Who Benefits When Generic Drug Prices Go Up?

November 10, 2016

Who Benefits When Generic Drug Prices Go Up? Photo


Over the last 24 months, a number of high-profile generic drug price increases have dominated the news cycle—along with the barrage of negative election-related stories— in part due to the rising proportion of healthcare costs being shouldered by employees.

  • As we entered the school year, Mylan, the maker of EpiPen, which is used to quickly treat severe allergic reactions, became the latest poster child for corporate greed. When drug maker Mylan N.V. bought the autoinjecting device EpiPen1 from Merck KGaA in 2007, its list price was $57. By 2009, the price for a two-pack was $100. Through a series of steady biannual price increases, a two-pack now costs about $600.
  • Last September, Turing Pharmaceuticals purchased 62-year old drug Daraprim, regularly prescribed for treating potentially life threatening infections from parasites, and subsequently increased the price from $13.50 to $750 – a 5,000% increase.
  • In February of 2015, Valeant Pharmaceuticals, who has made a business of buying prescription drugs and raising their prices, acquired 78-year drug Isuprel, used to treat conditions such as heart attack and congestive heart failure, and has since raised its price by 718%.

These are not new drugs that justify higher prices in order to recoup significant research and development costs. They are not existing drugs that have been improved as a result of costly investment in lab work and human testing. The manufacturing process was not shifted to a new, expensive plant. They are all well-established, generic drugs that were not developed by their current owners, and in each case, the biggest change for the drug was its owner. The price increases occurred for pure profit motives. While not often increased as aggressively as the drugs mentioned above, price increases on generic drugs are not unusual, as the chart above illustrates. There are, of course, legitimate reasons for some price increases, including market consolidation, lack of drug wholesaler competition, fewer manufacturers of older therapies and raw materials shortages.

In September, Hillary Clinton unveiled a proposal to address drug pricing, primarily aimed at generic drugs. Clinton’s proposal included the establishment of a task force with the power to determine whether price increases for life-saving or critically-needed treatments that have long been available were reasonable given product improvements (or lack thereof) and the amount of competition in the market. Under the proposal, if the increases are found to be unjustified, the task force would have the power to make direct purchases of alternative versions of the medication and make it available to consumers at a low cost or levy fines on the offending company. While it’s clear there was bi-partisan outrage over some of the more egregious drug price increases over the last two years, Hillary Clinton’s defeat in the presidential election, as well as the defeat of The California Drug Price Relief Act2, makes it less certain how this issue will be addressed by legislators in the future.

While it is clear that something needs to be done, we should be careful to not take actions that negatively impact drug discovery and innovation. The goal for most innovators in the pharmaceutical space is to improve the lives of patients and reduce the economic burden to the healthcare system through new approaches and the development of therapies that are often tailored to specific patient populations. An example of a company that plays this role is Intarcia Therapeutics, whose lead product candidate ITCA 650 combines a matchstick-sized osmotic mini pump implanted just beneath the skin to deliver a consistent flow of medication for a year in treatment of Type 2 diabetes. The novel approach to drug delivery virtually eliminates one of the biggest problems in diabetes care – medication adherence. In testing, ITCA 650 produced better glycemic control and more weight loss than Sitagliptin (brand name Januvia; currently used to treat Type 2 diabetes) over 52 weeks. If therapies such as ITCA 650 make it to market and exhibit greater efficacy and/or lower cost than what currently exists, their inventors should be compensated for the time, effort and expense incurred in developing their novel approaches to solving their given problems.

Key Takeaway:

There is clearly a need to regulate unjustified price increases on life-saving generic drugs – especially for drugs that lack competition and have not undergone meaningful changes or improvements. On the other hand, companies making new, high impact medicines that address patient needs in a better and more cost-effective manner should be compensated for the risks associated with bringing their drugs to market. Without the potential for profit, innovation goes away.

A quote from George Merck does a great job of explaining the unwritten social contract between drug companies and the public: “We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been.”3


  1. The autoinjecting device was first brought to the market in the mid-1980s and the epinephrine that the devices are filled with has been produced since 1906.
  2. A California ballot initiative aimed at reining in rising prices for prescription drugs. The Act sought to limit state health programs from paying more for medications than the U.S. Department of Veterans Affairs, which receives the steepest discounts in the country.
  3. Address to the Medical College of Virginia, Richmond (1 Dec 1950).

Tags: Chart of the Week | Regulation | Healthcare | Prescription drug prices

< Go to Chart of the Week

The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.

This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.  This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice.  The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete.  Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements.  Actual results may differ significantly.  Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.

Investing involves risk, including possible loss of principal.  Past performance is no guarantee of future results.  All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.

High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.

All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.

Subscribe to Our Publications