rx-bottle-and-cashThere is a conflict at the heart of pharmaceutical pricing in the United States. On one hand, it’s in the public’s interest for pharmaceutical companies to get a good return on the huge investments they make in developing new drugs; on the other hand, it’s in the public’s interest of affordability.

The system tries to resolve this by granting companies temporary monopolies (aka patents) on the drugs they develop — letting them effectively set the price unilaterally — but then allowing competition from generic substitutes once the patents expire. Many people have strong opinions about whether we have struck the right balance, or should regulate drug prices as most other wealthy countries do — although regulating prices appears to depress spending on research to develop new drugs.

However here is an interesting and too-little-emphasized fact: Most of the recent high-profile controversies over drug pricing do not have much of anything to do with this conflict. For example:

Epinephrine, the substance delivered by the EpiPen allergic-reaction injectors that drugmaker Mylan has been selling for more than $300 a dose lately, is a human hormone (also known as adrenaline) that was first isolated by a Japanese chemist in 1900. You can buy a vial containing half as much of the substance as an EpiPen does for $4.49 from Ace Surgical Supply.

Pyrimethamine, the anti-infection drug that under the brand name Daraprim made Martin Shkreli infamous when his company, Turing Pharmaceuticals, increased the price from $13.50 to $750 a tablet a year ago, was developed in the 1950’s at Burroughs-Wellcome, which later became part of GlaxoSmithKline. It has been off patent for decades.

Many of the drugs subjected to the biggest price increases by Valeant, the once-high-flying serial acquirer that ran into trouble about the same time Turing did last year, were similarly developed many decades ago and unprotected by patents.

None of the products mentioned above were developed by the companies selling them now. Mylan does not make the EpiPen (Pfizer does); Mylan acquired the marketing rights nine years ago. Mylan is able to charge so much because the design of the injector is proprietary. Competitor Sanofi did get Food and Drug Administration approval for its Auvi-Q injector in 2012, but abandoned the product early this year because of dosage problems.

With the brand name Daraprim, the market for the drug is quite small, so no one ever bothered to develop a generic competitor. And one of the (many) issues at Valeant was that it effectively controlled a specialty pharmacy, Philidor, that altered doctors’ prescribed generic orders to substitute more expensive Valeant drugs.

A new breed of pharmaceutical company has emerged (Valeant is, or at least was, the archetype) that does not develop drugs but identifies business opportunities in existing drugs —many of them with expired patents — that the previous owners were too lazy, timid, or decent to fully exploit. So they acquire them and increase the prices. One should take the price increases cited above with a grain of salt, meaning that with rebates and other incentives, most insurers pay nowhere near list price. However, the new discount price is now higher and the general idea has been to extract more money out of old drugs than was previously being extracted.

Increasing the value of off-patent drugs presumably gives drug companies at least a little bit more financial incentive to develop new drugs. But sudden big price increases in off-patent drugs may seem like a violation of the long-standing contract between the pharmaceutical industry and society.

In the case of the EpiPen, perhaps competition, not price regulation, is the solution to the problem. It’s a product for which there is a large and growing market, and there are already multiple competitors being sold in Europe, where prices for both the generics and brand-name EpiPens are much lower than in the United States. Tear down this wall, FDA!

The situation is totally different, though, for Daraprim, which is essential for treating certain parasitic infections but is (1) only prescribed to about 2,000 Americans a year and (2) does not need to be taken for long periods. That is not a market opportunity to warm a generics manufacturer’s heart. In fact, it may be a natural monopoly.