A little over a year ago, I was fiercely berated on Twitter for (partially) defending the actions a person who, at the time, was widely dubbed “the most hated man in America.”
To the woefully uneducated, this was a perfectly accurate and well deserved description of none other than Martin Shkreli, the notorious biotech investor who purchased and jacked up the price of toxoplasmosis drug Daraprim 5,000% late last year.
But a year later, the immediate scorn and hate that was thrust upon Shkreli and defenders like myself has proven, in a word, overdone. I knew at the time that my stance would be wildly unpopular, but my job isn’t to pander to the sanctimonious masses of the Internet… my job is to tell the truth.
When headlines first broke about Shkreli’s price hike, it was clear to me that the Twitter-sphere knew little to nothing about the biotechnology industry, drug development, and the inner workings of free markets in general. Even though Shkreli was guilty of childishly instigating the pitchfork-wielding Internet mob further than he needed to, any allegations that his actions were destroying patients’ lives were simply false.
The widespread but certifiably untrue belief at the time was that a hike in Daraprim’s price would not only result in financial hardships, but would literally cause AIDS patients to die. Never mind coverage, never mind Turing providing the drug at virtually no cost to the uninsured — the only thing that mattered at the time were the headlines.
Fast-forward a year, and the Shkreli haters have retreated almost entirely, and how couldn’t they? After all was said and done, there have been zero reports of anyone being denied treatment, let alone dying from the Daraprim price increase. As far as I’m aware, not a single insurer has dropped coverage of the drug, and, as Martin Shkreli and others including myself said would happen, the price hike has encouraged at least one competitor to begin offering alternatives to Daraprim at a cheaper price.
Of course, reality is of little consequence to the thinking of those who don’t care enough about truth to step out of their fragile subjective bubbles. Hell hath no fury like a progressive scorned (warning: foul language ahead).
Oddly enough, the tweet above was my “Top Mention” on Twitter in September 2015. I could get into the hypocrisy of the social media platform letting hate speech like this, as well as countless death threats towards Shkreli, stand, while subsequently perma-banning names like Milo Yiannopoulos, but that’s not really why I’m rehashing all this today…
I’m bringing up Martin Shkreli and the Daraprim price hike fiasco not to point out the shameful behavior of armchair reactionaries or to brag about being right, but rather to address the looming implications the event has caused for the biotech industry as a whole…
Greed is Inevitable, So Leverage It
No one in their right mind would ever argue that price hikes from companies like Turing and Mylan (NASDAQ: MYL) aren’t motivated by greed. Pharmaceutical firms, just like every other company in the public sphere, are propelled almost entirely by profit — but is that really as bad as it sounds?
Politicians like Hillary Clinton sure seem to think so, and are milking this misguided idea for all it’s worth. In addition to calling for a panel of federal officials to determine the “right price” of prescription drugs, HRC’s campaign has some damning words for companies like Turing and Mylan:
Today, Hillary Clinton is offering a plan to protect Americans from unjustified price hikes in lifesaving treatments that have long been on the market. Over the last year, we’ve seen far too many examples of drug companies raising prices excessively for treatments that have been available for years—from Turing raising the price of pyrimethamine for AIDS patients by over 5,000 percent, to Mylan raising the price of the EpiPen by more than 400 percent. This is not an isolated problem: Between 2008 and 2015, drug makers increased the prices of almost 400 generic drugs by over 1,000 percent. Many of these companies are an example of a troubling trend—manufacturers that do not even develop the drug themselves, but acquire it and raise the price.
While it’s easy to throw shade at CEOs like Martin Shkreli and Heather Bresch, though, the reality is that the products that pharma companies provide wouldn’t even exist in the first place if not for the existence of strong profit incentives. Drug development is both expensive and incredibly risky, and it must be funded somehow. Though it may not be the utopia we all want, investors generally do not fund development of new drugs unless they think it can provide them a return.
The immediate retort to this underlying reality of technological and medical progress is that companies like Turing and Mylan aren’t actually innovating, they’re just raising the price of drugs that have been around for years. As true as that may be, the consequences of banning such price hikes are not so simple.
While resellers and price-hikers may not be directly developing new drugs, removing the industry’s right to price drugs as it chooses inevitably would have dire consequences down the line. Specifically, price caps would discourage future R&D by lowering the long-term value of new drug assets.
As Pfizer CEO Ian Read argued last month regarding Clinton’s aggressive response to drug price hikes: “In its totality it would be very negative for innovation… The way you reduce cost to society is having more products in the same category. So the way you get more value is by having more money in innovation.”
Of course, you can take the words of any bigwig biotech CEO on this matter with a grain of salt, but you can’t argue with basic economics: when you devalue future assets, you discourage R&D. As Perceptive Advisors CEO Joe Edelman, who recently appeared on CNBC’s “Squawk on the Street,” explains:
“It’s basically a risk-reward question. Drugs are very risky to develop. So if you want the maximum amount of risk taken… the greater the reward, the more people like me will invest, the more drug companies will invest… You have drugs aimed at very small patient populations where if you couldn’t charge in the hundreds of thousands, those drugs wouldn’t be around.”
Unfortunately for the biotech industry, and patients with diseases that still desperately need better treatment options, this is exactly where U.S. policy will be heading come inauguration day in January. Upshot’s election forecast now puts Clinton at a 92% chance to win, while FiveThirtyEight puts her at 86.7% and RealClearPolitics at 86.0%.
The biotech sector will no doubt be one of the biggest losers of a Clinton presidency, which, at this point, seems entirely likely. Since the Daraprim price hike, the iShares Nasdaq Biotechnology Index (NASDAQ: IBB) is already down a staggering 24%, with the broader biotech industry collectively losing tens of billions in market value over the last year.
On the flip side, there is a minor bull case to be made, specifically for biotech companies with high penetration in international markets. Because drug companies charge far lower prices abroad for the same treatment options, both Clinton and Trump have advocated for the re-importation of medications from overseas. If implemented, this would likely shift price increases abroad.
Until any of that happens, though, the safe play right now for investors is to lower their exposure to biotech, at least until the regulatory framework becomes clearer.
Until next time,
Jason Stutman
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