































 6 

PHARMACEUTICAL PRICE-GOUGING: AN ANALYSIS OF MARYLAND’S 
EFFORTS TO REGULATE UNCONSCIONABLE INCREASES IN THE PRICES OF 

GENERIC DRUGS 
 

Harry Shanmugam 

INTRODUCTION 

Few people in modern American history have attained the notoriety of “PharmaBro” 

Martin Shkreli. In August of 2015, he acquired the exclusive rights to a drug called Daraprim for 

$55 million through his company Turing Pharmaceuticals. Daraprim, which has been off-patent 

since 1953, is a drug primarily used to treat toxoplasmosis in newborn babies and HIV patients. 

No generics had entered the market due to high barriers to entry, and after acquiring Daraprim, 

Turing put it on a closed distribution and removed it from wholesalers and pharmacies. Very 

soon after, Turing raised the price of Daraprim from $13.50 a pill to $750 a pill—an increase of 

over 5,000%—and Martin Shkreli became the “Most Hated Man in America.”1 

Cases of pharmaceutical companies raising off-patent drug prices by obscene amounts 

routinely make headlines, and are almost always met with public outrage because of the intense 

and undue burden they place upon patients, insurance providers, and the government. This paper 

analyzes one new regulatory effort, Maryland’s HB 631, to curb price-gouging of generic drugs. 

The law will be examined in terms of its legality and efficacy through an exploration of the 

following: 

● Public health and economic ramifications; 

● Constitutional issues in the law’s regulatory mechanism; 

● The policy context and regulatory environment in which the law is operating.  

                                                      
1 Merle, R. (2017, March 8). Martin Shkreli’s long, strange tale could end with a decade in  
prison. The Washington Post. 



 7 

HISTORY 

Legislative History: Hatch-Waxman Act 

 The generic drug legal space is rife with complicated processes, checkpoints, and hurdles. 

The modern regulatory environment for generics was largely created in 1984 with the Drug Price 

Competition and Patent Restoration Act—commonly known as the Hatch-Waxman Act—which 

seeks to preserve drug innovation through patent-term restoration policies while also increasing 

competition in the marketplace through the introduction of generics.2 This section will focus on 

these latter provisions, which provide the backbone of the regulatory process for the entry of 

generics into a market. 

 Under Hatch-Waxman, the active compounds in pioneer drugs, known as new molecular 

entities (NME’s), receive a “data exclusivity” period of five years, during which no generic 

drugs can enter the market.3 If a drug is patent-protected, then this exclusivity period is extended 

until the life of the patent.4 After the exclusivity period expires,5 generics can enter the market by 

submitting an Abbreviated New Drug Application (ANDA), named so because the generic is not 

required to conduct clinical and preclinical trials.6 From here, the regulatory process becomes 

complicated and task-intensive. In order to be listed in the FDA’s approved list of drugs, the so-

called “Orange Book,” a generic must prove bioequivalence, meaning that the drug “performs in 

                                                      
2 Mossinghoff, G. J. (1999). Overview of the Hatch-Waxman Act and Its Impact on the Drug  
Development Process. Food and Drug Law Journal. 
3 Grabowski et al. (2017). Pharmaceutical Patent Challenges: Company Strategies and Litigation 
Outcomes. American Journal of Health Economics. 
4 It is here that the patent-term restoration provisions kick in. Many pioneer drugs see their realized patent life 
shortened because patents are often filed early on in the development process; Hatch-Waxman provides a 
maximum five year extension on the exclusivity for cases like these. 
5 Potential generic entrants can also attempt to enter the market before the exclusivity period expires by using 
what is known as a “paragraph IV challenge,” where they assert that their drug does not infringe on the brand 
name drug’s patent, or that the brand name drug’s patent is invalid. 
6 Mossinghoff, G. J. 



 8 

the same manner as the innovator drug.”7 After conducting studies to prove bioequivalence, the 

generic drug must then prove bioavailability parity—the rate of absorption of the generic drug 

must be comparable to the original. The drug then must undergo multiple chemical reviews and 

label reviews before it can be approved.8 

Price-Gouging 

 The Martin Shkreli saga ended with the pharma magnate eventually going to jail, but not 

for his price-gouging of Daraprim; he was instead convicted for running a Ponzi-like scheme at a 

hedge fund he managed. In fact, what he did at Turing with Daraprim was completely legal, and 

not entirely uncommon. Valeant Pharmaceuticals, for example, increased the price of two drugs 

treating a rare disorder called Wilson’s Disease by 5,785% and 3,162%.9 Another company, 

Rodelis, increased the price of a multi-drug resistant tuberculosis medication by 2,060%.10 

Indeed, a report by the Government Accountability Office found that from 2010-2015, 315 

generic drugs experienced an “extraordinary price increase—a price increase of at least 100 

percent.”11 

 Over the last decade, drug companies and industry groups have poured $2.3 billion into 

lobbying efforts in Washington.12 As a result, according to a joint report by the Yale School of 

Public Health and the Yale Law School, “the federal government has failed to take—and many 

policymakers have not even considered—meaningful steps to curb drug prices.”13 In the absence 

of federal action on this issue, some states have created policies of their own to combat 

                                                      
7 Ibid. 
8 Ibid. 
9 U.S. Senate, Special Committee on Aging. (2016). 
10 Ibid. 
11 United States, Government Accountability Office. (2016, August). Generic Drugs Under  
Medicare. 
12 Berman et al. (2017, August). Curbing Unfair Drug Prices: A Primer for States (Issue brief). 
13 Ibid.  



 9 

pharmaceutical price-gouging. In April of 2017, Maryland passed a law, HB 631, that was 

considered by many to be a model for other states. HB 631 prevented any drug manufacturer or 

distributor from “engaging in price-gouging in the sale of any off-patent or generic drug.”14 

Price-gouging, or an “unconscionable increase” was given a very specific definition by the 

Maryland legislature: 

“... ‘unconscionable increase’ means a price increase that is excessive, and not justified 

by the cost of producing the drug or expanding access to it, and that results in consumers 

having no meaningful choice about whether to purchase the drug at an excessive price, 

because of the importance of the drug to their health, and insufficient competition in the 

market for the drug.”15 

Violators of this law would be subject to fines of up to $10,000 per violation, with enforcement 

duties falling upon the office of the Maryland Attorney General. 

 Predictably, the law was met with resistance from the pharmaceutical industry, which 

immediately challenged the statute in court. The case, Association for Accessible Medicines v. 

Frosh, made its way up to the U.S. Fourth Circuit Appeals Court, where the court ruled in a 2-1 

decision that the law was unconstitutional. The state moved to have the case heard en banc by 

the full panel of judges on the court but was denied. In October of 2018, Maryland Attorney 

General Brian Frosh filed a petition for a writ of certiorari with the Supreme Court.16 

 

 

 

                                                      
14 Public Health - Essential Off-Patent or Generic Drugs - Price Gouging - Prohibition 
15 Public Health - Essential Off-Patent or Generic Drugs - Price Gouging - Prohibition 
16 Frosh et al. (2018, October). Petition for a Writ of Certiorari to the Supreme Court of the United States: Frosh v. 
Association for Accessible Medicines. Cockle Legal Briefs. 



 10 

ANALYSIS 

The Argument for HB 631 

The Maryland law regulates a very particular type of pharmaceutical business model; 

indeed, while rising drug prices are a problem in a variety of pharmaceutical sectors, HB 631 

only targets exploitation of dysfunction in the generic drug market, as outlined in a report by the 

U.S. Senate Special Committee on Aging. In its analysis of the generics industry, the Committee 

found that several companies purposely built their operations around the following five core 

elements: 

● The company would acquire a sole-source, off-patent drug for which there was only one 

manufacturer; 

● This drug was the gold standard for the condition it treated; 

● Critically, the company purchased a drug that serviced a small market; 

● After purchasing the drug, the company restricted consumer access to it by pulling it 

from normal pharmacies and wholesalers and putting it on a closed distribution loop; 

● Once these elements were in place, the company drastically increased the price of the 

drug so as to make a windfall profit.17 

 From an economic perspective, this is a creative (if rather Machiavellian) way to game to 

the market. Capitalism operates such that competition keeps prices down, but this innovative 

business model essentially forms monopolies around decades-old therapies; in the absence of any 

competition, the company is free to raise prices astronomically, and in the absence of any 

regulation, the company does so legally. 

                                                      
17 U.S. Senate, Special Committee on Aging. 



 11 

 Maryland’s price-gouging law was formed in response to the negative ethical 

implications and economic impacts of this business model. Drastic price hikes in the generic 

industry represent a life-threatening burden on patients—for example, 24% of cancer patients do 

not fill prescriptions because of excessive prices.18 Furthermore, the design of the above business 

model insidiously conspires to impose a special burden upon people afflicted by rare, “orphan” 

diseases with small patient bases. One witness before the Senate Committee described how her 

treatment for Wilson’s disease—which affects only about 2,000 to 3,000 Americans—spiked so 

suddenly that her out-of-pocket costs increased by over $10,000 per year.19 Another witness 

described how she faced a $360,000 bill for the use of a Daraprim to save her two-month-old 

infant from a case of toxoplasmosis.20 This kind of testimony makes clear the ethical case for 

curbing this kind of price-gouging; it is disturbing to see patients at their most vulnerable beset 

with astronomical medicine bills threatening their course of treatment. 

 Price-gouging also carries with it a host of negative economic effects. In many cases, the 

state covers a significant portion of the expenses for prescription drugs through programs such as 

Medicare and Medicaid.21 Price hikes thus represent a de facto tax upon citizens as states 

struggle to reconcile their role in providing essential health coverage in the face of rising costs. 

The economic implications extend to the private insurance market as well; faced with claims for 

increasingly expensive drugs, insurance companies have resorted to “increasing premiums, 

deductibles, and out-of-pocket drug payments,” or worse, denying claims all together, thus 

further threatening patient security.22  

                                                      
18 Lee et al. (2018). Legal Challenges to State Drug Pricing Laws. JAMA.  
19 U.S. Senate, Special Committee on Aging. 
20 Ibid. 
21 Berman et al. 
22 Ibid. 



 12 

Buttressing the economic and ethical arguments in support of HB 631 are the distinctly 

American, capitalistic tendencies against monopolistic behavior. The Sherman Antitrust Act 

expressly prohibits “monopolization, attempted monopolization, or conspiracy or combination to 

monopolize” when said conduct unreasonably restrains trade.23 The FTC is charged with 

regulatory power in potential violations of the Sherman Antitrust Act and related anti-

competitive legislation. However, the FTC does not intervene “without evidence of a conspiracy 

among competitors or other anti-competitive actions that sustain the increased price,”24 and in 

most pharmaceutical price-gouging cases, there is nothing insidious besides the price hike itself.  

Rarely do pharmaceutical companies engage in behavior that would exclude competitors25; 

instead, lack of competition arises from the lack of incentives to undergo the FDA’s intense 

approval process and be the second entrant into a small generic drug market. Indeed, the business 

models pursued by HB 631’s target companies operate fairly and legally within the regulatory 

framework of the generics market; companies like Turing and Valeant follow all of the rules of 

the FDA, and raise their prices because their legal monopoly status gives them no reason not to. 

But by creating conditions in which competition is non-existent—even if the steps in the 

process to do so were legal—this brand of price-gouging goes against the spirit of laws such as 

the Sherman Antitrust Act. Indeed, the language of the Maryland law operates on the same 

principles as, say, regulation against predatory pricing. In Utah Pie Co. v. Continental Baking 

Co. the Court held that there must be a clear marginal-cost economic or competitive basis for 

lower prices in order for the action to not be considered predatory pricing.26 HB 631 operates in a 

                                                      
23 Sherman Antitrust Act. § 2 (1890). 
24 Alpern et al. (2015). High-Cost Generic Drugs—Implications for Patients and Policymakers. New England Journal 
of Medicine. 
25 Ibid. 
26 Utah Pie Co. v. Continental Baking Co. (1967). 



 13 

similar fashion, dictating that a price-increase must be “justified by the cost of producing the 

drug or expanding access to it.”27 Even in the absence of FTC or congressional action to combat 

predatory behavior, there seems to be a basis in existing pro-competitive statutes for regulation 

against price-gouging. 

The Argument Against HB 631 

In its suit against the state of Maryland, the Association for Affordable Medicines (AAM) 

asserted two constitutional challenges to HB 631: that it violated the extraterritoriality prong of 

the dormant commerce clause and that it is unconstitutionally vague.28 

 The dormant commerce clause of the constitution places a “constraint on the power of the 

States to enact legislation that interferes with or burdens interstate commerce.”29 Coming out of 

this is the extraterritoriality principle, which states that a “state may not regulate commerce that 

takes place wholly outside of the State’s borders, whether or not the commerce has effects within 

the state.”30 Statutes directly controlling out-of-border commerce are invalid, regardless of 

whether the extraterritorial reach is expressly written or intended by the legislature or if it is a 

“practical effect” of the statute.31  

 In AAM v. Frosh, the appellate court held that even while HB 631’s provisions were only 

triggered when a drug was available for sale in Maryland, the act “directly regulates the prices 

charged for prescription drugs in out-of-state transactions.”32 The court based this conclusion on 

the assessment that the legislation would target transactions that occur outside of the state of 

Maryland because the wording of the act targets manufacturers and distributors—almost none of 

                                                      
27 Frosh et al. 
28 Association for Accessible Medicines v. Frosh. 
29 Ibid. 
30 Ibid. 
31 Ibid. 
32 Ibid. 



 14 

whom are headquartered in, operate in, or manufacture in Maryland.33 Indeed, the majority of 

these drugs are sold in Maryland through resale or consumer retail, but HB 631 instead puts its 

regulatory focus on price changes “in the initial sale of the drug,” thereby directly regulating the 

transactions of wholesale distributors and manufacturers which occur entirely outside of the 

borders of Maryland. 

 Maryland’s defense to this conclusion is that the out-of-state pricing effects are merely 

“upstream impacts of a state regulation” and not the direct regulation that the dormant commerce 

clause requires. But the court holds that HB 631’s regulatory mechanism constitutes a price 

control mechanism; instead of merely creating an upstream pricing disturbance because of an in-

state regulation, it creates a change in manufacturers’ pricing schemes that comes independently 

of “natural market forces.”34 By consequence, the “practical effect” of the Maryland Law is that 

Maryland places a price control on an out-of-state transaction—which is expressly prohibited by 

the extraterritoriality principle—thus rendering the law invalid. 

The court did not rule on the AAM’s claim of unconstitutional vagueness because the law 

was already invalidated for violating the dormant clause. The vagueness claim is important, 

though, because it asserts that the “unconscionable increase” standard was too inconsistent and 

reliant on post hoc enforcement by the Attorney General in order for the regulated parties to 

know clearly what their obligations were. The Supreme Court has set the precedent in cases such 

as FCC v. Fox that regulators must provide fair and clear notice of the exact duties a regulated 

group has before imposing regulations on them35; the enforcement mechanism of HB 631, 

wherein the Attorney General would file suit against companies in violation of the law, would 

                                                      
33 Ibid. 
34 Ibid. 
35 FCC v. Fox Television Stations. (2009). 



 15 

mean that such duties would be made evident only after the fact, subject to law enforcement’s 

discretion in its exercise of the penalty as opposed to a clear, prior communicated standard. 

 In a memorandum of law in support of their preliminary injunction, the AAM also claims 

that HB 631 would pose a significant threat to the public interest. The Association asserts that 

the law would “introduce enormous uncertainty and business risk for generic drug 

manufacturers,”36 leading to the potential risk of companies withdrawing from marketing their 

medicines in the Maryland market, or worse yet, declining to make generic medicines altogether. 

Such actions would be an unintended negative externality of the law, with detrimental public 

health consequences for the state of Maryland. 

Evaluating the Current System 

 In balance, then, it seems that the clear economic and ethical principles in favor of 

curbing price-gouging are countered by legal arguments that make meaningful regulation of the 

pharmaceutical industry difficult. The current infrastructure of the pharmaceutical distribution 

system is nationwide in scale; companies manufacture medicines in one state and then sell it to 

wholesalers at a national level, who then sell it to distributors who resale it to local retailers, 

hospitals, and pharmacies.37 Absent any federal action on this issue, it is difficult for states to 

find policy strategies that meaningfully combat price-gouging; constitutional constraints make it 

impractical to rely on state-level legislation to regulate a national-level problem. 

 The simple solution would be to lobby for more federal oversight on this issue, but such a 

perspective ignores the dysfunction in a system which allows such excesses in the first place—a 

system in which competition is inhibited and disincentivized. Indeed, per each additional entrant 

                                                      
36 Memorandum of Law in Support of Plaintiff's Motion for Preliminary Injunction. 
37 Ibid. 



 16 

in a generic drug market, drug prices decrease by 20%, and yet, pharmaceutical companies report 

consistent barriers to entry and inhibitors to competition.38 

The largest such barrier is the bloated nature of the FDA approval process for generics. 

As of 2015, the median approval time for an ANDA was 43 months, with more than half the 

applications taking upward of four years.39 Furthermore, there is increased demand in generic 

entry; in the last 3 years alone, the number of ANDA submissions has risen from 539 to 1,306.40 

Faced with such an immense workload, the FDA has fallen into a cavernous backlog, with 4,036 

generic drug applications awaiting approval as of July 1, 2018.41 The inefficiency of this 

approval system is compounded by the significant costs to be borne by ANDA applicants, with 

each submission facing “FDA fees well in excess of $70,000.”42 

In light of this, there is a certain twisted genius to the business model pioneered by 

Shkreli and other “price-gougers”—it makes sense to target drugs with small markets because 

potential competitors will be deterred from entering the cumbersome FDA approval cycle just to 

access such a small base of potential customers as the second or third entrant. As such, we see 

that the regulatory environment today is permissive to price-gouging; because of the complicated 

calculus that a company must undertake to decide whether to attempt to penetrate a market at 

such a high entry cost, players who make the first move and take a small drug market hostage 

have free reign to raise prices as much as they want to make a windfall profit. 

 

 

                                                      
38 United States, Government Accountability Office. 
39 U.S. Senate, Special Committee on Aging. 
40 Association for Accessible Medicines, & IQVIA. 
41 The Latest on the ANDA Review Backlog. 
42 U.S. Senate, Special Committee on Aging. 



 17 

CONCLUSION AND RECOMMENDATION 

The policy problem at the core of AAM v. Frosh is one of national significance. If the 

Supreme Court grants certiorari to this case, then it will place pharmaceutical price-gouging at 

the center of the national debate. In the end, we could see a realist versus formalist showdown in 

the court, where the economic and ethical implications of price-gouging are placed in stark 

opposition to the constitutional challenges posed by attempting state-level legislation on a 

problem of national scale. The court currently has a formalist majority, suggesting a victory for 

pharmaceutical companies, but price-gouging on life-saving medicines generally garners such 

universal discomfort that this case may not be decided on strictly ideological lines. 

Ultimately, though, even if Maryland’s law is upheld, it is an insufficient, surface-level 

patching to a hole that extends deeper into the system than this legislation can feasibly cover. All 

Maryland’s law does is provide penalties for companies that have recognized and capitalized on 

opportunities to increase their profits that are borne out of inefficiencies in the current market 

structure. This method of after-the-fact regulation does nothing to address the institutional 

problems that create an environment where price-gouging can occur in the first place. Instead, 

policymakers should turn their attention to fixing these enabling factors. Legislation to provide 

more resources to the FDA to work through their backlog is in order, as well as legislation that 

further incentivizes generic entry into markets with smaller patient bases.  

There is the potential for legislative innovation here—for example, expedited review for 

ANDA submissions to markets with only one generic drug would attract entrants to that market 

and thus lower prices. Indeed, with the cost of entry being reduced, the prospect of entering a 

market is not tempered by fears of a drawn-out and expensive approval process. This policy 

would also need to be accompanied by other legislative measures; special incentives for generic 



 18 

drugs entering markets with small patient bases would help effectively defeat the business model 

of many price-gouging companies from the bottom up. After these structural changes were 

implemented, Congress could look into giving more explicit guidance to the FTC on exercising 

its antitrust regulatory power to prevent maneuvers by pharmaceutical companies to corner 

segments of the markets. Ultimately, though, the focus of new policy initiatives should be 

adjusting the infrastructure of the pharmaceutical industry such that market entry by generics—

and by extension, competition—is increased. Indeed, natural market forces are often far more 

effective checks than imposed, post hoc regulations. 

The issues brought upon by pharmaceutical price-gouging are both troubling and 

pressing, couched in ethical and economic relevance. It is incumbent upon regulators and 

policymakers to take action in a way that restores competitive balance and thus mitigates the 

worst excesses of this essential, life-saving industry. 

 

 

 

 

 

 

 

 

 

 



 52 

                                                                                                                                                                            
Endnotes 

 
PHARMACEUTICAL PRICE-GOUGING: AN ANALYSIS OF MARYLAND’S 
EFFORTS TO REGULATE UNCONSCIONABLE INCREASES IN THE PRICES OF 
GENERIC DRUGS 
 
Alpern, J. D., Stauffer, W. M., & Kesselheim, A. S. (2015). High-Cost Generic Drugs —  

Implications for Patients and Policymakers. New England Journal of Medicine,372(7), 
685-686. doi:10.1056/nejmc1415471 

Association for Accessible Medicines v. Frosh (April 13, 2018). 
Association for Accessible Medicines, & IQVIA. (n.d.). Number of abbreviated new drug  

applications (ANDA) received in the U.S. from 2009 to 2017. In Statista - The Statistics 
Portal. Retrieved November 14, 2018, from 
https://www.statista.com/statistics/864366/andas-received-number/. 

Berman, A., Lee, T., Pan, A., Rizvi, Z., & Thomas, A. (2017, August). Curbing Unfair Drug  
Prices: A Primer for States(Issue brief). Retrieved 
https://law.yale.edu/system/files/area/center/ghjp/documents/curbing_unfair_drug_prices-
policy_paper-080717.pdf 

FCC v. Fox Television Stations (2009). 
Frosh, B. E., & Neall, R. R. (2018, October). Petition for a Writ of Certiorari to the Supreme  

Court of the United States: Frosh v. Association for Accessible Medicines. Cockle Legal 
Briefs. 

Grabowski, H., Brain, C., Taub, A., & Guha, R. (2017). Pharmaceutical Patent Challenges:  
Company Strategies and Litigation Outcomes. American Journal of Health 
Economics,3(1). doi:10.1162/ajhe a 00066 

Lee TT, Kesselheim AS, Kapczynski A. Legal Challenges to State Drug Pricing  
Laws. JAMA. 2018;319(9):865–866. doi:10.1001/jama.2017.20952 

Memorandum of Law in Support of Plaintiff's Motion for Preliminary Injunction, AAM v. Frosh.  
(2017, July 6). Association for Accessible Medicines. 

Merle, R. (2017, March 8). Martin Shkreli’s long, strange tale could end with a decade in  
prison. The Washington Post. Retrieved from 
https://www.washingtonpost.com/news/business/wp/2018/03/08/martin-shkrelis-long-
strange-tale-could-end-with-a-decade-in-prison/?utm_term=.6a3d0364b013 

Mossinghoff, G. J. (1999). Overview of the Hatch-Waxman Act and Its Impact on the Drug  
Development Process. Food and Drug Law Journal,54. Retrieved from 
https://pdfs.semanticscholar.org/905b/215a807fab1b61b60e0279b5fedc8a3cae90.pdf. 

Public Health - Essential Off-Patent or Generic Drugs - Price Gouging - Prohibition, MD  
Annotated Code §2-801 - §2803 

Sherman Antitrust Act, § 2 (1890). 
 



 53 

                                                                                                                                                                            
The Latest on the ANDA Review Backlog. (2016, September 15). Retrieved from  

https://pharmdevgroup.com/latest-backlog-anda-reviews/ 
United States, Government Accountability Office. (2016, August). Generic Drugs Under  

Medicare. Retrieved from United States, Government Accountability Office. (2016, 
August). Https://www.gao.gov/assets/680/679022.pdf. 

U.S. Senate, Special Committee on Aging. (2016). Special report of the U.S. Senate Special  
Committee on Aging on the sudden price spikes in off-patent prescription drugs: The 
monopoly business model that harms patients, taxpayers, and the U.S. health system(S. 
M. Collins & C. McCaskill, Authors) [S. Rept.]. 

Utah Pie Co. v. Continental Baking Co. (April 24, 1967) (LexisNexis, Boston College Libraries,  
Dist. file). 

 
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PBM_1139183?WT.mc_id=AM~RmluYW56ZW4ubmV0X1JTQl9SYXRpbmdzX05ld3
NfTm9fVHJhbnNsYXRpb25z~20180827_PBM_1139183. 

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