Drug approval in the U.S. is regulated by the Food and Drug Administration (FDA). Many other products are also regulated by the FDA, and definitions can be wide ranging. Even such items as fluoride toothpaste, antiperspirants, sunscreen, and dandruff shampoo are all classified as drugs.

No drug testing or trials are carried out by the FDA directly, but rather their Center for Drug Evaluation and Research (CDER) carries out an assessment of evidence presented by drug companies.

Such an evaluation is supposed to confirm that the drugs will function correctly, and that the benefits to health outweigh any known risks.  However, between 2001 and 2010, around a third of new drugs had major problems relating to their safety, after having been approved. In total, 71 out of 222 newly approved drugs had to be withdrawn.

Current system for drug approval 

Before being approved for sale, drugs must pass a series of tests. Usually, safety must be assessed theoretically and then successfully administered to animals, prior to any clinical trials taking place.

Initially, the CDER’s framework for approval will include an analysis of the targeted medical condition, and what treatments already exist, in order to consider the context. This means that a drug aimed at treating life-threatening conditions, for which no other treatment is available, may be deemed to carry some acceptable risks, whereas this same level of risk could be considered unacceptable for the treatment of more minor ailments.

Secondly, the CDER will evaluate the evidence submitted in relation to the clinical trials of the drug. This typically involves two supposedly well designed studies being conducted, although one study may be deemed sufficient in certain cases. Finally, a risk management strategy must put in place, often simply consisting of a drug label explaining the benefits and risks associated with the product.

Approval requests can be for a new drug (NDA), a biological licence (BLA), an over the counter drug (OTC), or an abbreviated application (ANDA). Accelerated approval can be applied for, at a cost, and expedited through the approval process in six months, as opposed to the normal ten month procedure. Another fast track application process can be used to obtain priority review for breakthrough therapies. Some drugs can eventually apply to change their classification to an OTC, and generic drugs are also assessed for release.

After approval has been granted, postmarketing trials may be required, and drugs will subsequently be withdrawn if problems arise. 

Rapidly approved drugs actually tend to have the lowest rates of withdrawal. This could perhaps be due to more comprehensive evidence having been provided with their application. Overall, the system appears to be rather complex.

Problems and potential for positive change

Apart from any inherent inefficiencies and flawed elements of the current system, one of the major problems it produces is related to the pricing of drug treatments. 

Any policy aimed at the reduction of drug company profits could be viewed as contrary to the principles of free trade and thus reducing the potential for innovation. However, since the industry is dominated by monopolies who are motivated by misguided incentives, it is important to examine what could be done to create a more competitive market that would also prove beneficial for consumers. 

Insufficient competition leads to the phenomenon of lockstep pricing. This occurs when one company raises their prices and others simply respond with a commensurate increase. Charles Silver and David A. Hyman of the Cato Institute conclude that rigorous antitrust enforcement may arguably be warranted in these circumstances to improve market conditions.

Pharmaceutical monopolies exist in large part due to the prohibitive research expenditure required to develop new products in the industry, and the exacerbating effect of patents. Once a drug is approved by the FDA, a patent will be granted for 20 years. Companies may increase prices dramatically during this period with no opportunity for competitors to challenge them.

Daraprim, a drug produced by Martin Shkreli, had its price increased from $13.50 to $750 per pill. Jazz Pharmaceuticals increased the price of their drug, Xyrem, by 841% over seven years. The pricing of drugs for diabetes has caused nationwide panic at times, some brands rising by 555% over 14 years.

Extensions to patents may be granted and this can result in huge profits, while restricting the sale of generic brands. Such an extension, of 1,393 days, granted to Pfizer for the drug Lipitor, resulted in $24 billion of extra revenue. Generic brands may already be approved in other countries, but are awaiting FDA approval due to a backlog of applications. 

This system could be streamlined to promote competition, with the introduction of an arrangement wherein approvals made in certain other countries would be recognized by the FDA. If the applications for generics relating to brands with the highest price rises were dealt with as a priority, this would incentivize the market more.

Abolishing these patents altogether could change the pricing of drug treatments and introduce more competition. A prize system, for example, that includes paying the first company to develop each treatment a premium, would not be a perfect alternative, but would at least compensate companies for their research and development, without creating monopolies.

At present, companies holding patents may even pay competitors with generic products not to release them, since this is less expensive than the potential loss of revenue, thus creating a very stagnant market.

Lengthy and expensive processes for the approval of new drugs, alongside a plethora of stringent regulations, contributes to the formation of monopolies and disincentivizes competitors. The consequences of this inefficient system are exorbitant prices for medication, alongside reduced consumer choice. Better solutions would be found through a liberalization of drug approval policy.

Why drug approval policy matters to SFL

At Students For Liberty, we are committed to promoting innovation and competitive markets that lead to more favorable outcomes for consumers. These principles should apply as much with regards to the pharmaceutical industry as with any other sector. 

In a free society, individual choice regarding medical treatment is of paramount importance. Transparent and detailed information about drugs promotes informed consent from patients.

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