When the news broke that Martin Shkreli, now the former CEO at Turing Pharmaceuticals, decided to increase the price of the life-saving drug, Daraprim, from $1,130 to $63,000, it made headlines all over the world. A price increase of more than 5,000 percent is probably not justified by high research and marketing costs. More likely his decision to hike the price was because of greed and the fact he could.
The Shkreli case was extreme. Although it is one of the most egregious cases of price hikes in the pharmaceutical industry, there are other examples — just not as large. According to the BBC, of the sectors recently reporting, the pharmaceutical industry ranked among the industries with the highest average profit margin. For instance, Pfizer had a 14 percent profit margin over the last period reported.
The pharmaceutical industry points out that the high prices of its products are mainly due to the high cost of research and development. In addition, less than 30 percent of its products succeed in the market, as reported by Business Insider and Reuters, respectively. To put this in context, over the last year, Pfizer had revenue of $48.9 billion, of which it invested $7.7 billion in research and development.
The case of Pfizer is representative of the so-called Big Pharma industry in the sense that many companies in this field spend a great deal of money on research. While they may have record profit margins it is also true that they are losing market share.
On the one hand, it would seem to the casual observer that big pharmaceutical companies are becoming more powerful by the day. On the other hand, the prestigious consulting firm, McKinsey, found that companies that manufacture generics and those developing treatments purely through biotechnology are taking an increasing market share from traditional pharmaceutical companies. According to those quoted in a 2016 report authored by the accounting firm, Deloitte: Generics should take a larger share of total global medicine spend, increasing from 27 percent ($261 billion) in 2012 to 36 percent ($421 billion) by 2017. It will be interesting to see Big Pharma’s response.
Since only three wholesalers now control about 80 percent of medication distribution, there is consolidation on this level. It will be fascinating to see how prices are influenced by this concentration. Wholesalers figure into the price of drugs as well.
A possible solution could involve a place where suppliers and buyers interact without wholesale vendors. This solution is provided by a company called Trxade.
Trxade is an online pharmaceutical marketplace, sort of an open market for medications, which links independent pharmacies with suppliers within an environment of price-transparency and competition. Trxade allows three types of interactions: Supplier to Pharmacy (S2P), Pharmacy to Pharmacy (P2P), and Supplier to Supplier (S2S). In the first, S2P, suppliers and pharmacies interact without wholesalers and therefore don´t have to pay the wholesalers´ markup. In the second, P2P, pharmacies that have a stock excess can sell products to pharmacies that have a shortage of those medications. Finally, the S2S plan allows suppliers to stock their needs through another supplier.
Additionally, Trxade built a state-of-the-art analytics system to detect potential scarcity of medications. By forecasting which medications are going to be scarce, pharmacies and suppliers can take precautions to avoid shortages, and even price hikes.
Although Trxade provides a way to foster competition and to eliminate wholesalers, there is a lot to do. Many prescription medications still cost a fortune. Let us hope that Trxade and similar platforms, together with the advance of generics, pressure big pharmaceuticals to make their products more affordable.
John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Mario Alejandro Mercado Mendoza, Hoffmire’s colleague at Progress Through Business, did the research for this article.