When you need a medication that's insanely expensive, what choice do you have other than to grin and bear it?
Make it yourself, apparently.
A group in Oakland, California, the Open Insulin Project, is trying to do just that for diabetics who can't afford their medication.
In theory, it's not that hard to produce insulin. It's a peptide -- a short protein -- that cells can be genetically engineered to produce. Just grow the cells and purify the insulin away from the other cellular components.
In reality, both production and purification can be challenging. And keeping high quality control standards to reduce variations among the batches is even harder. There are reasons the Food and Drug Administration regulates these things.
The Open Insulin Project is still at it.
Image source: Getty Images.
Expensively cheap medication
The patent on basic insulin ran out years ago. In fact, it was reportedly sold by the three inventors for $1 each in 1923 because they believed the medication should be freely available.
But newer insulin products that arguably work better are covered under new patents. Novo Nordisk's (NVO -0.86%) Tresiba, for example, is a long-acting insulin that users take only once a day.
For basic insulin, insurance companies and pharmacy benefit managers have been able to pit insulin makers -- Eli Lilly (LLY -0.14%), Sanofi (SNY -0.31%), and Novo Nordisk -- against each other, refusing to put them on their formularies (the lists of drugs they cover) if the companies didn't lower their prices.
That move has caused basic insulin sales to plummet. For example, U.S. sales of Novo Nordisk's human insulin were down 31% at constant exchange rates in the first half of the year, although the company was able to make up some of that by selling its newer modern insulins, resulting in just a 16% drop total of U.S. insulin sales at constant exchange rates.
The lower prices are great for the payers, but people without insurance are still charged full price, although companies often offer discounts to uninsured patients.
Image source: Getty Images.
Patents and monopolies
In most industries patents create monopolies, but when it comes to drug pricing, the story is a little more complex.
High drug prices can exist without patents when there's limited competition. A temporary monopoly can be caused by the need to gain FDA approval to manufacture a generic drug.
And while patents can keep branded drugs from facing generic competition, they can't limit competition from other branded drugs. The price of hepatitis C drugs from Gilead Sciences (GILD -0.21%), for example, has come down substantially as AbbVie (ABBV 1.26%) has gained approval for competing regimens. With either company able to cure almost all infected patients, it's easy for payers to pit them against each other to gain the best prices.
Disrupting supply and demand
Most generic drugs are cheap because they have substantial competition. The Food and Drug Administration did a study that found the presence of nine generic manufacturers resulted in a price that was 20% of the branded drug's. But just a single generic competitor allowed the manufacturer to price its name-brand drug at 94% of what the price would be otherwise.
Beyond insulin, there are plenty of examples of companies that have taken advantage of a lack of competitors and raised the price of a drug.
To combat drug shortages and escalating drug prices, seven health systems came together last year to form Civica Rx, a not-for-profit company with plans to get FDA approval to manufacture, either directly or through a contract manufacturer, drugs that are in short supply and/or are being sold for substantially more than their manufacturing costs.
And the government is considering getting in the game, too. Last year, presidential candidate Elizabeth Warren introduced a bill, the Affordable Drug Manufacturing Act, that would authorize the Department of Health and Human Services to manufacture a generic drug if no company is selling the drug, if the drug is in short supply, or if there is a spike in the drug price with one or two companies producing the drug.
Be the disruptor
Investors in branded drugs don't really need to worry about biohackers, the government, or not-for-profit enterprises competing with branded drugs. Makers of generic drugs may have problems, but likely only if they've taken advantage of a lack of competition to raise a price enough to get on these groups' radar.
The bigger worry for branded drug companies comes from other branded drugs treating the same diseases. To really profit, investors should look for companies going after conditions for which no treatments exist or making radical moves to provide substantially better offerings than are currently available.
