In August 2015 a former hedge fund manager Martin Shkreli made national headlines when his company, Turing Pharmaceuticals, acquired the rights for and raised the price by 5,556 percent of Daraprim (generic name Pyrimethamine), a drug commonly used to treat parasitic infections1. This exorbitant price increase of a potentially lifesaving drug so soon after its acquisition raised a host of accusations of profiteering and made Shkreli the posterchild of corporate greed within the pharmaceutical industry. When questioned about his actions, Shkreli stated that he was guided by a capitalistic desire to ensure that his company was able “to flourish” 2. The sensational nature of this event quickly captured the attention of the mainstream media and raised the question of whether this form of exploitation should be allowed within the American pharmaceutical industry. Though it would seem unethical to allow such obvious manipulations of the cost of lifesaving medication, there are ethical implications of conversely creating price caps on pharmaceutical products creating a level of moral ambiguity to the problem of pricing pharmaceutical products.

This incident with Daraprim is an extreme example; however, it signals a general trend within the industry to have newly formed companies buy up the patents for existing drugs and increase the price. A recent study performed by the United States Government Accountability Office found that since 2010 the price for generic drugs under Medicare Part D had increased3. This overall increase in the price of generic drugs was caused by the “extraordinary” price increases of 315 generic drugs, some of which had more than doubled in price in under ten years4. These arbitrary increases in price for generic medications often put unnecessary constraints on doctors as they are forced to prescribe alternate forms of treatment of questionable efficacy. Indeed, these increases are often attempts to capitalize on the limited supply of these generic drugs and some members of the industry have even been accused of cooperating so as to raise prices in tandem. An example of this attempt to raise prices for generics without justification is the company Mylan Specialty which is currently being investigated due to possible collusion with competitors over its price increase of the popular antibiotic Doxycycline.5  Such a worrying trend raises serious questions as to whether the government should be responsible for the regulation of an industry which is so vital to our nation’s wellbeing. This trend also raises the question of whether our nation is morally obligated to hold pharmaceutical companies to a higher code of business ethics precisely because of the impact that decisions from these companies can have on the stability of our nation’s Healthcare system. Even with increased government oversight, can an industry with such a powerful lobby truly be held accountable by the government6? These factors come together to create a complicated situation which pits the fiduciary obligations of a company against its obligations to the society which supports it. In the end, this problem can only be resolved by acknowledging that pharmaceutical companies must be held to a different set of standards than other industries due to their unique relationship with the American public health system.

The primary justification behind the recent increases in price for many brand and generic drugs is the financial burden that is placed upon pharmaceutical companies to ensure the efficacy and safety of their products before initial sales. The numerous rounds of clinical trials and the long time-frame in the R&D pipeline means that the production of new drugs is an onerous, expensive process that requires a steady stream of capital. The primary source of this capital for most well-established pharmaceutical companies is the sale of existing drugs which they have already patented. The necessity of this balance has led to the creation of an unspoken agreement between the pharmaceutical industry and the American public: the government will allow companies a certain degree of freedom with regards to pricing if the money earned is then used to develop new drugs7. However, the example of Turing Pharmaceuticals represents a clear violation of this trust since the newly formed company had devoted very little of its operating budget to research and development and acquired the patent for Daraprim from an existing company8. These tactics of corporate piracy, even if ethical permissible in other spheres of business, cannot be permitted within the American pharmaceutical industry due to the need for constant reinvestment in the development of new drugs. If this trend is not reversed, either through legislation or ethical business practices, it is likely that the pharmaceutical industry will lead to a general destabilization of an already shaky Healthcare system.

When faced with such rapid inflation of drug prices, the first reaction of many legislators is to propose two potential solutions. More liberal candidates advocate that the government follow the example of Canada and create a set of price caps for vital medications. Conversely more Conservative candidates take an anti-regulation stance and purpose that the FDA lower the amount of screening required before a drug can hit the market. While both potential solutions might alleviate the problem of drug price inflation in the short term, the repercussions of either of these actions could potentially cause untold harm to the American healthcare system.

The creation of a series of price caps would certainly be the most direct way for our nation to mitigate the dangers of drug price increases. However, this action would severely hamper the ability of pharmaceutical companies to generate income from the sale of their products. With such drastic decreases in revenue, the pharmaceutical companies, as capitalistic organizations, would be impelled by a fiduciary responsibility to their shareholders to alter their budgets to create a profit. When things are placed on the chopping block it is clear to see that the long term, high risk projects of producing new drugs would be the first things to go. The National Bureau of Economic Research predicts that cutting drug prices by 40 to 50 percent could lead to over a 60 percent reduction in the number of new research and development projects undertaken in the United States9. The effects of this reduction would not be felt immediately, but the stagnation of pharmaceutical research and development would lead to an overall decrease in the quality of care provided by the Health Care system. In addition, the negative effects of this action would most likely be felt by the most vulnerable segments of society. The increased financial pressures of price caps would lead pharmaceutical companies to cut the development of drugs which they would consider less profitable in favor of the more lucrative drugs and treatments10. Thus due to the emphasis placed on the development of new drugs within the American system, the pharmaceutical industry cannot be regulated into control solely with price caps if an alternate source of capital is not provided. The addition of price caps would require an increased level of investment in pharmaceutical companies from either the public or private sector to maintain the current rates of drug development. Since the American public is unused to investing such a large amount of money in a previously self-sufficient industry, this solution is unlikely to help the situation in the long run.

The opposing strategy of limiting the federal oversight of the actual development of new drugs has a questionable efficacy and potentially disastrous consequences. The stringent FDA guidelines, though very costly, are vital to ensuring the safety and efficacy of a product for public use. This oversight is especially important with regards to pharmaceutical products due the potentially life altering consequences of a failed or defective drug. Ideally the Pharmaceutical industry would take its responsibility to its consumers seriously and would conduct appropriate levels of screening for their products without prompting from the federal government. However, the regulations are necessary to ensure a standard across the industry and to prevent the pressures of a capitalistic system from leading companies to jeopardize the wellbeing of their customers. By removing these strictures of federal oversight, the government would eliminate the standardization of the industry without any concrete likelihood of decreasing prices in a meaningful way11. In an industry that is as competitive as pharmaceuticals it is rather naïve to believe that companies will immediately pass on their savings from the shortened development to their customers. And any attempt to mandate that companies to lower their prices in return for decreased levels of screening is merely exchanging one form of federal regulation for another.

Both the aforementioned strategies for combating this inflation crisis in the pharmaceutical industry are ineffective due to the fact that they are unable to reconcile the capitalistic nature of these companies with the public service that they are expected to perform within our society. The American public demands that these private sector companies function as the engines of innovation within this critical part of the healthcare system and are shocked when the costs of this immensely complicated process are passed along to the consumer. The pharmaceutical companies, as they currently exist, should not be obligated to adjust their prices based on the need of the society for their product. An alternative approach would be to have the government take an active role in the management of pharmaceutical development by potentially employing a contract based system. These contracts would increase the control the government had over which drug projects were prioritized within the industry instead of allowing merely companies to make minor changes to lucrative drugs to maintain control of a patent12. This would give the government control to ensure that new drugs continued to be produced without asking private companies to assume the entirety of the financial burden.

This being said the pharmaceutical industry should also be held accountable for their prices. In recent years, some members of this industry have been price gouging and exploiting the complicated supply chains to create an increased demand for their product13. The profit margins of large pharmaceutical companies in recent years have been enormous, despite the claim that the price increases are necessary for the R & D of new drugs. For example, a majority of the largest pharmaceutical companies allocate between 15 to 20 percent of their operating budget to research and development programs. This contrasts starkly with the expenditure of smaller pharmaceutical companies, some of which can spend up to 50 percent of their total budget on research and development despite their markedly smaller operating budget14. In light of this disparity between the levels of investment between the different sized pharmaceutical companies, it is clear that the free market alone is not enough to induce larger companies to devote a proportionate amount of their budget to developing new products. Part of the solution to this aspect of the problem would be to hold pharmaceutical companies to a higher ethical standard than other corporations by demanding that they justify each increase through litigation and public hearings. In this way pharmaceutical companies could be treated less like purely capitalist organizations and more like cooperatives which provide a valuable service to society but are still directly accountable to the people they serve.

1 Pollack, A. (2015). Drug Goes From $13.50 a Tablet to $750, Overnight. Retrieved November 10, 2016, from http://www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html

2 Vaughan, J. (2016). Ethical Discussion: The ethics of drug pricing- General Education. Retrieved November 04, 2016, from https://blog.spcollege.edu/general-education/ethical-discussions-the-ethics-of-drug-pricing-spcethics/

3 Part D Generic Drug Prices Declined Overall, but some Had…(n.d.). Retrieved November 3,2016, from http://www.gao.gov/assets/680/679022.pdf

4 GAO Report: 315 Gererics More Than Doubled in Price Since… (n.d.). Retrieved November 5, 2016, from http://www,raps.org/Regulatory-Focus/News/2016/09/13/25847/GAO-Report-315-Generics-More-Than-Doubled-in-Price-Since-2010/

5 Kodjak, A. (2016, November 4). Retrieved November 10, 2016, from http://www.npr.org/sections/health-shots/2016/11/04/500690800/generic-drugmakers-facing-antitrust-inquiry-over-rising-prices

6 Eduardo Porter, “Importing Less Expensive Drugs Not Seen as Cure for U.S. Woes,” The New York Times, 16 October 2004

7 Ann-Marie McIntyre, Key Issues in the Pharmaceutical Industry (New York: Wiley, 1999).

8 Vaughan, J. (2016). Ethical Discussion: The ethics of drug pricing- General Education. Retrieved November 04, 2016, from https://blog.spcollege.edu/general-education/ethical-discussions-the-ethics-of-drug-pricing-spcethics/

9 Thomas A. Abbott, The Cost of US Pharmaceutical Price Reduction: A Financial Simulation Model of R&D Decisions (Cambridge, MA: National Bureau of Economic Research, 2005).

10 Schulenburg, F. V., Vandoros, S., & Kanavos, P. (2011). The effects of drug market regulation on pharmaceutical prices in Europe: Overview and evidence from the market of ACE inhibitors. Retrieved November 03, 2016, from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3402967/

11 W. Duncan Reekie and Michael H. Weber, Profits, Politics, and Drugs (New York: Holmes & Meier Publishers, Inc., 1979).

12 Big Pharma loses key ruling over cancer drug patent. (n.d.). Retrieved November 03, 2016, from http://www.cbsnews.com/news/big-pharma-loses-key-ruling-over-cancer-drug-patent/

13 Katie Thomas, “News of Charges in Price Fixing Inquiry Sends Pharmaceuticals Tumbling,” The New York Times, 3 November, 2016.

14 I. (2015). How much of a drug company’s spending is allocated to research and development on average? Retrieved November 01, 2016, fromhttp://www.investopedia.com/ask/answers/060115/how-much-drug-companys-spending-allocated-research-and-development-average.asp