Pharma’s New Poster Boy

Martin Shkreli’s trou­bles are fo­cus­ing at­ten­tion on how the drug in­dus­try does busi­ness His sin was do­ing what the phar­ma­ceu­ti­cal in­dus­try has al­ways done—on steroids

Bloomberg Businessweek (Asia) - - Opening Remarks - By Paul M. Bar­rett −With re­port­ing by Robert Lan­greth and Doni Bloom­field

Call it a case of tempt­ing fate or in­stant karma—the cos­mos sought its in­evitable re­venge when Martin Shkreli, the hiphop-lov­ing, drug-price-in­flat­ing biotech ex­ec­u­tive, was ar­rested, in­dicted, and perp-walked on Dec. 17. But the ac­tiv­i­ties that got him cross­wise with the feds aren’t what the 32-year-old Twit­ter ad­dict with the sar­donic smirk will be re­mem­bered for. What’s so trou­bling and im­por­tant about his story is that the way he ran his drug com­pa­nies— the amoral but prob­a­bly le­gal busi­ness plans he em­ployed—were of a piece with main­stream phar­ma­ceu­ti­cal mar­ket­ing.

Fed­eral pros­e­cu­tors de­scribed Shkreli’s do­ings as “Ponzi-like” and charged him with fraud, claim­ing that he fleeced a com­pany he started in 2011 called Retrophin. He al­legedly used its stock and cash to pay off in­vestors who’d suf­fered losses at small hedge funds he’d

pre­vi­ously run into the ground. Un­like the typ­i­cal Ponzi artist—think Bernie Mad­off—Shkreli started real com­pa­nies that ac­quired real prod­ucts and ac­cu­mu­lated hun­dreds of mil­lions of dol­lars in value, at least in the eyes of Wall Street.

Out on $5 mil­lion bail, Shkreli claims in­no­cence. His PR team took is­sue with the “Ponzi” la­bel, say­ing in a state­ment: “Ponzi vic­tims do not make money, yet Mr. Shkreli’s in­vestors en­joyed strong re­sults.” Maybe the hedge fund in­vestors got their money back, but Shkreli will have to ex­plain why it was kosher to make them whole with as­sets that be­longed to a pub­licly traded com­pany. He jus­ti­fies the shell game by say­ing he had the bless­ing of his lawyer, but that lawyer has also been in­dicted in the case.

How­ever the crim­i­nal pro­ceed­ings play out, Shkreli de­serves to re­main in­fa­mous for the rea­son he first be­came no­to­ri­ous. Af­ter the Retrophin board ousted him as chief ex­ec­u­tive of­fi­cer in 2014, he started an­other com­pany, Tur­ing Phar­ma­ceu­ti­cals. He then ac­quired Dara­prim, a decades-old life­sav­ing med­i­ca­tion for par­a­sitic in­fec­tions, and hiked the price mon­strously, from $13.50 to $750 a pill. De­fi­antly jus­ti­fy­ing this gam­bit and vow­ing to re­peat it with other “or­phan” drugs for rare diseases, Shkreli turned him­self, at least for 15 me­dia min­utes, into what the BBC called “the most hated man in Amer­ica.” On that score, he de­fended him­self on Twit­ter just the day be­fore the FBI showed up at his Man­hat­tan apart­ment. “If you can af­ford our drugs with in­sur­ance, great,” he tweeted. “If you can’t, you can have it for free. Our sys­tem works.”

That claim isn’t ter­ri­bly dif­fer­ent from the jus­ti­fi­ca­tion the phar­ma­ceu­ti­cal in­dus­try rolls out when­ever it’s chal­lenged on drug prices that seem alarm­ingly high. Granted, Shkreli wasn’t typ­i­cal; most com­pa­nies don’t at­tempt 55-fold overnight price hikes for treat­ments that help ba­bies and HIV suf­fer­ers. But Shkreli didn’t in­vent the re­pug­nant prac­tice of find­ing an old drug, jack­ing up the price, and tak­ing the prof­its. He just did it on steroids.

Shkreli, who in the wake of the Retrophin in­dict­ment re­signed as CEO of Tur­ing and was fired from the same job at a third tiny drug­maker, was sim­ply fol­low­ing the lead of com­pa­nies such as Valeant Phar­ma­ceu­ti­cals and Rodelis Ther­a­peu­tics, which ex­ploit in­ef­fi­cien­cies in the U.S. health-care sys­tem. “Shkreli’s be­hav­ior isn’t brand­new; other com­pa­nies have done it,” says Steve Brozak, pres­i­dent of WBB Se­cu­ri­ties. “He just went fur­ther.”

Valeant raised the price of two heart drugs, Nitro­press and Isuprel, by 212 per­cent and 525 per­cent, re­spec­tively. Rodelis boosted a tu­ber­cu­lo­sis treat­ment to $360 a pill from $20, be­fore say­ing in Septem­ber it would give up rights to the drug in re­sponse to a pub­lic out­cry. And from 2005 to 2008, Quest­cor Phar­ma­ceu­ti­cals, now owned by Mallinck­rodt, raised the price of the mul­ti­ple scle­ro­sis drug Ac­thar from $1,235 a vial to more than $29,000.

Be­fore re­turn­ing the rights to the tu­ber­cu­lo­sis drug to the non­profit foun­da­tion from which it had bought them, Rodelis said that rais­ing prices would en­sure “long-term avail­abil­ity” to pa­tients and that it would main­tain ac­cess for any­one who needed the medicine. A Mallinck­rodt spokesman says Quest­cor in­creased prices sharply be­cause its in­fre­quently used MS drug had be­come un­prof­itable; more re­cent hikes, he adds, have been mod­est.

Shkreli’s ar­rest and in­dict­ment will en­cour­age bet­ter-es­tab­lished phar­ma­ceu­ti­cal ex­ec­u­tives to dis­tance them­selves from the hoodie-wear­ing crim­i­nal de­fen­dant. “To com­pare us to Tur­ing is ridicu­lous,” Valeant’s CEO, Michael Pear­son, said in a Dec. 15 in­ter­view with CNBC. “That is a sin­gle-prod­uct com­pany.”

“He is not us,” Ken­neth Frazier, CEO of Merck and chair­man of Phar­ma­ceu­ti­cal Re­search and Man­u­fac­tur­ers of Amer­ica (PhRMA), the in­dus­try’s main trade group, said at a Forbes Health­care Sum­mit two weeks be­fore Shkreli tran­si­tioned from pariah to perp.

But while Shkreli is an out­lier, main­stream phar­ma­ceu­ti­cal makers rou­tinely raise prices 10 per­cent or more a year, much faster than in­fla­tion, for drugs aimed at can­cer, diabetes, MS, and high choles­terol. Those more mod­est­seem­ing in­creases on widely con­sumed med­i­ca­tions have a vastly greater ef­fect on over­all health-care spend­ing than the abrupt in­fla­tion of Tur­ing’s drug, used by only a couple thou­sand pa­tients (page 21).

The steady jumps in brand-name drug prices make medicine far more ex­pen­sive in the U.S. than it is in Canada, Europe, and most of the rest of the de­vel­oped world, data com­piled by Bloomberg and other or­ga­ni­za­tions show. The drug in­dus­try has ar­gued— and Shkreli had echoed—that it’s mis­lead­ing to fo­cus on list prices, be­cause they don’t in­clude dis­counts com­pa­nies strike pri­vately with in­sur­ers or pa­tient give­aways.

A Dec. 18 Bloomberg News anal­y­sis, done with the as­sis­tance of re­search firms SSR Health and IHS, re­vealed that even when dis­counts are fac­tored in, prices for top-sell­ing drugs are sig­nif­i­cantly higher in the U.S. than abroad. The list price of Merck’s diabetes pill Janu­via is cut in half on av­er­age by dis­counts, ac­cord­ing to SSR Health data. Even so, Merck gets about $169 for a monthly sup­ply of Janu­via, more than twice as much as in Canada, the next most costly place to buy it. Drug com­pa­nies set their own prices in the U.S.; in most de­vel­oped coun­tries, gov­ern­ments re­strict what can be charged.

“The en­tire health-care sys­tem in the United States is more ex­pen­sive than other coun­tries,” says Robert Zirkel­bach, a PhRMA spokesman. Higher U.S. prices, the ar­gu­ment goes, sub­si­dize de­vel­op­ment costs that ben­e­fit pa­tients world­wide, many of them des­ti­tute. A Merck spokes­woman says that for com­pet­i­tive rea­sons the com­pany doesn’t dis­close the dis­counts it of­fers.

Price in­creases—whether of the Shkreli va­ri­ety or less in-your-face—are just the way busi­ness gets done. That, at least, is the les­son Shkreli learned. The day be­fore his ar­rest, in an in­ter­view about his $2 mil­lion pur­chase of a one-of-a-kind Wu-Tang Clan al­bum, he told the pub­li­ca­tion HipHopDX: “If you talk to any­one in pharma, maybe I don’t have the same re­sources as Pfizer, I may not have the same ex­pe­ri­ence as Merck, but I’m crafty as f---.”

Not quite as crafty as he thought. Now he’s serv­ing the use­ful pur­pose of hold­ing a mir­ror up to the rest of the drug busi­ness. Ad­dress­ing more con­ven­tional price in­creases, Steve Miller, chief med­i­cal of­fi­cer for Ex­press Scripts Hold­ing, the largest U.S. man­ager of cor­po­rate prescripti­on-drug ben­e­fits, says: “We can no longer sus­tain a sys­tem where 300 mil­lion Amer­i­cans sub­si­dize drug de­vel­op­ment for the en­tire world.” <BW>

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