Does 5,000% hike prove need for drug price controls?

When a small drugs company owned by a former hedge fund manager bought the rights to a drug used by a few people with compromised immune systems, it probably didn't know it was about to start a global debate on drugs pricing.

But after Turing acquired Daraprim, the only drug sold in the US to treat toxoplasmosis, and hiked the price from $13.50 to $750 a treatment, that is just what happened. Now a presidential frontrunner has pledged to take action and biotechnology stocks are in retreat.

What happened?

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Turing Pharmaceuticals, run by Martin Shkreli, bought Daraprim from British giant Glaxosmithkline in August – and promptly hiked the price by 5,000 per cent. After a public outcry it has said it will make the drug available free to vulnerable poorer patients and cut the general price, says The Independent, although it has not yet disclosed the new cost.

A failure of the free market?

It's more complicated than that. In some respects this is a failure of a market that is not free enough: The Economist notes Daraprim is no longer patent protected and that the increase should be "an open invitation for a competitor to come in and offer something similar for less money".

But while in theory anyone can offer the drug under its generic name pyrimethamine, the market for a niche medicine offered to those with weak immune systems such as those with HIV to treat a relatively rare condition is "so small that, even at its new price, it may not be worthwhile for another drugmaker to set up facilities… and obtain the necessary approvals to sell it".

So Turing is not ripping off patients?

It's not black and white, but even some pro-market commentators think it went too far.

In its leader column, the Financial Times says the Daraprim case is an example of "indefensible financialisation of what ought to be a public good". It says Shkreli "has made a financial bet" and is hoping the "relatively small market for Daraprim, and the lack of alternatives" will allow him to "extract unjustified monopoly rents".

This is not the first such case of companies "buying up old, neglected medicines, often for rare diseases, and jacking up their prices". The Economist cites estimates that drug prices in the US have risen 127 per cent since 2008, compared with an overall 11 per cent rise in consumer prices.

What can be done?

One option is direct price controls, of course, and there are many who would support such stringent action.

A more moderate course of intervention was set out by Hilary Clinton, Democratic presidential frontrunner, who suggested that the government's public health insurance company should be allowed to negotiate prices with drug companies. This is what the NHS does in the UK and, while drugs prices are still rising they are not doing so to the same degree. Daraprim, for example, is still sold by GSK here for around £13 for a course of 30 tablets. But the move would not be popular with drug companies or their financial backers: Clinton's proposal sent biotech stocks tumbling.

Others argue the problem is not too little regulation but too much. Paul Howard, a senior fellow and director of health policy at the Manhattan Institute, writes in the New York Times that price controls only "dampen innovation" and "hurt the sickest patients" – and that instead the drug control processes should be liberalised to get drugs out quicker and more cheaply.