“Even the FDA seems to agree that FDA approval is superfluous.”

Last August, the drug company KV Pharmaceutical filed for Chapter 11 bankruptcy protection after its run-in with Congress and the U.S. Food and Drug Administration (FDA). Although KV played by the rules, it experienced the capriciousness of Congress and the FDA and, shortly thereafter, the immutability of economic laws.

This story revolves around 17 alpha-hydroxyprogesterone caproate (17P), a long-acting form of progesterone used to reduce the risk of preterm birth. With 17P not available through normal drug manufacturers, compounding pharmacies—pharmacies that produce their own pharmaceutical products—had stepped in to produce and sell “homebrew” doses of 17P for $10 to $20 each. Once KV Pharmaceutical received FDA approval and marketing exclusivity for its branded version of 17P, named Makena, the price skyrocketed to $1,500 per dose, increasing the cost of a complete therapy from $300 to $30,000. What happened next and why? The backstory reveals several points: Drug companies can make questionable choices; some in Congress are surprised by the unintended consequences of their laws; the FDA encourages drug companies to price like monopolists; the FDA isn’t committed to its own rules; and FDA approval is not a necessary condition for the successful use of pharmaceuticals.

In 1956, the FDA approved Squibb’s Delalutin (the original version of 17P), but for conditions other than reducing the risk of preterm birth. After some time, Squibb (now part of Bristol-Myers Squibb) stopped marketing and manufacturing Delalutin. This opened the possibility of another company applying to the FDA to receive marketing approval and marketing exclusivity for a “new” branded version of 17P.

It wasn’t until 2003 that 17P was actually studied for reducing the risk of preterm birth—defined as babies born before 37 weeks of pregnancy. A clinical trial involving pregnant women with a history of preterm delivery showed that weekly injections of 17P substantially reduced the rate of preterm delivery among these women and reduced health problems among their infants. This led to the “off-label” (for conditions not officially approved by the FDA) compounding by pharmacists.

Old “square peg” drugs, such as 17P, cast doubt on the whole rationale for the FDA. Do we really need the FDA to ensure that the medicines we consume are safe and effective? If so, then how do we explain the existence of a corner of the market where unproven “homebrew” drugs are being used—and the sky hasn’t fallen? Quite clearly, FDA approval is not a necessary condition for the successful use of medicines.

Not surprisingly, given its tendency to seek greater control, the FDA’s long-term goal is to bring these “misfit” drugs into compliance. As a carrot, the FDA rewards pharmaceutical companies that take such products through the expensive and lengthy approval process with multi-year marketing exclusivity under the Orphan Drug Act. KV bought into this promise. In February 2011, the FDA approved Makena to reduce the risk of preterm birth in pregnant women with a history of at least one spontaneous preterm birth, giving Makena seven years of marketing exclusivity.

As someone whose child was born prematurely, at 2 pounds 11 ounces, I can tell you that preterm births are both scary and expensive. (Thankfully, my son is now a healthy and happy 16-year-old.) While we were lucky, not everyone is, and preterm births remain a serious problem. According to Sandra Kweder, M.D., deputy director of the Office of New Drugs in the FDA’s Center for Drug Evaluation and Research, “Preterm birth is a significant public health issue in the United States. This [Makena] is the first drug approved by the FDA that is indicated to specifically reduce this risk.”

As a next step, the FDA was supposed to shut down all compounding operations because, according to the FDA’s own compliance policy, when the FDA approves new, commercially available drugs, all production of compounded copies must cease.1 After all, how can it be “marketing exclusivity” if other producers are allowed to sell their own versions?

However, the FDA broke its own rules, presumably due to pressure from Congress. In a letter to the Federal Trade Commission, Senators Sherrod Brown, D-Ohio, and Amy Klobuchar, D-Minn., argued that Makena’s price would reduce access to 17P and exhorted the FTC to investigate potential price-gouging and anti-competitive conduct by KV. The Senators expressed concern that KV was “taking advantage” of the FDA’s approval and Makena’s orphan-drug status, leading to “a monopolization of treatments to address preterm labors.”23 Brown didn’t stop with the FTC. At a Senate Appropriations Hearing, Brown grilled FDA Commissioner Margaret Hamburg on the “outrageous” price of Makena and asked her to “take leadership within HHS to find a strategy or path quickly to get this company to price its drug responsibly.”45

Were Brown and Klobuchar serious? Of course KV had taken advantage of its situation with Makena. That’s what companies do. Google uses its search-engine success to sell advertising. Microsoft uses its operating system dominance to sell copies of Office and its Office popularity to promote Windows. Apple uses iTunes to sell iPods and iPhones. Chinese manufacturers use their low-cost advantage to sell countless consumer products.

In this case, of course, the federal government essentially handed KV its advantage. Brown and Klobuchar are disingenuous for blaming the company for taking advantage of something that Congress gave it. And what is the FDA’s award of market exclusivity other than a temporary, government-granted “anti-competitive” monopoly? The Senators should have started their investigation of anti-competitive conduct by looking in the mirror.

Under wilting political pressure, Hamburg and the FDA neglected to stop the compounding pharmacies, and the cheap doses of 17P continued. This put KV in a difficult position. Feeling stress from both the government inquiry and cheap competition, KV reduced the price of Makena to $690 per dose. This symbolic gesture didn’t help matters, though, because competitors were still selling 17P at two percent of KV’s price.

KV forced the issue by reversing roles with the FDA and analyzed some compounded versions of 17P, where it found that most failed to meet at least one FDA quality standard for potency and/or purity. The FDA retorted, after analyzing some compounded 17P products itself, that it had found no major safety problems, but it reserved the right to take enforcement action against the compounding pharmacies, if warranted. But did the FDA really want to set a precedent of allowing unapproved drugs on the market and then acting only if there were a major problem with them? Perhaps seeing the rhetorical corner it was boxing itself into, the FDA reiterated its belief that approved drug products such as Makena “provide a greater assurance of safety and effectiveness than do compounded products.”

In August 2012, hopelessly trapped and facing disappointing sales, KV Pharmaceutical filed for Chapter 11 bankruptcy protection, blaming the FDA’s lack of enforcement of the market exclusivity for Makena. KV explained that it had been “unable to realize the full value” of Makena after the FDA gave de facto approval to the compounded products, which “effectively nullified” Makena’s seven years of exclusivity. KV had earlier sued the FDA to take “sufficient enforcement actions” to stop the distribution of compounded 17P, but in September 2012, U.S. District Court Judge Amy Berman Jackson dismissed the suit on the grounds that the case pertained to the FDA’s “discretionary enforcement activities.”

Was KV gullible for actually believing that it would get the seven years of marketing exclusivity promised by the FDA? Perhaps. The FDA has demonstrated that it is, at its heart, a political organization that bends its rules to accommodate the prevailing political winds. In the choice between following their own rules and keeping their jobs secure, the FDA’s top brass chose the latter.

New drugs in the same price range as Makena are marketed regularly with no public outcry. But we normally don’t get to see the generic price before the branded price; we normally see the high branded price for a decade or so and then, after patent expiration, we see generics enter the market at a fraction of the price. KV should have realized that it was operating in an unusual environment and refrained from setting such a high price for Makena. While KV Pharmaceutical played by the rules, it was far from astute.

If the products not approved by the FDA are priced at $15 per dose while the approved product is priced at $1,500, is the FDA partly responsible for high drug prices? Certainly.

If you are a pharmacist compounding 17P and facing many other producers, you think like a generics company and price your doses at the going rate. If you are KV Pharmaceutical, with a government-granted monopoly, you think like a monopolist. The key issue for a monopolist wishing to maximize profits is the ultimate value of the product. Here, the value is roughly equal to the cost of the condition being prevented. KV provided some figures to defend Makena’s price:

  • 543,000 American babies are born prematurely, which results in intensive hospital care for almost all of these babies and lifelong disabilities for some of them.
  • Preterm birth is responsible for $26 billion a year in medical expenses in the United States.

If we divide $26 billion by 543,000, the cost per baby is about $48,000. If Makena worked in every case and if it were given to only those mothers who would have otherwise delivered a baby prematurely, then the price of around $30,000 for a full course of therapy would have made sense. In other words, “Pay me $30,000 now to avoid a cost of $48,000 later.” However, we must also factor in the success rate for Makena and the fact that even women who will not deliver prematurely get the drug because we don’t know beforehand exactly who will deliver a preterm baby. For instance, if the success rate is 63 percent and Makena is given to four women for every one that really needs it, then the decision is more like: “Pay me $120,000 now to avoid a 63-percent chance of facing a cost of $48,000 later.”6 That’s not a good deal.

A more thorough analysis in the New England Journal of Medicine by Joanne Armstrong, M.D., M.P.H. 7 concluded that every dollar invested in compounded 17P saved $8 to $12 in healthcare costs (a good investment). Makena, unfortunately, required $8 to $12 in drug spending for every dollar in costs it avoided (a bad investment). These data suggest that KV should have priced Makena at $150 per dose instead of $1,500.

Regardless of which price was the “correct” price, KV attempted to charge a monopoly price, as monopolists normally do, while the compounding pharmacies priced their 17P doses to match the competition. Therein lies the FDA’s connection with high drug prices: The FDA encourages drug companies to price new medicines as monopolists. Under our current legal and regulatory framework, many pharmaceuticals are probably an order of magnitude more expensive than they otherwise would be.

Even with high drug prices, there are good reasons for such intellectual property protection, which plays an important role in the development and marketing of pharmaceuticals. After all, why pay for the expense of drug research, development, and marketing if another company can, without incurring these costs, produce a copy of your drug and undercut your price? One partial solution is to have full intellectual property protection for each original medicine, but have more medicines on the market, even erroneously maligned “me too” drugs. Having a dozen monopolistic statins on the market provides some good competition and gives doctors and patients welcome therapeutic alternatives.

Unassuming 17P was a misfit product brought into FDA compliance through the approval of branded Makena, but the resulting fiasco shone a light on the monopolistic pricing of branded drugs, the unintended consequences of certain laws, and the pliability of FDA rules, and provided a counterpoint to the argument that the FDA needs to vet all medicines.

For more on these topics, see Pharmaceuticals Economics and Regulation, by Charles L. Hooper in the Concise Encyclopedia of Economics. See also Richard Epstein on Property Rights and Drug Patents. EconTalk podcast, February 2007.

Most people believe that the FDA needs to ensure that the medicines we Americans consume have been proven to be safe and effective long before we ever get a chance to use them. Yet the Makena story gives us a peek into an area of medical practice where unproven “homebrew” drugs rule the market, where even the FDA seems to agree that FDA approval is superfluous. Is there a bigger lesson here?

A former commissioner of the FDA, David Kessler, once stated, “If members of our society were empowered to make their own decisions about the entire range of products for which the FDA has responsibility, however, then the whole rationale for the agency would cease to exist.”8 He has a point.


Inspections, Compliance, Enforcement, and Criminal Investigations. U.S. Food and Drug Administration. December 21, 2009.

“Brown Leads Effort to Demand Federal Investigation Into Price Gouging of Pre-Term Labor Drug for Expectant Mothers,” Senator Sherrod Brown press release, March 17, 2011.

“Senators seek investigation into KV drug pricing,” Lisa Brown, St. Louis Post-Dispatch, March 19, 2011.

“Senators demand action on Makena price,” BioCentury Extra, BioCentury Publications, March 17, 2011.

“Contradicting itself,” BioCentury, The Bernstein Report on BioBusiness, BioCentury Publications, week of April 18, 2011.

If four women were treated with Makena, the price would be $30,000 times four, or $120,000. The cost of each premature baby is $48,000. The probability that Makena would work for the one woman that really needed it was 63 percent. So the cost would have been $120,000 with a benefit equal to 0.63 times $48,000.

Joanne Armstrong, M.D., M.P.H., “Unintended Consequences — The Cost of Preventing Preterm Births after FDA Approval of a Branded Version of 17OHP,” N Engl J Med 2011; 364:1689-1691 May 5, 2011.

“David Kessler’s Legacy at the FDA,” Robert Goldberg, Quick Study, Institute for Policy Innovation, 1997.


*Charles L. Hooper is president of Objective Insights, a company that consults for pharmaceutical and biotech companies, a visiting fellow with the Hoover Institution at Stanford University, and a blogger at Medical Progress Today.

For more articles by Charles L. Hooper, see the Archive.