Martin Shkreli, CEO of Turing Pharmaceuticals, was harshly criticized last week after raising the cost of one of the company’s drugs, Daraprim, from $13.40 USD to $750 USD—an increase of 5,000 per cent. Manufactured exclusively by Turing, this price hike has reignited the debate on the ethics of charging patients for medicine. 

Daraprim is used to fight against toxoplasmosis, an infection caused by the parasite Toxoplasma Gondii. It can cause various symptoms like body aches, headaches, fever, and fatigue. The drug is mainly prescribed in the treatment and care of immunocompromised individuals. This includes young children, HIV positive patients, pregnant women, and those undergoing chemotherapy. For HIV positive patients in the U.S.,  the average annual cost of care is about $25,200— nearly 40 per cent higher than it was 20 years ago.

The reason behind Daraprim’s newly increased price can be explained by investigating the drug development process. Most drugs are developed in phases. In the U.S., the first step towards releasing a drug is a three to four year-long pre-clinical phase. If successful, it is followed by an application to the Federal Drug Administration (FDA) as an Investigational New Drug (IND). The next steps are clinical phases 1, 2, and 3, after which the FDA choses to approve the drug or not. Following approval, the manufacturer files a New Drug Application (NDA) with the FDA. If accepted, the FDA may also ask the manufacturer to conduct additional post-marketing studies. The entire procedure takes eight to 12 years.

Dr. Joseph Schwarcz, director of McGill University’s Office for Science and Society spoke about the finances of creating a new drug.

“When you’re looking at the cost of a drug, you’re not just looking at what it really costs to produce that drug, which is usually very little, but what you have to pay for the years of research to not only get that drug but the others [as well], which never made it to market.”

Since developing a drug takes such a long amount of time, it also requires a lot of funds. According to a new study by the Tufts Center for the Study of Drug Development, developing a new prescription drug is estimated to cost $2.6 billion USD. Top tier pharmaceutical companies will employ over 1,500 scientists and spend over $1 million each day, on discovering new biological targets and creating new therapeutics—chemicals, proteins, or vaccines—in hopes of moving into clinical testing. 

Schwarcz continued to explain the difference between the types of drugs pharmaceutical companies make. 

“Some drugs are absolute blockbusters [that is, they] generate profit,” he said. “But there are [also] orphan drugs, which can cost as much to develop but don’t have the chance to make money because there aren’t enough patients to take that drug”

According to a study done by Forbes, pharmaceutical companies had a 42 per cent profit margin in 2013. A profit margin shows what percentage of sales are left over after all expenses are paid by the business. For example, if a company has a 20 per cent profit margin, it’ll get $0.20 for every dollar of revenue earned. In that year, Pfizer, Hoffmann-La Roche, AbbVie, GlaxoSmithKline and Eli Lilly—five of the largest pharmaceutical companies in the world—all had a profit margin of 20 per cent or more.

Nevertheless, Schwarcz highlighted that pharmaceuticals use most of their profits to fund research on newer drugs. 

“They are not philanthropic enterprises,” Schwarcz said. “Pharmaceutical companies need to have a chance to make money, because if they don’t then there’s not going to be any research.”

In an interview with Bloomberg TV, Shkreli justified increasing the price of Daraprim.

“We needed to turn a profit on this drug," he said. "The companies before us were [basically] giving it away.” 

Schwarcz disagreed with Shkreli’s reasoning, stating that insurance coverage would not completely absorb the increased costs of the drug.

“A raise to that extent is absolutely ridiculous," Schwarcz explained. "[Shkreli] argues that it’s insurance coverage anyway. [But] so many people don’t have insurance coverage [in the U.S.].” 

Financing the pharmaceutical industry remains a complicated issue.

“It is a question of how the drugs are paid for,” Schwarcz said. “And to make sure that someone who [doesn’t] have the means to pay can have access to the same drug. It’s government responsibility.”