Matthew Herder argues that recent drug price hikes are only one part of a bigger problem with industry-driven pharmaceutical research and development.

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Dramatic overnight increases in the price of a few pharmaceutical products have grabbed a lot of attention this week. For example, the manufacturer (Rodelis Therapeutics) of cycloserine, a critical drug used to treat a rare and dangerous form of multidrug-resistant tuberculosis, raised the drug’s price from $15 US per pill to $360 US – a 2,000% increase. Not to be outdone, the manufacturer (Turing Pharmaceuticals) of pyrimethamine (brand name: Daraprim), a life-saving treatment for a parasitic infection called toxoplasmosis, raised the price from $13.50 US per pill to $750 US – a 5,000% increase.

These are just the latest examples, however. In August, after acquiring two heart drugs from other manufacturers, Valeant Pharmaceuticals jacked up their prices by hundreds of percentage points. Also, in early 2014 Valeant planned to increase the Canadian price of a critical treatment for Wilson’s disease, trientine, roughly 13-fold, from $963 per month to $13,244.

Pyrimethamine (brand name: Daraprim)

Are these and other similarly dramatic examples of price gouging total outliers?

It’s true that cycloserine and Daraprim were exceptionally high price changes. But make no mistake: they are the exception that proves the rule. What rule? The rule that there is, at most, a tenuous relationship between the demonstrated value of a pharmaceutical product, the parties who actually do the work of establishing its safety and effectiveness, and the product’s price point in the marketplace. Pharmaceutical pricing has less to do with the costs of research and development or the benefits of one drug compared to others, and more to do with what the market will bear.

The policy question is “what’s to be done?”

Several US states have introduced “pharmaceutical cost transparency bills” with the aim of requiring drug companies to justify the prices they set. Democratic Presidential candidate Hilary Clinton has even put out a plan that would require companies to reinvest a portion of their profits back into research. Some experts think it’s a move in the right direction whereas others are skeptical.

It’s clear we need to change the way we regulate pharmaceutical pricing but it’s also clear we need to do more.

In Canada, the Patented Medicines Pricing Review Board supposedly provides some pharmaceutical price control. But its ambit only extends to patented drugs so it wouldn’t have a say in cases like Daraprim and trientine. These drugs are old, off-patent, yet still essential to patients. So the Patented Medicines Pricing Review Board’s mandate would have to be reworked if it’s to become more effective.

Provinces and territories too, provide a level of cost control through their decisions to list pharmaceutical interventions on formularies. However, this system is woefully inadequate in terms of securing fair prices for both brand-name and generic drugs. A national body, with far greater clout in bargaining prices, is therefore needed. National pharmacare, in other words, should also be part of solution.

But we have to think even bigger. Even if the Patented Medicines Pricing Review Board’s mandate is reworked and some form of national pharmacare comes about, we are going to be stuck with the drugs (and sometimes the prices) that private companies come up with. For some rare diseases, a competitive supplier just may not exist even after patent or other forms of market protection have expired. That will make it really hard for even a national body to negotiate a better price. What’s more, there are financial incentives for companies to make ‘me-too’ products that have little benefit compared to existing treatments. Industry has generated important breakthroughs as well. But do we really need a ninth or tenth cholesterol-lowering statin?

If we want to shift the balance of research and development toward both improved and affordable drugs, I think we have to fundamentally rethink how we encourage and engage in drug research and development. Existing incentives like patents give rise to perverse behaviours. Alternative systems that try to tie the rewards to actual research and development performance, like the Health Impact Fund, have been proposed. But uptake has been minimal to date. We’re told over and over again that the private sector is responsible for most pharmaceutical innovation. Yet the public’s contribution to the research behind some of the most important treatments in the last several decades is nothing short of remarkable. It’s time we seriously entertained the idea that publicly funded science can do way more. Publicly funded and controlled drug discovery and research and development should be on the table.

Sadly, Canada’s research funding agencies have been moving in the opposite direction, reducing support for investigator led clinical trials and putting a huge premium on partnering with industry. The problem is that in making those deals, we often cut ourselves out of the decision-making about what drugs to develop, how, and, if they make it to market, what price to charge. Cases like cycloserine and Daraprim will shine a big light on the risks with that approach.

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Matthew Herder is an Associate Professor in the Faculties of Medicine and Law at Dalhousie University, Halifax, Canada. @cmrherder