Controversial Pharmaceutical Pricing Strategies

Even before the scandal he caused over pharmaceutical price-gouging in September, Martin Shkreli had a storied business history full of litigation and scandal. From allegations of harassment to “absconding with stock,” Shkreli is no newcomer to headlines. More recently, however, Shkreli’s questionable ethics not only prompted turmoil in the markets, but also public dismay and loud reproach from powerful politicians.

Shkreli is currently the CEO of Turing Pharmaceuticals. Through clever business maneuvering, Shkreli was able to turn Turing Pharmaceuticals into the sole producer of Daraprim, a generic drug used to treat toxoplasmosis, a parasitic infection.

In the United States, Daraprim is not widely produced because the market for the drug is very small. However, for the 8,821 users who have Daraprim prescriptions, the medication is absolutely vital. Without it, patients suffer from severe symptoms that include signs of stroke, headache, confusion, and/or fever.

A small market unable to reduce consumption in response to rising prices and little price competition set the stage for Turing to effectively corner the market for Daraprim. In August, Turing bought up the available supply of the drug to create a short-term monopoly. Then, overnight, the company squeezed the price of a single pill from $13.50 to $750, an increase of more than 5,000 percent. As Sean Dickson, the manager of healthcare access for the National Alliance of State and Territorial Aids Directors, told The Guardian, “His actions are more like Wall Street than the drug-development industry. It’s speculative, like picking a penny stock and figuring out how to get the price up – but for real people this is about life and death.”

Shkreli’s actions set off an intense media reaction. Donald Trump called him a “spoiled brat.” On Monday, September 21st, Hilary Clinton tweeted that “Price gouging like this in the specialty drug market is outrageous. Tomorrow I'll lay out a plan to take it on.” And to many investors’ chagrin, lay out a plan she did.

Clinton’s proposed legislation caps the costs of medications at $250 a month. Wall Street then responded with a whole-sale dump in the price of stocks across the biotech sector. The logic behind this 4% fall in stock value on Monday following Clinton’s tweet is that “anti-industry populism” would damage the biotechnology industry, driving down prices and innovation.

Despite the public outcry, Shkreli initially defended his inflation of Daraprim prices as a necessary evil. He claimed that the rise in price was justified because profits could be invested into researching a better, less expensive alternative to Daraprim. After sustained public criticism, Shkreli surrendered to public pressure on September 24th, announcing that "We've agreed to lower the price of Daraprim to a price that is more affordable.” Shkreli stands by his company’s decision to jack up prices, pointing out that the new price was in line with prices of similar small-volume medications for rare diseases, and asserting that he was actually acting in the best interest of consumers by trying to raise money to then use to create a more effective medication.

Shkreli is not alone in his decision to raise the price of a pharmaceutical. Several other biotechnology companies have been engaging in similar controversial activities. There is growing public concern regarding price rises of generic drugs, many of which have long been the bedrock of certain medical treatments. Consumers have witnessed a definitive trend towards buying old generic drugs, and turning them into exorbitantly expensive “specialty drugs.” If these aggressive actions by biotechnology businesses continue, it will put mounting pressure on the presidential candidates for 2016 to follow Ms. Clinton’s lead and outline regulatory policy. The prospect of restrictive, potentially price-capping policy on the biotechnology industry does not bode well for investors.

In late October, another pharmaceutical company, Imprimis Pharmaceuticals Inc, announced that it would be producing an alternative to Turing’s drug Daraprim, priced at $1 a pill.  Despite the ostensibly propitious nature of this announcement, Imprimis’s new drug has a major drawback.  This Daraprim alternative is not FDA approved.  Luckily for consumers, this is not a deal breaker.  The drug can still be sold via prescriptions.  However, in order to obtain FDA approval, Imprimis would be forced to spend millions of dollars, and the drug would lose its profitability.  The absence of FDA approval definitely hinders Imprimis’s prospects for sales of its Daraprim alternative.  Recognizing this, when asked about the new drug, Shkreli made it obvious to reporters that he is unconcerned.

However, despite this nonchalant attitude, Turing Pharmaceuticals recently reported a loss of $14.6 million for the third quarter of 2015.  This loss comes in spite of a $5.6 million profit from the sale of Daraprim.  Turing attributed the losses to recent efforts in Research and Development.  No matter how the money is escaping, the combination of bad press and heavy losses is bad news for Shkreli.