Caution: Markets Working

Yesterday, the FDA approved a generic EpiPen made by Teva Pharmaceuticals, injecting much needed competition into the market and opening a new chapter in a saga that began nearly two years ago with the revelation that EpiPen prices had been raised over 500% in less than a decade.

That scandal turned the tide of public opinion against Mylan, the company that manufactures EpiPens, which became synonymous with pharmaceutical greed. Mylan’s CEO, Heather Bresch, was dragged before congressional hearings and forced to explain the rationale behind such ‘unconscionable’ pricing.

Teva’s shares rose nearly six percent with news of the FDA approval. Meanwhile, Mylan --  formerly vilified as profiteers -- announced a 22 percent drop in sales for the second quarter. The company’s board is currently considering whether to sell some of its properties, or even the entire company, to recoup its consistent losses.

Welcome to the market at work. People make a killing until they don’t. Monopolies are unbreakable until they aren’t. Prices are high until they drop. It’s not a perfect system, but under the right circumstances it works better than any of the alternatives - especially the alternatives that are floating around these days.

The EpiPen saga perfectly illustrates how the market reacts to price signals and public outcry, ultimately restoring equilibrium. Studies show that the first generic competitor to enter the market will be priced slightly lower than the branded competitor; the entrance of a second generic competitor, however, lowers the average generic price to around half of the branded price.

Thanks to FDA Commissioner Scott Gottlieb’s efforts to increase competition by expediting the approval of generic drugs, a second generic EpiPen competitor could enter the market in the next few years. The irony is that Gottlieb was labeled as a tool of the pharmaceutical industry by a group of progressive senators during his confirmation hearings. Just a year prior, that same group had attacked Mylan for the same kind of anticompetitive practices that Gottlieb has been successfully rolling back.

In all likelihood, those progressives won’t see the EpiPen saga is an example of the market at work. In fact, they’ll likely cite it as evidence for why more government regulation is a good thing: sure, competition may lead to lower prices a few years from now, but the government could have lowered them in six months!

They’re right about one thing: the government could lower the price of an EpiPen much quicker than market forces could – if it employed price controls. But in the long run, such aggressive government action would do more harm than good. If we allow the government to heavily regulate the pharmaceutical industry, we would effectively be trading long-term progress for short-term satisfaction.

If you want the price of an EpiPen to drop to $30 tomorrow and stay the same for decades, you can feel free to support a system that lets the government fix prices and cap profits – just don’t expect that system to develop any miracle drugs any time soon. America has become the world’s medicine chest precisely because it relies on competition, not regulation, to control its pharmaceutical industry. Countries like England and Germany haven’t just frozen their drug prices – they’ve frozen their drug industries.

Our market doesn’t always work as perfectly, efficiently, or altruistically as we may want -- but, assuming certain conditions are met, it works nonetheless. We don’t need massive government action to solve the problem of high drug costs. Instead, we need to increase competition, and protect intellectual property without shoring up monopolies; it’s a light touch, not an iron first. The approval of a generic EpiPen should make us confident that this is precisely the course Scott Gottlieb’s FDA is on. As long as these policies are in place, things will continue to improve - slowly, perhaps, but surely.

Tim Rice is project manager for health policy at the Manhattan Institute. Follow him on Twitter here.

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