Two recent events have served to highlight the range of difficult questions raised by pharmaceuticals regulation. Last week, a man died in the French city of Rennes after a clinical trial of a painkiller went tragically wrong. In New York last month, Martin Shkreli, a former hedge fund manager, was arrested on securities fraud charges; Shkreli, who denies wrongdoing, won the sobriquet of “most hated man in America” after the company he controlled raised the price of the life-saving drug, Daraprim, from $13.50 a tablet to $750.
Daraprim was developed in the 1950s and the patents expired a long time ago. The market, though, is small and Shkreli’s company had acquired the only US producer. Any other company that decided to sell the product would need to gain approval from the Food and Drug Administration, which would cost time and money. Anyone taking that path would face the risk that, when their product appeared, the incumbent might reduce their price in predatory competition, and this knowledge may deter prospective entrants.
The pricing of Daraprim is a textbook example of the problematic economics of contestability — the way in which market outcomes are influenced not just by the number of competitors but by the potential for competition.