So what are the real costs of drugs today?

It’s unlikely you won’t have found yourself shocked these last few days by the story of the ex-hedge fund manager who bought the rights to a so-called ‘HIV drug’ and then “gouged” the price per pill from $13.50 to a staggering $750.

What you may have missed, though, is that something very similar was happening at almost exactly the same time to an old second-line TB drug. In this case it was hiked from US$500 for 30 tablets to $10,800 as the drug changed hands from Purdue to Rodelis Pharmaceuticals – and then was dropped back to $1,050 for 30 tablets as Purdue took the drug back after protest. (They reckon that they simply couldn’t make any profit manufacturing it at their original price.)

Aside from the fact that the hedge-funded ‘HIV’ drug (deraprim) is 62 years old and isn’t strictly speaking an HIV drug at all (actually it’s a drug used for treating a serious pararastic infection that sometimes occurs in HIV patients) there seems to be something pretty weird afoot here and it’s all about manufacturing rights and prices in the U.S.

This second-line TB drug (cycloserine) is of a very similar age to the ‘HIV’ drug – it’s technically a year older having been discovered 63 years ago. As such both drugs are way out of their original patent periods, and original patents are anyway only intended to protect the interest of those who initially invest their intellect and effort in a new drug’s development. Subsequently their prices should generally reflect what the demand from the marketplace dictates. The cases of both deraprim and cycloserine seem to be examples of a relatively new and quite cynical American business strategy — of acquiring old, neglected drugs (often for rare diseases) and turning them into costly “specialty” drugs.

Of course TB is hardly a rare disease – but we’ll come back to that in a minute.

Cycloserine was acquired last month by Rodelis Therapeutics, a company which rather worryingly reveals almost no information about itself online. It promptly raised the price of the old TB drug more than twenty-fold. Rodelis justified this by announcing that it needed to “invest” in order to make sure the supply of the drug remained “reliable”. Not surprisingly this dubious excuse for what looked like out-and-out profiteering raised something of a storm of protest, and last Saturday the company bowed to the outrage and agreed to return the drug to its former owner, a non-profit organization affiliated with Purdue University.

“We discovered literally on Thursday the strategy that had been undertaken by Rodelis”, said Dan Hasler, the president of the Purdue Research Foundation, which had former oversight of the drug’s manufacturing operation. “We said this was not what we had intended.”

The Foundation now, however, will charge $1,050 for 30 capsules, twice what it charged before, though around a tenth of what Rodelis was trying to charge. Rodelis reckons that the new price is necessary to stem losses, but let’s take a closer look at this claim – because what’s happened is still a huge 100% hike in the former price of the drug.

Cycloserine is a so-called ‘second line’ drug used as part of a multi-drug regimen, usually of six drugs, to treat MDR-TB when the standard drugs don’t work. Originally it went on sale in 1955 when there was a lot more TB around in North America than there is today but still 30 years before any cases of MDR-TB were emerging. It’s not a nice drug. It has pernicious side-effects many of which involve variations of psychotic disorders. But it still has a part to play as one of the back-up drugs that can attack the TB mycobacterium when it’s resistant to first-line drugs. For a long time the drug was being produced by Eli Lilly and Company, but around 15 years ago it decided to drop it, largely because it was getting out of antibiotics as they were no longer seen as being sufficiently profitable. Lilly then transferred the rights along with the manufacturing skills to generic drug companies in India, China and South Africa in order to see the regions most affected by MDR-TB supplied with the drug. Then, in 2007, it gave the rights for the United States and Canada to the Chao Center for Industrial Pharmacy and Contract Manufacturing, which itself operates under the auspices of the Purdue Research Foundation. Its president, Dan Hasler, was himself a former Lilly executive before becoming President of the Purdue Foundation, and he reckons that the Chao Center has lost about $10 million on the drug since 2007 because of the small number of patients who need it and the high regulatory costs of its manufacture. So the Chao Center was hardly uninterested in making a deal when it was approached by Rodelis.

An adult patient with multidrug-resistant tuberculosis normally takes three 250mg capsules of cycloserine a day, along with other drugs, probably for 24 months and often longer. Under the price Rodelis intended to charge, a full course of cycloserine in the U.S. would thus cost $788,000 for cycloserine alone. With the new price from the Chao Center, it will now be $76,650. That’s quite a difference – but before Rodelis got involved it cost less than half that at $36,500.

During 2013 (the last year we have the numbers for) there were just 95 new MDR-TB cases notified in the U.S. (as opposed to an estimated 480,000 worldwide, which itself is almost certainly a gross under-estimation), and Dan Hasler reports that they sell pills for about 40 U.S. MDR patients each year. Given that cycloserine is used over a full two years, we can halve that original treatment cost of $36,500 (to $18,250) to give us an approximate annual cost per patient, and we can then multiply this by 40 patients – which gives us a rough annual turnover for Chao for this drug of $1,460,000 – so let’s call it one-and-a half million dollars.

But Chao took the drug on back in 2007, and so have been manufacturing it for eight years during which time they say they’ve lost $10,000,000 on the drug. So let’s see: 8 years x $1,460,000 = $11,680,000 (let’s call this 11 million). So they’ve taken $11 million in sales and still lost $10 million in the last eight years… it really must have been a no-brainer to see the back of the thing, because given these numbers it surely must be a very expensive drug to produce. In fact even now it looks like, having doubled their earlier price, they will still only just be breaking even on the drug!

But is it really that expensive to manufacture?

You’ll recall that Lilly transferred manufacturing rights and expertise to generic manufacturers in India, China and South Africa. So what sort of prices are now being charged by manufacturers in these countries? Well, as of today, here in the UK, you could buy a single box of 30 tablets of cycloserine online, imported into the UK by a Canadian company but manufactured by Mcleod Pharmaceuticals in Mumbai, for £120 (or around $200). But hang on – Purdue reckon they can barely clear their costs unless they charge $1,050 for the same amount of tablets (and our rough calculations based on their own numbers confirm this…).

Well of course there are two factors at play here that do complicate things a little. One is the bulk size of batch manufacture. Mcleod will surely be manufacturing an awful lot more tablets than Purdue. But in this case surely it would simply make infinitely more sense to just import the drug from abroad, rather than have it produced at all in America for so few patients at such high cost.

But of course there are also the costs of obtaining American regulatory approvals. This sounds like it could be expensive, but would they really be so high given that Mcleod’s tablets are already approved by both the WHO’s Expert Review Panel and its Stringent Regulatory Authority and that the drug itself was awarded FDA approval back in 1964 thanks to Eli Lilly? It seems highly unlikely.

But here’s the real kicker. The WHO’s Green Light Committee’s Global Drug Facility (GDF), which has been ordering second-line TB drugs in batches that have been small enough for them to have been seriously criticised for having been inefficient and uneconomical, pays just $0.14 for each tablet. Yes – less than a quarter of a dollar – or more than a two-hundredth of the new price being set by Purdue. So the GDF can buy a two-year course of cycloserine for a patient in South Africa for $310, while the same number of tablets in the U.S. cost $76,650.

Globalisation anyone?

You have to wonder what the hell the word really means since normal economic principles of supply and demand don’t seem to operate any more – especially as two huge global trading treaties are currently being negotiated (TTIP and TPP), both of which are being heavily lobbied by the pharmaceutical industry. The fact that much of the secret negotiations involve agreeing international principles of intellectual property rights (i.e. patents, which have huge implications for the prices of drugs anywhere), and given the industry’s self-evident capacity for outrageous greed, this should concern all of us anywhere.