When cheap drugs suddenly become expensive

October 1, 2015

The reasons for recent jumps in generic drug prices are varied, but some common themes have emerged in a new study by National Center for Policy Analysis Senior Fellow Devon Herrick.

The reasons for recent jumps in generic drug prices are varied, but some common themes have emerged in a new study by National Center for Policy Analysis Senior Fellow Devon Herrick.

“The prices of some generic drugs have skyrocketed in price in recent years,” according to Herrick. “Generic drugs account for about 80% of the drugs Americans use. They, at least in theory, face unlimited competition. But the reality is many things can impede that competition. I began researching ways consumers can save on drugs back in 2003.  Choosing generic drugs was always the best strategy. So naturally I became concerned when some of them became hard to find and the prices of some shot up drastically in price.”

“Market consolidation in manufacturing and distribution plays a role in some cases,” according to Herrick. “Aging products lines and niche drugs tends to have unstable prices. The recent examples of antiparasitic treatments and the malaria drug are great examples. They were so rarely used that the number of firms making them dwindled to one. That-along with an FDA that is overwhelmed with a 4000 drug application backlog- created the conditions where the ‘new owners’ of the drugs could jack up the price, knowing they would likely have more than two years of monopoly profits before another firm’s application could be approved to compete with them.”

Partly what allowed that to happen is also the recent jump in the number of specialty drugs used for serious, but rare conditions, according to Herrick.

“FDA provides lucrative incentives for drug makers to research and develop drugs for rare conditions [orphan drugs],” he says. “In addition, biotech drugs are another example of expensive drug used for serious conditions.”

As an aside, specialty drugs are only 1% of drugs prescribed but account for one-third of drug spending, notes Herrick. “But, orphan drugs and other specialty drugs are supposed to be new drugs still under patent protection, not an avenue for jacking up the price of 60-year old generic drugs-that may sell for pennies apiece abroad where their use is more common- to hundreds of dollars per pill.”

Managed care executives should be concerned because they could find themselves in situations where “a cheap drugs suddenly becomes expensive-or super expensive,” Herrick says.

“Executives based in hospitals could find themselves in situations where an injectable, such as an oncology drug, is hard to find and cost much more than normal-and has to be procured on the gray market. If they know there conditions can occur without warning, they can better plan,” he says. 

It does appear, however, that the surge in generic drug prices is beginning to moderate, Herrick says.

“However, I suspect there are other CEOs like the 32-year old CEO of Turing Pharmaceuticals who are scouring the market in search of opportunities like Daraprim that would allow them to cheaply acquire old, little-used drugs that can be jacked up in price to astronomical levels,” he says. 

Some of the recent price spikes are unavoidable as raw material supply chains are disrupted, according to the study.

“But other examples are avoidable-basically involving firms [manufacturers and distributors] gaming the system because FDA cannot respond and approve competing [abbreviated new drug applications] fast enough,” he says.

This study is part one of Herrick’s in-depth examination of the rising costs of generic drugs. The second part, which will examine the regulatory and legal reasons for the price hikes, will be released soon.