Martin Shkreli Has One Idea, And It’s a Bad One
By Derek LoweSeptember 21, 2015
Martin Shkreli may finally have overstepped, and it will be a good thing if he has.
Let me back up both those statements. Shkreli, you may recall, was the founder of Retrophin, a company whose business model was to buy up obscure orphan generic drugs (such as Thiola) and immediately raise their price by, say, twenty-fold. They had analyzed the market, and what insurance companies might be able to put up with, and determined that this could be gotten away with, so why not? After writing about this here, I got involved in a Shkreli skirmish on Reddit (he’s famously active on social media, rather unusually so for someone in his position). But not long after that encounter, he was fired by Retrophin’s board, and the lawsuits are flying.
Shkreli wasted no time forming another company, Turing Pharmaceuticals, and Alan Turing should be sitting up in his grave any day now, at the rate things are going. In my Reddit exchanges with Shkreli, he’d talked about the drugs he’d “discovered”, and Turing made claims about how if you work for them and discover a drug, you’d get a share of the profits (see that last link for more). But so far, they don’t seem to be as interested in discovering drugs as in discovering opportunities to use other people’s drugs as a means to stick it to patients and payers. The company has bought up rights to yet another obscure medicine, Daraprim (pyramethimine), and immediately hiked the price fifty-fold, from $13 to $750 per dose.
So here’s the conflict: companies do (and should) have the right to charge what they think their market will bear. But ordinarily, you’d think that most markets wouldn’t have enough slack in them for a price increase like that one. What we’re seeing is a peculiar part of a generally peculiar market, though. Drug companies are granted a temporary monopoly by the patent system, in recognition of the value of new therapies. Arguing about this tradeoff does not cease, but overall, I think it’s a reasonable system (although one can imagine others, which would involve tradeoffs of their own). But one feature of the existing order is that patents expire (and you’d be surprised how many loud anti-pharma activists don’t seem to realize that). And once they expire, the price comes down as the generic manufacturers get into the market.
That’s how it’s supposed to work, anyway. But in recent years, another strategy has emerged, and Retrophin/Turing are just the most dramatic examples of it. Entire companies have sprung up to take advantage of this sort of leverage – not by discovering their own drugs (too expensive, too risky!) but by buying up existing ones. And the most egregious examples have come in the generic sector. By various means, old generic compounds have ended up as protected species, and several companies have made it their business to take advantage of these situations to the maximum extent possible.
The FDA grants market exclusivity to companies that are willing to take “grandfathered” compounds into compliance with their current regulatory framework, and that’s led to some ridiculous situations with drugs like colchicine and progesterone. (Perhaps the worst example is a company that’s using this technique to get ahold of a drug that’s currently being provided at no charge whatsoever). There are also loopholes that companies are trying to exploit when competitors try to prove generic equivalence: whatever it takes to keep competition away and get unlimited pricing power.
But as I discussed in one of those links above, that pricing power is a mighty weapon, and should be handed out sparingly. A company that takes on the substantial risk of new drug discovery deserves it much more than one that is merely rent-seeking. And that’s exactly the economic term for what Retrophin, Turing, Catalyst, Makena and other such companies are engaging in: a chance to put the squeeze on. Here’s the situation with Daraprim:
Daraprim, which is also used to treat malaria, was approved by the FDA in 1953 and has long been made by GlaxoSmithKline. Glaxo sold US marketing rights in 2010 to CorePharma. Last year, Impax Laboratories agreed to buy Core and affiliated companies for $700 million. In August, Impax sold Daraprim to Turing for $55 million, a deal announced the same day Turing said it had raised $90 million from Shkreli and other investors in its first round of financing.
Daraprim cost only about $1 per tablet several years ago, but it went up sharply after CorePharma acquired it. According to IMS Health, which tracks prescriptions, sales of the drug jumped to $6.3 million in 2011 from $667,000 in 2010, even as prescriptions held steady at about 12,700. In 2014, after further price increases, sales were $9.9 million, as the number of prescriptions shrank to 8,821. The figures do not include inpatient use in hospitals.
So there’s already been one round of price-jacking with this old drug, and now Turing is here to take it to unheard-of levels.
In any functioning market, someone else would jump in and offer this compound for less – but Turing’s business plan includes “closed distribution”, that loophole mentioned above to try to keep any other generic companies from getting enough of the drug to run a clinic trial proving equivalence. (What to do about this will be the subject of the next post, going up immediately after this one).
Shkreli himself is saying that Turing needs this price increase to do research on better drugs than Daraprim, but this is a need that up until now no one seems to have thought worth filling. And if it’s worth filling, then surely there are other ways to go about raising the money than via a 50x price hike. He’s also dealing with criticism in his usual diplomatic way, calling John Carroll of FierceBiotech a “moron” on Twitter for questioning this strategy. In that case, put me down as a moron, too, because I think it’s a terrible idea. See the next post for more. . .
Rent-seeking in the modern pharmaceutical market
Reply With Quote
Originally Posted by Steely Glint
