The Sen­ate dis­sects Mar­tin Shkre­li's scheme to grab a $1B wind­fall

What­ev­er else you may have to say about Mar­tin Shkre­li and his team at Tur­ing, they did their home­work.

They want­ed to find a poor­ly per­form­ing or­phan drug serv­ing a small pa­tient pop­u­la­tion that had a sole-source man­u­fac­tur­er to sup­ply the mar­ket, so dis­tri­b­u­tion could be care­ful­ly con­trolled. And Dara­prim at Im­pax fit that bill per­fect­ly.

Be­cause a “clas­sic closed dis­tri­b­u­tion play” like Dara­prim served a small pa­tient pop­u­la­tion, they not­ed in emails and doc­u­ments cit­ed by the new Sen­ate re­port on drug pric­ing, there weren’t enough peo­ple in­volved to gen­er­ate an ef­fec­tive lob­by­ing cam­paign that might greet a sud­den price hike. Oth­er gener­ic man­u­fac­tur­ers could be barred from get­ting their hands on the prod­uct, keep­ing com­pe­ti­tion at bay. And the price could be set where they want­ed it, tak­ing a drug with lit­tle an­nu­al rev­enue and cre­at­ing an op­por­tu­ni­ty to make hun­dreds of mil­lions of dol­lars in a quick wind­fall.

Shkre­li had this to say to an in­vestor:

I think it will be huge. We raised the price from $1,700 per bot­tle to $75,000. Pre­vi­ous­ly im­pax sold 10,000 bot­tles per an­num (50% is giv­en away, how­ev­er). So 5,000 pay­ing bot­tles at the new price is $375,000,000—al­most all of it is prof­it and I think we will get 3 years of that or more. Should be a very hand­some in­vest­ment for all of us. Let’s all cross our fin­gers that the es­ti­mates are ac­cu­rate

As the deal was com­ing to fruition, he not­ed:

Very good. Nice work as usu­al. $1bn here we come.”

Once they got this drug, the com­pa­ny al­so bent over back­ward to make sure they were ship­ping Dara­prim on­ly to cus­tomers who would use it for pa­tients, and not for any­one — es­pe­cial­ly com­pound­ing phar­ma­cies — who might want to pro­duce a knock­off.

“Re­strict­ed dis­tri­b­u­tion in this case was a de­lib­er­ate part of Tur­ing’s plan to de­fend its shock­ing price in­crease and sub­se­quent in­creased rev­enue against po­ten­tial com­pe­ti­tion,” the Sen­ate re­port on price goug­ing states.

Shkre­li was fol­low­ing a play­book he set up at Retrophin, where he cre­at­ed the busi­ness mod­el with its ac­qui­si­tion of an­oth­er drug named Thi­o­la.

Here’s what he had to say to a Retrophin in­vestor:

The drug com­pa­nies are afraid. Small ones, big ones, etc. Big price in­creas­es are hor­ri­fy­ing be­cause most ex­ec­u­tives over­es­ti­mate changes in de­mand. It comes most­ly from phar­ma’s his­to­ry as qua­si-con­sumer prod­ucts. . . . The next gen­er­a­tion of phar­ma guys (or the smart ones) un­der­stand the in­elas­tic­i­ty of cer­tain prod­ucts. The in­sur­ers re­al­ly don’t care. They just pass it through and fo­cus on man­ag­ing care for physi­cian pay­ments and block­busters. They as­sume some­one will gener­i­cize it if it is mak­ing too much mon­ey, and they’re right.

So I don’t re­al­ly think of it the same way as oth­ers. I think this deal, if we pull it off, is worth $100m-$200m to our com­pa­ny. We’ll see!

I fig­ure this dy­nam­ic may not last for­ev­er, you need to max­i­mize op­por­tu­ni­ties while you can.

Shkre­li was right on some things, and wrong on a few crit­i­cal el­e­ments. The biggest blun­der was that he could hike the price of Dara­prim more than 5000% overnight with­out trig­ger­ing a pub­lic back­lash. Af­ter Andy Pol­lack at The New York Times wrote about it, the con­tro­ver­sy went vi­ral, trig­ger­ing an on­line mob of crit­ics to blast the deal and push law­mak­ers to take ac­tion.

On the oth­er hand, af­ter Shkre­li re­neged on a promise to low­er the price, he re­signed, the con­tro­ver­sy ebbed away and Dara­prim is still sold by Tur­ing with the same stick­er price.

Shkre­li him­self im­me­di­ate­ly re­spond­ed to the re­port with his usu­al blend of out­rage and fin­ger-point­ing.

https://twit­ter.com/Mar­tin­Shkre­li/sta­tus/811632835736039424

I queried Shkre­li on Twit­ter, par­tic­u­lar­ly in­ter­est­ed in whether he felt that de­spite all the con­tro­ver­sy, he and Tur­ing es­sen­tial­ly got away with it all, giv­en that the price for Dara­prim re­mains fixed at the in­flat­ed fig­ure. Here’s the ex­change.

https://twit­ter.com/Mar­tin­Shkre­li/sta­tus/811940094353539072

https://twit­ter.com/Mar­tin­Shkre­li/sta­tus/811940416299925504

https://twit­ter.com/Mar­tin­Shkre­li/sta­tus/811941471930687489

Guap, by the way, is slang for much mon­ey. Shkre­li is sched­uled to go on tri­al in June on fed­er­al charges that he was en­gaged in fraud re­gard­ing guap that had noth­ing to do with the prices he charged for drugs.

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