was not enough incentive to incur the relatively modest costs of regulatory review for generic versions of pyrimethamine and benznidazole, what incentive would there be to cover the much higher costs of developing a new drug?

Without patents to provide temporary market exclusivity to innovators, the pharmaceutical market could become dominated by the first mover and/or lowest marginal cost provider. Such a market structure could result in a small number of providers and monopoly power that is not subject to the limitations of the patent system, especially for drugs with small potential markets. The $13.50 to $750 price hike orchestrated by Martin Shkreli shows the potential consequences of such a patentless system. Those who would eliminate pharmaceutical patents should study pyrimethamine and benznidazole as cautionary tales, and be warned that a pharmaceutical market without the support and limitations of a strong patent system could result in higher drug prices and/or fewer drug choices, which is not what doctors want to order.