There is a saying that those who like sausages should never see them being made. Often this analogy is applied to political backrooms where idealism is ground down into a product amenable for mass consumption. As go sausages and politics so goes modern medicine; those who consume it probably shouldn’t look too closely at how its made.

Martin Shkreli is the CEO of Turing pharmaceuticals, the company that recently raised the price of it’s anti-toxoplasmosis drug Daraprim by %5000 overnight and in the process sparked a vitriolic public reaction to the soaring cost of drugs across the pharmaceutical industry.

The problem for patients in need of Daraprim (usually HIV+ patients with compromised immune systems) is that they will likely die if they cannot access the drug. Thus, no matter what the cost of the drug, patients, or more often insurers or government programs, will be forced to pay for it. While I sympathize deeply with patients who are being forced into bankruptcy to even keep up with co-pays for such expensive treatment, I think Shkreli is simply doing the ugly sausage making which is necessary to survive in the modern American pharmaceutical industry.

Daraprim is far from an isolated example of the incredible growth in the costs of medicines being seen across the pharmaceutical industry. Soliris for example, a drug made by Alexion pharmaceuticals to treat rare childhood blood disorders, has been called the most expensive drug in the world. It is estimated that Soliris costs as much as $700 000/year for patients that must remain on the drug for the rest of their lives, but the true cost of the drug is unclear because the drug-maker negotiates a separate deal with each government or insurer that buys the drug. What is even more interesting about Soliris, is that the company quietly helps patients in efforts to use media campaigns to encourage governments around the world to complete negotations with Alexion and start paying for the drugs (see the video below).

Importantly, Alexion and Turing pharmaceuticals both insist that no patients are dying because they cannot afford to access their drugs. The company themselves will help uninsured patients to find government or charity programs to pay for the drug, and in some cases will even donate the drug directly to the patient. The company has a direct interest in finding ways for patients to pay for drugs, and it is generally not good business for anyone to let the patients die.

The problem this model poses is that the governments and insurers distribute the cost of drugs over society and thus have the ability to pay the extremely high costs of these drugs and pharmaceutical companies work under an imposed monopoly while treatments remains on patent. If individuals were required to actually pay for these drugs out of pocket, it would simply be impossible to charge $700 000 for treatment. Similarly, once generic manufacturers are allowed to start creating their own versions of pharmaceuticals, the costs of drugs often drops precipitously. Thus, the system conspires to allow manufacturers to price drugs in a way that is independent of market reality.

The argument in support of such a system is that the R&D necessary to research a drug and bring it to market is extremely expensive and extremely risky. The cost to bring a drug through clinical trials has been estimated to be in the billions of dollars, much of this due to the failure of drugs which turned out to be unacceptably ineffective or dangerous as they advanced through the pipeline of clinical development. Even accounting for the oft cited fact that pharmaceutical research starts with scientific research funded by and performed in public institutions, bringing a drug to market is incredibly expensive.

Lets not mince words here: the costs of modern drugs is 100% about (a) profit, (b) recouping R&D costs, and (c) generating sustainable support for future R&D. The cost of actually manufacturing drugs is a rounding error in comparison to this. It is also important to keep in mind that investors a reasonable to expect profits to be high due to the high risk and relatively short patent window for pharmaceutical sales.

In some ways, pharmaceutical companies are simply keeping up with the explosive growth in costs throughout healthcare. Hospitals have been charging unbelievable amounts of money for basic services for many years now. By distributing the costs of medical care across the commons, the medical insurance industry allows patients to receive the a level of care that is greater then an average person could normally afford, but this also divorces the costs of such care from market realities.

Just as any other capitalist companies would do, pharmaceutical companies are simply exploiting this system as far as they can. Pharmaceutical companies that fail to properly exploit these vulnerabilities and maximize profits will ultimately be eaten by Wallstreet sharks like Shkreli.

In 2011, KV pharmaceuticals won approval from a drug against pre-term birth called Makena. Use of the drug would drive up the cost of injections to prevent pre-term labour from around $250 to around $25 000. Following public outcry and congressional investigation, Makena cut the cost of the drug in half but eventually went into bankruptcy. In 2014, KV was purchased by AMAG pharmacetials which is now raking in massive profits from record sales of Makena (see article).

Public backlash is not an effective check on pharmaceutical profiteering.

Where we may win symbolic victories against people like Shkreli or companies like KV pharmaceuticals, we are losing the war. Government regulation of drug costs is possible, and could really make a difference in the costs of drugs but I fear any intervention tends towards weak controls on drug costs and is unlikely to go to the lengths necessary to fix a fundamentally broken drug development system.

So what can we do to really address the quagmire of pharmaceutical development? If the problem is that R&D is expensive and risky, then we must find a more efficient means to fund pharmaceutical research and development. 

In his TED talk, Roger Stein proposes a radical new model for achieving just this. He proses that we should establish an equity megafund to spread the risk of drug development out over a larger number of drug candidates. By spreading risk, such a fund could provide the capital needed to perform the expensive clinical trials needed to gain FDA approval while providing reliable returns necessary to allow large investment funds like pension plans to stomach the risky venture of pharmaceutical innovation.  While such a model would not completely remove the profit incentive for companies trying to bring pharmaceuticals to market, it might go along way to decreasing the risk and thus the kinds of returns that companies expect with successful drugs.

I wonder if we could perhaps go a step further than such a megafund, and actually require that those companies involved in the research side of the pharmaceutical industry not be involved in the production and sales side of the business. What if the last step for FDA approval after a successful phase III clinical trial was for the drug developer to sell the rights for said drug on the open market to a drug producer.

By forcing the R&D company to sell off their drug to a pharmaceutical production and sales company, this would demand that a clear accounting of the presumed value of said drug is made. This would give governments and private insurers a real target on which to base negotiations for drug prices. Perhaps if we could sever the risky business of pharmaceutical R&D from the much more hum-drum business of producing, marketing and selling those drugs it would go a long way to simplifying drug pricing negotiations between drug manufacturers and insurers.

Unfortunately though, I think it would do little to bring down the overall cost of drugs. Because the market value of a drug is in the end set by whatever a drug producer thinks it can charge for a drug and we still are unwilling to put any reasonable limits on what we will pay for life saving drugs, the fundamentals that drive drug prices up is unlikely to change.

It comes down to what has been called one of the most important economic questions of our time. How do we inject economic reason into medical decision making? We must at some point decide to say no, that is too much to spend to save someone’s life. Insurers and governments simply must put a price on human life.

If we want to pay reasonable prices for drugs, we are going to have decide what constitutes reasonable.

In the end, that is the unavoidable sausage making of the pharmaceutical industry, and it’s the sausage making of capitalism. Captalism demands that we determine a reasonable value of everything, including human life. As long as we are unwilling to decide on a dollar figure for what constitutes reasonable medical expenditure, the industry which is vital to keeping so many people alive and well is going to continue to balloon without limit.