Drug companies are reeling after the Martin Shkreli incident - and it could shake up the entire industry

Last week, Martin Shkreli got as close to a household name as any pharma CEO in at least the past few decades.

Shkreli is the CEO of Turing Pharmaceuticals, a new company that just bought the US marketing rights to Daraprim, a drug that fights parasitic infections. Almost immediately, he hiked the price of the drug up by 5,000% - causing public outrage and political attention to drugs pulling the same stunt.

Even though Shkreli quickly backtracked and announced he'd lower the price, the pharmaceutical and biotech industries are still reeling.

Here's why:

Drug companies make most of their money off new drugs that fall under a patent. Twenty years after the drug patent is filed, it wears off, and generic drug companies can start making their own versions of the same drug.

For drugs like Daraprim, for which only about 8,000 prescriptions are filled a year (a tiny drop in the bucket by pharmaceutical standards), it simply isn't worth it for other companies to try and come up with generic alternatives. This allows for a price monopoly, in which the drug manufacturer can set virtually any price they want.

That is, until now.

In 2011, the relative interest in the search term "drug price" was about 25% in the US. Now, the relative interest is higher than it's ever been: You can thank Martin Shkreli.

But Daraprim isn't the only one.

Dozens of companies who own other drugs have done the same thing. Here are just a few (Doxycycline is an antibiotic, and Isuprel and Nitropress are two kinds of heart medication):

The beginning of the end for drug price hikes?

Shortly after two recent articles came out highlighting recent drug price spikes, both of the companies mentioned in those articles have announced cuts to their prices. 

Another company called Valeant, who markets the heart drugs Isuprel and Nitropress (in the chart above), hasn't had an easy time either. Democrats in the House of Representatives recently asked for a subpoena of Valeant for drug increase documents, Bloomberg reported recently. If their request is granted, Valeant will have to hand over information on how they price their drugs.

Drugs meant for a just a few

In interviews, Shkreli called Daraprim an "orphan drug," meaning it was developed specifically to treat a rare medical condition.

But that's not exactly true.

The FDA defines orphan drugs as treatments that are for rare diseases/disorders that affect fewer than 200,000 people in the US that are not expected to make the drug company much money.

For one thing, the term "orphan drug" generally only applies to patented drugs. Daraprim's patent has expired - it's 62 years old. Plus, Daraprim is used to treat toxoplasmosis, a disease that mainly affects people with weakened immune systems (like people with AIDS) and pregnant women. Many who took notice of the hike said Shkreli was taking advantage of a vulnerable population.

The story even caught the attention of Democratic presidential candidate Hillary Clinton, who tweeted that the practice was "price gouging" and "outrageous."

Raising prices now to develop a new drug later?

Shkreli justified hiking up the price of Daraprim by saying it would help his company develop a better version of the drug later. That business model is a different model from the ones used by most drug companies, who get funding from private groups for their research.

Sam Peltzman, a health economist and professor at the University of Chicago says Shkreli's justification was bogus because it's completely backwards.

"It's total hokum," Peltzman told Business Insider. "The sources of research funding are the attraction of getting a return on the research funding investment. They do not come from someone making a lot of money and saying, 'I've got nothing else better to do with it so I better do some research.' The economics is backwards in a statement like that." 

Now, presidential candidates - mainly Clinton and Bernie Sanders - are coming up with plans to change how pharmaceutical and biotech companies price their drugs.

Coupled with an American public opinion of pharmaceutical companies turning even more sour, it's looking like last week's news might be the spark that ignites a change to America's drug pricing policies.

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