Politics, Pricing

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.

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.

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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