Janine Jackson interviewed Dean Baker about drug prices for the September 25 CounterSpin. This is a lightly edited transcript.

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Janine Jackson: Start-up Turing Pharmaceuticals bought rights to the drug Daraprim, a long used treatment for toxoplasmosis, in August and then raised the price—long sold for around a dollar a pill, but more recently around $13—to $750 a pill.

That was what the CEO, former hedge fund manager Martin Shkreli, initially defended as a common-sense business decision, and, he argued, ultimately an altruistic one, since he claimed that some of the profits would be devoted to finding a cure for toxoplasmosis.

After a social media beatdown, Shkreli has backed off the price increase, but people truly concerned about the price and the pricing of drugs would do well not to dust off their hands and walk away. Here to give us some of the bigger picture is economist Dean Baker, co-founder of the Center for Economic and Policy Research, writer of the blog Beat the Press and a regular contributor to FAIR.org. Welcome back to CounterSpin, Dean Baker.

Dean Baker: Thanks for having me on.

JJ: Among the various epithets that one might attach to Martin Shkreli, “criminal” would not appear to be one: He didn’t break any laws, and were it not for social media, we probably wouldn’t know his name. But the outrage is understandable, and seems to tap into something real. In some ways, this story seems kind of anomalous. How does this fit, really, in the bigger question of why drugs costs what they do?

DB: I think there’s two things here: the point you were making before, this is an old drug, it’s a generic drug, there is no patent on it, and ordinarily we are looking at high-priced drugs because–you have a drug company like Gilead Sciences owning a patent on Sovaldi, a hepatitis C drug. They did develop, or play a role in developing is the issue, but they played quite a role in developing it; they brought it to market and they are ostensibly recovering research costs. There’s at least some truth to that.

In this case, what they discovered, this hedge fund guy discovered, you have an old generic drug, it’s not widely used, but it is very important for the people who need it, a life-or-death proposition, no easy substitute, they are the sole producer. So they have a de facto monopoly. Now someone else could get into the market, but it wouldn’t be worth them taking the time to get FDA approval, because it’s a very small market.

So he found this little niche and he was able to jump in there and charge outlandish prices, because there is no one else there. That’s actually happened to several other generic drugs over the last three, four, five years. This is just a failure of anti-trust regulations, because that is really what that’s about.

The more typical story has to do with how we finance research more generally and, as mentioned, the cases of Solvadi and the hepatitis C drug and Gilead Sciences—they are charging $84,000 a year for treatment, the generic price would be less than $1,000. Now, that stems from how we finance research and I think that’s very, very problematic, but it’s at least a very different question than what this hedge fund guy did, which is really price-gouging pure and simple.

JJ: Yeah, I mean, what we’re hearing is, “This is why the market is the wrong mechanism for drug pricing,” but really, on another level, the problem more broadly with drug pricing is it doesn’t really follow what people understand as a free-market system, in which, hey, if you can do the same thing for less, for cheaper, you win. It’s not really a market in the way people think of it.

DB: That’s right on both accounts. In this case, it’s a generic drug where there is a sole legal manufacturer, so it’s very far from market. The reason he could do this is because it is a monopoly. Now, obviously, if he continues to charge these prices, $700 a pill, it won’t stay a monopoly, but in the meantime, a lot of people, their insurers, the government, whoever is picking up the tab, would be out an awful lot of money. And, of course, some people may not have that money; they may not be able to get it. But over time that would eventually be eroded.

But the more common story, the patent cases I was talking about earlier, the government is giving you a monopoly, so people who like the market—sorry, fellows, that’s not the market. The government is saying to Gilead Sciences, “Go ahead, sell your drug for $84,000, and if anyone comes in and competes with you, we will put them in jail.” So that is hardly a free market.

And, again, I understand you have to pay for the research—and I’ve had discussions with people, they insist that you don’t want to pay for the research. No, the government could pay for the research; this is an incredibly inefficient way to do it. We’ve already spent $30 billion a year on research at the National Institutes for Health. And I always have people take great pleasure in saying that the National Institute for Health doesn’t develop drugs, they do basic research. I know they do mostly basic research, but I know they do sometimes develop drugs, but that [in general] they don’t develop drugs because we don’t tell them to develop drugs.

So the point I always make is we could pay for this directly, we could even have it go through the private sector, and then we could have all these drugs available at generic prices. They would cost the same as a bottle of generic aspirin. We shouldn’t be looking at paying $84,000 for someone’s hepatitis C, for their treatment.

And the analogy I’ve made, and I think it is an appropriate one, is we don’t think it makes sense to have the fire department come down to your house when it’s on fire and your family is inside, then negotiate how much you should pay them. And that’s in effect what we’ve done with drugs, and that’s just not a good way to finance drug research.

JJ: Bring us into the global picture; how does this relate to what is going on now in terms of the WTO and drug pricing?

DB: The US government has really been doing the drug companies’ work in trying to extend patent and related protections as broadly as possible. Particularly we’re concerned, or the government has stated that it is concerned, about the developing world. Particularly India, where you have a very advanced, state-of-the-art generic drug industry, where they are producing drugs at much, much lower prices, because, basically, they don’t have the same sorts of patent protections as we do.

And the immediate issue before the WTO—the WTO did require, this is part of the TRIPS [Trade-Related Aspects of Intellectual Property Rights] legislation that was put in there by President Clinton in 1994, the WTO requires developing countries to adopt US-style patent laws. The original deadline was 2005; that was extended to 2013 and then 2016, specifically for prescription drugs.

There is an effort now to extend it further—the US agreed to go along with 2023—and there is a big push by the developing countries, and recently got support of the European Union, to basically extend indefinitely for the least developed countries, as long as they are in that category of least developed—like Ethiopia, Eritrea, Madagascar, very, very poor countries—saying that as long as they are very poor countries, they won’t have to have US-style patent protection.

So there is an effort to do that at the WTO. The Obama administration has yet to take stand on that position; certainly a lot of health activists would like to see President Obama join the European Union in saying we will put off the date of which they have to adopt the US-style patent protections.

JJ: What about not extending and extending the exemption, but kind of overturning the idea that drugs should fit in this patent regime? I mean, if we think that people ought to be able to develop generic drugs, why don’t we just say that?

DB: Well, you do have to deal with what the funding mechanism is, and that is, I think, what today we have to talk about. Obviously the pharmaceutical industry doesn’t want us to have that discussion, but we spend on the order of over $400 billion a year—the United States, not the whole world—we spend $400 billion a year, about 2.2 percent of our economy, on prescription drugs, and if these drugs were available at generic prices, we would probably be talking about spending less than a tenth of that amount. This is a huge amount of money.

Again, I understand we have to finance the research, but the way we do it now is an incredibly inefficient way to do it. Drug companies have a massive incentive to misrepresent their findings, they do it all the time, they say drugs are effective that turn out not to be, they conceal evidence that there are harmful side effects. People die from that, and that’s because we’ve given them incentives. People who believe in the market should understand that we’ve given them enormous incentives to mislead the public, to in effect, lie about the safety and effectiveness of their drugs.

Also, because of the patent system, they keep their research secret as much as they can. Pfizer doesn’t want to give away its research findings to Merck, to its competitors; why on Earth would they do that? That makes sense for Pfizer, but it doesn’t make sense if you want to see drugs develop rapidly to treat new diseases.

So it’s an incredibly inefficient, archaic system, and we should be having a discussion about how you modernize the system of financing drug research. But as I said, the drug industry is very powerful, and they really don’t want to have that discussion.

JJ: We’ve been speaking with Dean Baker from the Center for Economic and Policy Research. You can find them online at CEPR.net. Thank you very much Dean Baker for joining us this week on CounterSpin.

DB: Thanks for having me on.