Photographer: Dhiraj Singh/Bloomberg

Rigging Charge Exposes One Reason for Inexplicable Drug Pricing

  • Justice Department charges former executives with collusion
  • Drugmakers boost costs for versions of older generic drugs

At least twice a week, Tanja Vanderlinde says patients call in to say they can’t afford drugs.

High-deductible health plans mean they have to dip into their own pockets to pay for generic antibiotics such as doxycycline, a “gold standard’’ for Lyme disease, said Vanderlinde, an internist at Concord Hospital Medical Group in New Hampshire.

Doxycycline used to cost about 10 cents for a 100-milligram capsule. Its list price rose to as much as $4.92 in 2013 before dipping to as little as $1.23 recently.

“It’s crazy,” Vanderlinde said.

Seemingly inexplicable pricing is widespread in the U.S. market for generic antibiotics. Since 2012, list prices for tetracycline, which treats pneumonia and urinary tract infections, have soared to 170 times the old price. And some varieties of erythromycin, used for strep throat and other respiratory tract infections, have risen 1,000 percent since 2010.

“It’s a market failure,” said Craig Garthwaite, a health economist at Northwestern University’s Kellogg School of Management.

Inflating Prices

On Wednesday, the U.S. Justice Department gave a possible explanation for spiraling prices of at least some drugs. It charged two former executives of Heritage Pharmaceuticals Inc. with conspiring with other drug companies to inflate the price of doxycycline.

In August, Heritage fired the men, its chief executive officer and president, after an internal investigation, according to a company representative, who said Heritage is cooperating with the U.S. probe.

Heritage initiated its own legal action against the two men. “We are deeply disappointed by the misconduct and are committed to ensuring it does not happen again,” the company said in an e-mail.

Heritage, the U.S. unit of Pune, India-based Emcure Pharmaceuticals Ltd., also makes tetracycline. The antibiotic was inexpensive until a shortage of raw ingredients caused two generics makers to leave the market. When Heritage introduced 500-mg capsules of tetracycline in 2013 for $9, it was more than 100 times the old price, according to price data from First Databank Inc. compiled by Bloomberg Intelligence. The prices are before discounts.

Shortage Over

Today, the shortage of raw ingredients is over and several companies make the product, including Emcure. In May 2015, Heritage raised list prices to $12.60 for 500-mg capsules and $6.30 for a 250-mg capsule. Two new competitors that entered the market in May matched Heritage’s list prices.

Heritage “made substantial investments’’ to return tetracycline to the market after the shortage, including purchasing the new drug application and paying to begin production again, the company said in a statement.

“The net price paid by Heritage’s customers for tetracycline has always been less than the publicly listed price,’’ the company said. Since new competitors emerged, the net price paid by Heritage’s customers has dropped more than 54 percent for the 250-mg dose and more than 63 percent for the 500-mg dose, the company said.

Some companies take advantage of the fact that old drugs such as antibiotics come in a variety of unique formulations, said Troyen Brennan, chief medical officer for CVS Health Corp. “They feel they can simply jack the price up and make a quick profit,’’ Brennan said. “They drive the price up and they hope that nobody notices.’’

Price Reviews

To combat the problem, CVS’s drug-benefits unit has started reviewing prices for unusual spikes every day instead of yearly, as it’s done in the past. In August, it said it would stop covering 10 drugs identified as having “hyperinflationary’’ price increases.

CVS’s drug-benefits unit will soon expand the exclusions to include “a number of antibiotics,’’ Brennan said. He wouldn’t name the drugs because the list has yet to be finalized.

Patients have taken to the internet to discuss whether fish-tank antibiotics are fit for humans. And why not? Erythromycin for fish tanks costs $1.70 a dose at PetSmart.com. A slightly higher dose for humans is made by Arbor Pharmaceuticals LLC, owned by investors including private equity giant KKR & Co. It lists for $9.69. A few years ago, it cost 67 cents.

Fish antibiotics aren’t meant for people. Gary Jones, research-and-development manager for Mars Fishcare, a unit of candymaker Mars Inc., said the antibiotics his company sells are specifically formulated for fish tanks and contain additives that would make it very unpleasant for a human to ingest. He said he didn’t know why the cost was different.

Pill or Liquid

Erythromycin, introduced in the 1950s, was once sold in pill or liquid form by numerous companies.

But after newer, more convenient antibiotics hit the market in 1991, erythromycin use declined. By late 2010, the main manufacturer left was Abbott Laboratories, which sold its portfolio to Arbor Pharmaceuticals.

Arbor raised list prices aggressively since then -- with nine separate increases between October 2011 and January 2016. EryPed 200, a liquid form of the drug, now lists for $376.23 for a 100-milliliter bottle, up from less than $10 in 2010 when Abbott owned it, according to data from Bloomberg Intelligence and the 2010 edition of Red Book. A 500-mg pill has soared to $14.60 today from less than 30 cents in 2010.

Sustainable Access

“When the company acquired the erythromycin products, all comparable products had exited the market due to low margins and declining sales,’’ Arbor said in an e-mail statement. “It became clear that in order to provide sustainable patient access, the price would need to be increased.’’ The company said it reinvested profits into funding its branded and generic development pipeline, and for the acquisition of innovative branded products. “Through discounts, co-pay support and free product, we ensure that every patient is able to fully access all of our medications,’’ it said.

KKR said it wasn’t involved in Arbor’s pricing strategy and otherwise declined to comment.

Erythromycin has been a boon for closely held Arbor. In a July news release, Arbor said 500 of its 600 employees were sales representatives.

Sales of Arbor’s erythromycin products, before discounts, topped $280 million last year, up from about $70 million in 2011, according to data from Symphony Health Solutions compiled by Bloomberg Intelligence. Sales grew even as demand for the drug steadily dropped, to fewer than 600,000 prescriptions last year from 1.4 million in 2011, according to the data. Arbor said its net sales, after discounts, are “significantly less” than gross sales.

The older antibiotics are easy targets for drug price increases. It’s difficult for insurers to restrict coverage for drugs that treat acute illnesses, and blowback from patients is limited because most people only use them once.

Thomas Labs, based in Tolleson, Arizona, sells packets of powdered erythromycin for fish tanks for as little as $1 per 250-mg dose, according to its website. 

Alas, the company says on its website that the packets are “not for human use” and “not to be given to fish intended for food use.”

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