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A generic pill's price just went up $700. Why doesn’t another company create a competitor?

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Earlier today I wrote a lengthy piece on Daraprim, the generic drug whose price increased 5500 percent overnight. Turing Pharmaceuticals is the only company that manufacturers the drug and, earlier this year, it raised the price from $13.50 to $750.

Since I published that article, I've gotten some version of this question well over a dozen times: why doesn't someone else start making Daraprim? The drug is 62 years old and its patents have long expired.

But for Daraprim, the patent isn't really the issue. It's the fact that Daraprim isn't a frequently used drug. The New York Times estimates that between 8,000 and 12,000 prescriptions get filled annually. You could only fill about a quarter of a baseball stadium with the number of people who take the drug in a given year.

So think about a generic drug manufacturer looking at the Daraprim situation. There are fixed costs associated with building a new plant (or possible lost revenue on other drugs, if they switch production at an existing plant), getting samples of the drug, and figuring out how to make the generic product.

"You have to be able to sell a good amount to minimize average cost," says Craig Garthwaite, a health economist at Northwestern University's Kellogg School of Business.

And with Daraprim, there simply isn't a big enough patient population for a competitor to sell a "good amount" to. And this is, more generally, a problem with the markets for drugs that only a small number of patients use. They often aren't big enough to support two competitors.

Moreover, there's risk associated with starting a drug price war. Let's say I decide to launch Sarah's Generic Drug Company, and I'm pretty sure I can break even by slightly undercutting Turing and charging $700. What happens if Turing responds by dropping its price down to $500, or even back to $13.50? It will keep all its patients — and my nascent drug company is likely going bankrupt.

"As an economist, you see a revealed preference in the fact that no one else has entered the market and started making a Daraprim competitor," Garthwaite says. "If this was easy — if you could make artisinal Daraprim and sell it out of your food truck — someone would be doing it. But they're not."