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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Welcome back to Endpoints Weekly, your review of the week’s top biopharma headlines. Want this in your inbox every Saturday morning? Current Endpoints readers can visit their reader profile to add Endpoints Weekly. New to Endpoints? Sign up here.

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