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.

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