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UPDATE 2-Clinton proposes $250 monthly cap on prescription drug costs

(Adds background on drug price increases)

LITTLE ROCK, Ark., Sept 22 (Reuters) - Democratic presidential candidate Hillary Clinton on Tuesday will propose a $250 monthly cap on prescription drugs to stop what she calls “excessive profiteering” by pharmaceutical companies.

At a campaign stop in Iowa, Clinton will outline a plan to encourage the development and use of generic drugs and to end pharmaceutical companies’ ability to write off consumer-directed advertising as a business expense.

Under Clinton’s plan, the monthly cap would limit what insurance companies could ask patients to pay for drugs that treat patients with chronic or serious medical conditions.

“It is time to deal with skyrocketing out-of-pocket costs,” Clinton said on Monday during a campaign stop in Little Rock, Arkansas,

Her comments came after the New York Times reported on how a startup biotechnology company, Turing Pharmaceuticals, raised the price of the 62-year-old Daraprim treatment for a dangerous parasitic infection to $750 a tablet from $13.50 after acquiring it.

Shares of biotech companies such as Biogen Inc and Gilead Sciences Inc dropped on Monday after Clinton tweeted that steep prices for specialty drugs were “outrageous.”

Critics of marketing drugs to consumers say it encourages the use of costly brand names over generics and can be confusing or misleading. A series of court decisions has determined the practice cannot be banned outright because it is a form of commercial speech protected by the U.S. Constitution.

Clinton says the government could save billions of dollars by no longer allowing pharmaceutical companies to deduct what they spend marketing drugs to consumers, and those funds could be redirected into encouraging research and development.

The largest pharmaceutical companies are collectively earning $80 billion to $90 billion per year at higher margins than other industries while average Americans struggle to pay for medicine, Clinton’s campaign said.

While Clinton has maintained her front-runner status, she has been under pressure to take more populist stances to widen her lead over U.S. Senator Bernie Sanders, her second-place rival for the Democratic nomination.

Clinton would also prohibit what the campaign called “pay-for-delay agreements,” in which the owner of a brand-name drug pays a generic competitor to keep its product off the market for a period of time, usually as part of a litigation settlement.

Clinton wants Medicare, the U.S. government’s health insurance program for the elderly, to be able to negotiate with pharmaceutical companies over drug prices and require more generous rebates, driving down overall costs.

Consumers would also be allowed to purchase drugs from other countries, where medicine is often less expensive, so long as sufficient safety standards are in place, Clinton’s campaign said.

Traditional “Big Pharma” companies have long faced criticism for steadily raising prices of their prescription medicines in the United States, often by jumps of 10 percent or more.

Drugmakers are unapologetic about their five- or six-digit prices on new treatments for cancer, hepatitis C and high cholesterol. Sovaldi, a treatment from Gilead Sciences, can cure hepatitis C, but at a cost of $1,000 per pill.

Even more controversial have been eye-popping increases in costs for older drugs in limited supply, often after other drugmakers acquire them. They say the funds help cover research and development costs for new products.

For instance, prices for heart drugs Nitropress and Isuprel went up fivefold and twofold, respectively, after Valeant Pharmaceuticals International Inc purchased them earlier this year. In 2011, KV Pharmaceutical Co changed the price on a decades-old preterm labor treatment, Makena, to $1,500 a week from between $10 and $20.

For more on the 2016 presidential race, see the Reuters blog, "Tales from the Trail" (here). (Additional reporting by Caren Bohan in Washington and Michele Gershberg in New York; Editing by W Simon, Eric Walsh and Lisa Von Ahn)