An Unpopular Take on Martin Shkreli

Investors exposed heavily to the biotech sector aren't having a particularly good week — not because of earnings or any financial metric, but because of a sudden wave of social media backlash that's managed to shake up the market.

For those who missed it, a lone tweet from Hillary Clinton on Monday sent the $IBB plummeting. Clinton took to the highly intellectual 140-character platform to criticize high drug prices — specifically in reference to a recent 5,000% increase on Daraprim, a 60-year-old drug used to treat a parasitic infection known as toxoplasmosis.

Hilary then linked to a New York Times story with the headline: “Drug Goes From $13.50 a Tablet to $750, Overnight.” Needless to say, many people were quickly outraged, and investors soon panicked at the thought of external pricing pressure from the public.

Some Quick Background

Earlier this year, Turing Pharmaceuticals, a small Swiss-based pharmaceutical company, acquired the rights to Daraprim from specialty U.S. pharmaceutical company Impax Laboratories for $55 million. After the transfer of rights to Turing, the price was quickly raised from between $13.50 and $18.00 a tablet to $750 — a near 5,000% increase.

Crucial to this story is that Turing is somewhat unique when it comes to pharmaceutical companies. It's not run by a doctor, scientist, or long-term biotech executive — it was founded by hedge fund manager Martin Shkreli.

Martin Shkreli is one of those public figures who's easy to hate. He's an unapologetic capitalist with a history of accusations against him including:

• Harassing and threatening a former employee at his previously led company Retrophin
• Tipping Twitter followers off to nonpublic information
• Failing to pay debts/honor contractual obligations as a hedge fund manager
• Stock-trading irregularities and other violations of securities rules
• Price-gouging other drugs such as Thiola

On top of all these alleged wrongdoings, Shkreli has proven to be generally abrasive to the public. He called one journalist who questioned the price-raise a “moron,” he's flashed $9,000 bottles of liquor on his Twitter page, and he has previously provoked negative dialogue with tweets such as: “Any haters left? Come at me.”

Combined with a sudden 5,000% price-hike on Daraprim, Shkreli's shady and flamboyant history proved to be the perfect storm for Internet backlash. Insults and death threats came flying from all directions. It wasn't pretty, to say the least.

By Tuesday evening, the pressure proved too great. Shkreli took an interview on ABC News saying Turing would lower the price of Daraprim. Exactly how much, we still don't know.

As reprehensible as Shkreli's behavior may be, though, this story is not as black and white as it may first appear. Shkreli's personal character flaws aside, there are a number of misconceptions surrounding this story that deserve to be addressed.

Claim #1: Daraprim is Used to Treat HIV/Aids

The claim that Daraprim is used to treat HIV is, at best, misleading: Daraprim actually treats toxoplasmosis, a disease caused by the T. gondii parasite.

Toxoplasmosis can be a major concern for patients with severely weakened immune systems, such as those patients living with HIV/AIDS, but it's not actually used to treat the latter. This is an important distinction when weighing the level of public outrage we've seen because comorbidity is quite rare.

According to a joint publication by the Division of Parasitic Diseases and the National Center for Infectious Diseases, the estimated number of cases of congenital toxoplasmosis in the U.S. sits between 400 and 4,000. For perspective, the estimated number of people living with AIDS in the U.S. is about 1.2 million.

This certainly does not serve as an argument for for-profit pharma or massive price-hikes, but it's an important distinction nonetheless —  specifically, because the economics of tiny, specialty drug markets like toxoplasmosis can get a little counterintuitive (more on this further below). 

Claim #2: A Price-Hike on Daraprim Would Decrease Access to the Drug

Whether or not a price-hike on Daraprim would decrease access is a question that's still up in the air.

According to Shkreli, Turing promises to get it in the hands of more patients than ever before. According to his “haters,” though, people are going to be denied access and will either die or be heavily burdened as a result.

The truth, as usual, will likely fall somewhere in between.

According to the L.A. Times:

[Turing] has taken steps to ensure that no patients go without Daraprim because of its cost or the unwillingness of pharmacy managers to stock it. Last week the company announced a special program aimed at ensuring "quick, efficient access for patients in need" and served by federally funded health programs. Shkreli says that Turing discounts about half of Daraprim sales to about $1 per 100-pill bottle. Rima MacLeod, a toxoplasmosis expert at the University of Chicago, was quoted in USA Today last week saying that none of her patients has yet lost access to Daraprim because of the price increase. "Turing’s people have been helpful every single time," she said.

The plan being referred to here is the U.S. 340B Drug Discount Program. This law requires participating pharmaceutical manufacturers to enter into a pharmaceutical pricing agreement (PPA) and to provide specified discounts on covered entities.

In other words, patients who can demonstrate need are protected against the attention-grabbing 5,000% price increase. Rest assured, Turing Pharmaceuticals is both publicly and legally committed to making sure that the small number of patients who need Daraprim will get it.

The flip side, of course, is that the burden of payment will likely fall onto insurance companies and wealthier Americans who can't demonstrate need. Those hit the hardest will be patients at the border of “can't afford it” and “can afford it, but only at a major financial toll.”

But then there's Shkreli's argument that because the drug was so underpriced in the first place, access to it had become limited. This may sound a bit counterintuitive, but it's actually not completely off base.

As The Street's Adam Feuerstein explains:

Without revenue, the makers of these drugs have little incentive to spend money on educating doctors and patients about the drug's availability or its benefits. When this happens, some patients may never be diagnosed or learn there's a drug which could help them. (Doctors, harried for time in our overloaded health care system, don't always know about every disease or drug out there.)

And as Mathew Herper of Forbes points out:

Rare disease drugs have a different economic logic than any other medicines. Their makers work hard to make sure that patients who can’t pay get the medicines for free, and that those who are hit with high insurance copays are helped with those. In return, they negotiate hard with countries and insurance systems to get paid for the medicine for as many patients as possible. This strategy is highly profitable because the medicines are valuable.

The reality of Daraprim is that its original owner, GlaxoSmithKline, had neglected the drug for decades once it became too small of a venture for it. The company wasn't keeping prices so low out of good will or altruism; it just wasn't worth its effort to market anymore.

Arguably, this neglect by GSK has hurt patients by decreasing awareness. Considering the low incidence of toxoplasmosis, it's certainly possible that many doctors had become unaware of the disease and the drug. Whether or not $750 was the right price to change that, though, is unclear.

Claim #3: Shifting Cost to Insurers Will Increase Everyone's Premium

In an ironic twist, many defenders of the sick, who were simultaneously bashing Shkreli for his greed, have expressed deep concern that they might have to pay a little extra to save someone's life from toxoplasmosis… the argument being: "Even if insurance absorbs the price-hike, this will reflect on my premium."

Besides being highly hypocritical, this claim is, for all intents and purposes, false.

As noted earlier, toxoplasmosis affects just 400 to 4,000 individuals in the U.S. each year. Even at full market penetration and a generous price estimate of $500,000 for full treatments, the drug could pull in maximum revenue of $2 billion.

For perspective, the total health care industry runs at about $3 trillion a year.

This means that even using the most generous figures, Daraprim would account for just six-hundredths of a percent of U.S. health care costs. It's a drop in the bucket, and, quite frankly, there are much bigger issues plaguing medical care today — namely inefficiency in the FDA approval process, which causes drugs to be so expensive in the first place.

Claim #4: Profiting off Disease is Disgusting

Perhaps the most common piece of outrage focused at Shkreli over the past few days has been in regards to him profiting off disease. This accusation has stretched well past Daraprim, though, with many people now attacking the Big Pharma industry altogether.

When you hear about someone profiting off a disease, it sure does sound pretty terrible, but it's worth considering a few things before discounting the for-profit biotech industry…

First, there's the simple matter of profitability and how much is too much. This line is impossible to define objectively, but we have to draw it somewhere. Certainly a $750 pill is way too much if it costs $1.00 to produce; I think we can all agree on that.

But when determining cost to produce, we can't ignore other operating expenses. We must ask how much it took to get this drug to market and ultimately how much is being made in proportion to what was spent. Saying that Daraprim costs $1.00 is a gross misrepresentation of the economics at work.

In other words, if we're going to vilify a company (or an entire industry) for profiteering, it only makes sense we look at how much it's actually profiting first…

The average profit margin for Big Pharma biotech last quarter was 16.9%. For perspective, Apple, which was recently rated by Forbes as America's most admired company, operates at a 22.3% net margin. In terms of corporate greed, Big Pharma actually ranks comparatively low.

As for Turing's margins, we don't yet have those figures, but singling out Shkreli for excessive greed seems less justified when you put the numbers in context.

For one, we must keep in mind the cost of similar specialty drugs when looking at Daraprim's $750 price tag. Gilead Science's Sovaldi was selling for $1,125 a pill when it first hit the market. Alexion's Soliris costs $700,000 for a year of treatment. UniQure's Glybera costs — wait for it — $1.21 million.

As outrageous as these figures seem, though, we should keep cost in mind before pulling out our pitchforks. The average drug now costs a staggering $1.4 billion to get to market. Not to mention that developers take on a major risk for every drug in their pipeline, 92% of which fail in clinical trials.

While it's true that Shkreli did nothing to improve or develop the 62-year-old drug, the reality is he (and his investors) paid $55 million for it. Despite being developed decades ago, the costs to create Daraprim were embedded somewhere in that $55 million price tag.

Of course, they would never admit this, but GlaxoSmithKline passed Daraprim down to CorePharma knowing good and well that the price would need to be raised for them to turn a profit. Impax, which then bought CorePharma, raised the price ~1,800%, but that wasn't enough to justify the asset, so it hot-potatoed the rights over to Turing.

Of course, any company that just purchased an asset for $55 million is going to wish to turn a profit; that's just business. Whether or not $750 a pill was a reasonable figure is impossible to say without knowing the projected margins.

This brings us back to the question of what is and isn't too much. A 50% margin seems pretty egregious to me when it comes to medicine, but that's my own arbitrary line in the sand, and yours will likely be elsewhere.

Whatever the figure you decide on, one thing is for certain: If we were to forbid profit altogether, there would be far less incentive for the development of better medicine. 

Of course, we should all want to help sick people because we're altruistic, too, not just because we want to make money, but when it comes down to it, altruism alone will not produce the same level of progress.

As a testament to this fact, it's worth pointing out that the U.S., the epitome of capitalism, has long been the bed of global medical innovation. For the past half-century, we've developed more new chemical entities (NCEs) than any other country in the world.

Of course, America producing more than half of the world's new drugs didn't come to be because we grow doctors and scientists on trees. The reality is that we run a profit-incentivized industry that a) increases domestic research efforts and b) draws in the best and brightest minds from around the world.

If you're outraged at a 5,000% price hike overnight, that's only natural, but try to remember that profit has incentivized medical progress for the last half century, and during that time frame, we've seen more progress in medicine than in all of prior human history.

Does this mean capitalism and for-profit health care are perfect? By no means… but until someone shows me a country or economic system that innovates more in the field of medicine, I'd say ours is the best one there is.