Friday, December 18, 2015

Could It Happen to a Nicer Guy?


Since I don't know him personally, I'll grant that it's possible that Martin Shkreli is indeed a genuinely nice guy. But it seems unlikely.

If the name seems familiar, it's because a lot of news stories since late summer (and a 1 Dec blog post, here) covered the dramatic price increase Turing Pharmaceuticals instituted when it acquired an old, but still highly effective drug, Daraprim, which is primarily used to treat a serious and often life-threatening parasitic ailment. Overnight, Turing, the start-up pharmaceutical company Shkreli runs, raised the per-dose price of Daraprim from $13.50 to $750. No, the decimal point is not misplaced.

An uproar followed, which Shkreli seemed to enjoy (He should have raised the price more, he said.).

What goes around eventually comes around, I thought.

I just didn't expect it to come around so quickly.

Yesterday, Shkreli was arrested on securities fraud and wire fraud charges at his Manhattan home by the FBI, and arraigned in Brooklyn's federal district court.  (And, yes, I will admit to a little schadenfreude over the "perp walk" pictures.) (And yes, through a spokesperson, Shkreli said that he is "confident" that he will be cleared of all charges.)

The arrest has nothing to do with Turing, but rather with Shkreli's earlier career as a hedge-fund manager and with his first biopharmaceutical company. As reported by Stephanie Clifford and Matthew Goldstein in today's New York Times (full DealBook article, here),
Martin Shkreli told investors that his hedge fund had an auditor, that it had posted a 36 percent return since its inception and that it had $35 million in assets under management.
None of it was true, federal authorities say.
According to the authorities, what Shkreli was really doing was running a small-time Ponzi scheme. The article reports,
His former hedge fund, MSMB Capital Management, had recorded losses of at least 18 percent and was essentially broke by 2011, having less than $1,000 in its bank account.... The hedge fund had no auditor.
The authorities described Mr. Shkreli, 32, as a failed trader with a habit of spreading falsehoods and running his business on fumes and misappropriated money. His Ponzi-like scheme, they said, involved looting Retrophin, a biopharmaceutical company he used to run, to pay back his disgruntled investors.
Note that MSMB Capital was Shkreli's second hedge fund; his earlier effort, Elea Capital Management, which he ran from 2006 to 2007, had also lost money.
The indictment mirrors some of the accusations contained in a civil lawsuit filed in August [2015] by Retrophin, which ousted Mr. Shkreli as chief executive in 2014. The company had accused him of using Retrophin as his personal piggy bank to help pay off upset investors in the hedge fund by hiring some of them for sham consulting jobs.
Am I surprised? Of course not. Only that it's taken so long for things to unravel. And, please, a 36 percent return? Repeat after me, class, "If it sounds too good to be true..."

More concerning, however, is a second New York Times article today, by Andrew Pollack, who notes that Shkreli was "a walking, talking (incessantly) personification of one of the pharmaceutical industry's worst nightmares -- the greedy drug company executive."

With his arrest, many in the industry hope, things will quiet down ...and they can go on doing many of the things that Shkreli was doing so boastfully. While most companies are smart enough not to raise prices by 5,500% overnight, they do often "increase prices 10 percent or more a year", which is way above the current rate of inflation. And since the drugs involved often involve common diseases like diabetes or cancer, those increases "have a far bigger impact on health care spending" than did the increase on Daraprim.

Pharmaceutical companies had been hoping that most people wouldn't notice the price increases. Daraprim made it harder, so they now hope that the spotlight will turn away. I wouldn't be so sure. As Pollack writes,
Unlike many other countries, the United States does not control drug prices, making the American market a big source of profits for drug makers worldwide. In the last two decades or so, price increases on existing drugs in the United States accounted for fully half the growth of the entire multinational pharmaceutical industry...
I recognize that it costs an amazing amount to do the research and testing to bring new drugs to the market, some of which are true breakthroughs (although many are only marginally, if at all, better than existing ones). But at some point, too much is just that: too much.







Friday, December 4, 2015

Sometimes A "Disappointing" Result Is Good Enough


Ever since the horrific deaths of 29 mine workers at Massey Energy's Upper Big Branch mine in 2010, I've been wondering how long it would take to impose criminal penalties on the company (Massey Energy is now owned by Alpha Natural Resources).

Given the enormous power and influence that coal companies still wield in West Virginia, I didn't expect much. After all, while a 2011 Mine Safety and Health Administration report explicitly blamed safety violations at the mine for allowing coal dust and methane gas to collect and ignite, it wasn't until November 2014 that former Massey CEO Don Blankenship was indicted on four criminal counts by a federal grand jury. (Two of several prior blogposts on the Massey situation can be found here and here.)

As Alan Blinder wrote in today's New York Times (full article, here):
The prosecution of Mr. Blankenship was one of extraordinary political, legal and emotional significance in West Virginia, a state where many residents have long believed that coal companies and their leaders faced only cursory scrutiny.
Alpha Natural Resources had agreed four years ago to a $209 million settlement in civil and criminal penalties with the Justice Department, Some of that money ($46.5 million) was earmarked for the families of the miners who died. The settlement protected Alpha executives, but not Massey executives, from prosecution. 

Blankenship's trial, scheduled for January of this year, was postponed until October; jury deliberation began in mid-November.

Yesterday, Blankenship was convicted on one of those four counts -- the misdemeanor of conspiring to violate federal safety standards, to be sure, rather than any of the felonies. Question: Why is a conspiracy to violate federal safety standards only a misdemeanor?

As Blinder wrote,
Mr. Blankenship was not tried on any charges that accused him of direct responsibility for the deaths at Upper Big Branch.... But prosecutors argued that his leadership had laid the groundwork for catastrophe. There was not necessarily a formal conspiracy, prosecutors acknowledged, but they said that Mr. Blankenship's example and tone had set Massey on a course that put profits ahead of lives.
Massey had, under Blankenship's "leadership", collected thousands of citations for violations of safety standards. Blinder noted,

His lawyers are nonetheless "disappointed" with the verdict, and are planning an appeal. Me, I'm disappointed that he was only convicted on one count. But I agree with Blinder that this trial was of "extraordinary political, legal and emotional significance", so a disappointing outcome is actually OK.

Blinder quoted a West Virginia University law professor: "A century of mine disasters and failing to hold coal company executives responsible is over."

Dear God, I hope so.






Tuesday, December 1, 2015

What Goes Around Usually Does Come Around.

If you look up "arrogant jerk" in the dictionary, I suspect you'll find a photograph of Martin Shkreli, CEO of Turing Pharmaceuticals.

If you haven't been following this story -- and I sort of wish I hadn't been, because it's so depressing -- Shkreli, a former hedge fund manager, runs Turing, a start-up pharmaceutical company. How do you start up a pharma? By buying existing drugs.

In August, Turing acquired Daraprim, a 60-plus year old drug that is used primarily to treat a serious and often life-threatening parasitic ailment, toxoplasmosis, and is also used to treat malaria. Overnight, the price of the drug went from $13.50 a tablet to $750 a tablet. That's right, $750. Take the original price and increase it more than 50 times. (For expanded discussion of the original price increase and of the problems Shkreli has seen and/or caused in previous careers, see the Sept. 20 New York Times article by Andrew Pollack, here.) 

Despite a storm of protests, late last month Turing refused to lower the price (Times article, also by Andrew Pollack, here). It did say, however, that "it would offer discounts of up to 50 percent to hospitals and would take other measures to help patients afford the medicine."

Protests have been ineffective, obviously, but now Turing faces a new foe: Express Scripts, the nation's largest prescription drug manager.

According to Andrew Pollack of the New York Times, Express Scripts "will promote use of a compounded medicine that contains the same active ingredient as the Turing drug." (Full story, here)

Nathan Bomey of USA Today (article, here) reported that Express Scripts will "speed access to a $1 treatment offered by San Diego-based Imprimis Pharmaceuticals" and noted that while the Food and Drug Administration has not approved Imprimis' compounded drug formulations as a recommended treatment for toxoplasmosis," doctors can immediately prescribe the treatment.

Not surprisingly, Turing reacted negatively. Bomey reported that a Turing statement termed the move "potentially unsafe and ineffective", and added that the compounded version is "unnecessary" because "patient assistance programs" can reduce the cost to an insured patient to a $10 copay (last time I checked, $10 was still a lot more than $1), and free of charge to qualified uninsured patients.



Monday, September 21, 2015

Business 101: The Truth Will Out


A number of companies have found themselves in, um, unfortunate situations this month because of problems that they should have known would eventually come to light.

You may think I'm talking about GM's ignition switch issues (which I've written about plenty of times before, e.g., here), and for which the company agreed last week to pay $900 million (some details of the settlement can be found in a New York Times article sourced from Reuters, here), and in some ways, I guess I am: did they really think the problems would just go away? That no one would notice?

Or were they just hoping that no one would notice on my watch?

But I was also thinking about the ouster of United Airlines CEO Jeff Smisek, in part due to the turbulent investigation of "Bridgegate". According to Chicago Tribune reporter Gregory Karp, Smisek is accused of "improperly currying favor with former Port Authority of New York and New Jersey David Samson. United reinstated a money-losing route from Newark to an airport near Samson's South Carolina vacation home." (full article, here)

Smisek was apparently hoping for, among other things, subsidies for a new United airplane maintenance hangar at Newark. The Thursday-down and Monday-back flights (I want a three-day workweek too!) were cancelled four days after Samson resigned from the Port Authority in 2014.

Did he think no one would notice?

Smisek is out, but not exactly hurting: According to a New York Times article from the Associated Press (here), the ex-CEO "would get a severance payment of $4.9 million and be eligible for a bonus. Smisek, 61, will have health insurance until he is eligible for Medicare and keep flight benefits and parking privileges for the rest of his life. He gets to keep his company car."

I particularly like that he is "eligible for a bonus."

And then there's Volkswagen (September has been a sadly great month for these stories).

In last Friday's New York Times, reporters Coral Davenport and Jack Ewing wrote that the Environmental Protection Agency was ordering the carmaker to recall some 500,000 diesel automobiles because:

...the German automaker [was] using software to detect when the car is undergoing its periodic state emissions testing. Only during such tests are the cars' full emissions control systems turned on. During normal driving situations, the controls are turned off, allowing the cars to spew as much as 40 times as much pollution as allowed under the Clean Air Act...

Why would VW do such a thing? "Experts in automotive technology said that disengaging the pollution controls on a diesel-fueled car can yield better performance, including increased torque and acceleration."

Did they think no one would notice?

It does take a while sometimes (the VW and Audi models involved in the recall, for example, are 2009-2015 model year vehicles), but:

The Truth Will Out.









Monday, August 31, 2015

What Does It Take to Get a Banker to Perp Walk?

Thank you, Gretchen Morgenson, for regularly asking the right questions. I have complained before (most recently here and here) that bankers -- despite nearly imploding the US economy -- have never had to undergo an individual "perp walk" but have merely paid (at a corporate level) fines.

In the business section of Sunday's The New York Times, Morgenson asked, "How can we expect Wall Street's me-first culture to change when regulators won't pursue or even identify the me-firsters who are directly involved?" (full column, here)

In a settlement between the Securities and Exchange Commission and Citigroup, the bank has agreed to pay $180 million, mostly to investors, for a "disastrous" municipal bond deal that Citigroup "concocted and peddled" to wealthy investors from 2002 until 2008, which ended up losing said investors some $2 billion.

As is often the case in these settlements, the bank "neither admitted nor denied" the allegations. And the bank has already paid out over $700 million to compensate some of its investors for some of their losses. But....
The SEC case also comes more than seven years after the Citigroup investment strategy imploded. Unfortunately, six years is the time limit given to clients wishing to bring an arbitration case. So the facts laid out in the SEC's complaint against Citi are of no help to any investor who had not yet sued to recover from the bank.
Most disturbing, though, is the settlement's lack of accountability. As is all too common, Citigroup's shareholders are footing the $180 million bill associated with it. But they didn't devise the toxic bond strategy, sell it or hide its risks to investors. 
That was the work of Citi employees, as the SEC's order makes clear. Indeed, it contains chapter and verse about the crucial role played by the fund manager overseeing these investments. Some 50 references to actions taken by the fund manager and his staff are contained in the order.
What the SEC's order doesn't do, however, is name that fund manager. Morgenson has done her research, however, and does. That may embarrass that former Citi employee, but what I want to know is...

Why hasn't he been charged with anything?



Monday, August 10, 2015

The Merchants of Doubt Are Back in Town

In 2010, historians of science Naomi Oreskes and Erik Conway published a terrific book called The Merchants of Doubt (the book was followed last year by a documentary of the same title, directed by Robert Kenner).

In their book, Oreskes and Conway outlined the way some key scientists, political conservatives, have manipulated scientific data to cast doubt on the dangers of smoking, the reality of human-caused climate change, the existence of a hole in the earth's ozone layer, etc.  (More information about the book can be found at the Merchants of Doubt website.)

Coca-Cola seems to have found the technique compelling.

In today's New York Times, Anahad O'Connor reports that Coca-Cola is providing funding to scientists who argue that obesity is caused, not by eating too much, but by exercising too little (full article, here).

Global Energy Balance Network, the non-profit receiving Coke funds, is described on its website as "a newly formed, voluntary public-private, not-for-profit organization dedicated to identifying and implementing innovative solutions -- based on the science of energy balance -- prevent and reduce diseases associated with inactivity, poor nutrition and obesity. It is a premier world-wide organization led by scientists working on the development and application of an evidence-based approach to ending obesity." ("Energy balance" is the simple equation of calories in, from food and drink, to calories out, from physical activity.)

So much for all that pesky criticism about the role that sugary soft drinks play in weight gain and obesity.

So it's really all about getting up off that couch, and not so much about getting your hand out of the cookie jar, right?

Sadly, no.

As Aaron Carroll wrote in the New York Times last June, research clearly shows that, to lose weight, eating less is far more effective than exercising more (article, here).

Among other points, Carroll noted that studies have shown that "total energy expenditure and physical activity levels in developing and industrial countries are similar, making activity and exercise unlikely to be the cause of differing obesity rates."

Moreover, exercise can raise appetite, so if all you do is exercise more... you may find that you're eating more too.

That's not to say exercise is unimportant. Carroll wrote that:
Many studies and reviews detail how physical activity can improve outcomes in musculoskeletal disorders, cardiovascular disease, diabetes, pulmonary diseases, neurological diseases and depression....
But that huge upside doesn't seem to necessarily apply to weight loss. The data just don't support it. Unfortunately, exercise seems to excite us much more than eating less does.
So why would Coca-Cola be funding this Global Energy Balance Network? Let's see...

As O'Connor reports today, regular Coke sales are down ("In the last two decades, consumption of full-calorie sodas by the average American has dropped by 25 percent."), there are widespread efforts to tax sugary drinks and/or to remove them from school vending machines.

Hmmmmmm.


Monday, July 27, 2015

Should "Cost of Doing Business" Include Product Safety?


Over the years, I've spent a lot of time thinking about the "cost of doing business".

Traditionally, that has meant a pretty simple calculation: add up all the expenses needed to run your business (renting office space, buying and supporting the tech equipment you'll need, phones, lights, insurance, your own salary and that of any needed support staff, etc., etc.); divide that by the number of days per year that you expect to have to work; and you end up with a daily break-even: make more than that, on average, and you'll be profitable; make less, and you'll go broke. The difference can be small... but the results dramatic.

As Charles Dickens' Mr. Micawber says in David Copperfield:
Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds, ought and six, result misery.
What else should you include in the "cost of doing business"?

For a while now, it's become apparent that fines related to failure to comply with government regulations are part of that "cost" calculation in many industries. I've written about that in regards to banking (here and here, for example), agriculture (here), technology (here), and automotive (here).

Today's New York Times has a Bill Vlasic article that sheds more light, unfortunately, on that cost calculation.

According to the article, the National Highway Traffic Safety Administration (NHTSA) has fined Fiat Chrysler a record $105 million "for failing to complete 23 safety recalls covering more than 11 million vehicles."

Let me repeat myself: 23 safety recalls, and 11 million vehicles.

Fiat Chrysler has admitted to violating federal safety rules.
...[The] civil penalty was broken down into a cash penalty of $70 million, and an agreement that Fiat Chrysler would spend at least $20 million on meeting performance requirements detailed in the consent order. An additional penalty of $15 million will be assessed on the company if an independent monitor, who has yet to be announced, discovers further violations of safety laws or the consent order. 
Under the order, Fiat Chrysler is required to buy back as many as 500,000 vehicles with defective suspensions that can cause drivers to lose control. Also, owners of more than one million Jeeps with rear-mounted gas tanks that are prone to fires will be given an opportunity to trade in their vehicles at rates above market value.
As I've written before -- about General Motors in that case -- If your product has a problem, please don't wait for people to die to address it.

As of a few hours ago, Fiat Chrysler stock was down, following the fine announcement, but who knows how seriously the penalty will affect the stock price. After all -- it's just a cost of doing business, right?

Wrong.