A Parasite meets Wall Street

Screen Shot 2015-09-24 at 9.23.55 AMToxoplasma gondii is a parasite that causes opportunistic infection in helpless people. It may have met its match. The cost of treating Toxoplasmosis, a rare but extant infection, just shot up exponentially. Drug-resistant strain, you ask? Have physicians in Infectious Disease gone mercenary, you wonder? No. A change in ownership.

Daraprim (pyrimethamine) is a nifty drug which kills parasites. It’s been around for eons. I still recall its name from my medical school pharmacology exam. The price of Daraprim, whose production barely costs a dollar, may rise from $13.50 a pill to $750 a pill, after the rights to distribute the drug were acquired by Turing Pharmaceuticals.

Why? The answer is best told by Michael Shkreli, the CEO of Turing, and former hedge fund manager. The reason why Shkreli has acquired a generic drug lying in a forgotten backwater, and raised the price of a magnitude more suited to the hyperinflation of the Weimar Republic, is to make profits. Lots of profit. If this answer seems inane, ask yourself why a former hedge fund manager would be interested in a rare disease of devastating consequences. Penitence is the wrong answer.

Shkreli was shocked that people were questioning his decision to raise the price of Daraprim. He is not the only one to have taken advantage of the asymmetric power in drugonomics, he protested. Compared to Sovaldi which fetches a $1000 a pill, Daraprim is a bargain, he reasoned. It is not his fault that the drug had been underpriced relative to the fair market value. And then, with nearly a straight face, Shkreli said that the price increase was for the good of patients. You have to admire the lad’s chutzpah. It’s either audacity or utter disdain for the proletariat.

Shkreli says the mark-up will be used for research and development (R &D) of new products, which will be more effective and less toxic than Daraprim. I’d hazard a guess that when Turing’s scientists discover the ground-breaking, me-too drug for Toxoplasmosis, it won’t be cheaper than $750 a tablet. The trouble is that no one is screaming for new products for Toxoplasmosis.

Usually, pharma justifies the mark up on the drug by the R&D costs incurred. Shkreli, in a move of sheer brilliance, is justifying the costs on promissory research – research that hasn’t happened and may never happen and if it does happen may never yield anything useful.

Imagine you’re dying of thirst in Death Valley and this guy selling tap water for $100 a glass says “I’ll be using the $100 profits to make safe water, safer than Evian.” You might say – “I don’t want Evian, tap water is good enough. I’m dying.” In healthcare good enough is not a virtue. There is no end to the potential of reducing human suffering marginally, and no bounds to the price we will pay for that marginal reduction. Shkreli knows that, as do others in this industry.

Seizing the day, Senator Clinton, who has been awfully silent recently, unveiled a bold proposal where she’d make sure pharma spent their profits appropriately on R&D. She’d hold them accountable. That’s really mighty, Senator. I can hear Shkreli quaking in his boots.

I understand why the price of the drug is more than the sunk costs of R&D, the cost of production and the cost of the CEO’s private yacht. I understand patents and intellectual property. I get that if pharma doesn’t enjoy monopoly, even temporarily, there’d be little incentive to innovate. But this logic has been extended to such a nonsensical level that any perturbation of the status quo, such as importing generics, leads to the threat that pharma won’t innovate.

(Incidentally, pyrimethamine costs 10 cents a tablet in India. I’m allowed to check in two pieces of luggage. Just saying….)

No innovation is a bald threat which hasn’t been empirically tested. The reason it hasn’t been empirically tested is because there’s a slim possibility that it may turn out to be true. This is a game of chicken, to borrow game theory, in which pharma doesn’t blink and we’re too much of a chicken to call their bluff. We have made a Faustian bargain with pharma – we want to live longer and they want to make more money. It’s win-win, until we see the price tag.

Compounding this, is the runaway logic which prohibits CMS from price fixing. The logic, endemic in conservative circles, is that price fixing is socialism, and obviously if we fix prices we are a short step to gulags. The logic is getting tedious. Not least because what is being defended is not free market capitalism, but a political economy that is the union of the ugliest wart of capitalism – greed – and the most sterile part of socialism – lack of competition. Drugonomics is not Adam Smith’s invisible hand. It is Gordon Gekko’s visible middle finger.

Pharma is not evil. It is the mythical Homo Economicus. It does what a rational agent would do in a monopoly – it fleeces as much as it can fleece. It knows that payers will blink – case in point, those alleged penny pinchers at Britain’s National Institute of Clinical Excellence yielded to Gilead and will cover Sovaldi.

Pharma innovates on the condition that it can price freely. Pharma also delivers the goods. If a bacterial strain went rogue, greedy pharma would have more chances of finding a cure, than Buddhist Monks, or tenured Ivy League scientists.

Shkreli may be a particularly virulent strain of Homo Economicus. But remember, he is not doing anything illegal. The media is portraying him as an unsentimental money maker. I couldn’t care less if he boiled his neighbor’s bunny. The demonization distracts us from the most important question, which is not why Shkreli is raising the price of Daraprim by 5500 %, but how.

Saurabh Jha, MD is a radiologist at the University of Pennsylvania

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13 replies »

  1. In my opinion it is not just Martin and Turing doing this. There are many other companies that hike drugs all the time. While Turing and Daraprim are a very rare case, I believe they have become the whipping boy, and are taking lashes that should be distributed throughout the entire industry.

  2. Dr. Palmer —

    My understanding is that the FDA has 4,000 drug applications in its backlog at the moment. So, even though generics have an abbreviated approval process under the Hatch-Waxman Act of 1984, it would take a potential new competitor 24-27 months to win FDA approval to manufacture this drug in the U.S. That means this rip off artist will have 24-27 months to gouge patients and insurers, not just a few months as you suggest.

  3. It does illustrate how health care is a bubble–folks rushing in like the ferry boat operators on Lake Laberge near Whitehorse in the Yukon in 1898. “The northern lights have seen queer sights…”

    All these people rushing in to the health care sector eat. Quiz: So total costs do what?

  4. Don’t you think the generic manufacturers are going to jump in fast? The molecule is relatively simple. Look it up. The patents are old. We might arrive with a newer modification that has fewer side effects. I think you should not worry. It is a flash in the pan. Let the guy make a few months of profit. The fragrant smell is going to bring new makers into the game like flies. He is trying to monopolize the distribution channel so that competitors can’t buy samples to use in comparative studies needed for generic approval by the FDA. But maybe the Indians can supply this for 10 cents a capsule. I think the hedge fund is going to have a few months of profit.,,period. It is like they bought the rights to aspirin. Too easy a molecule.

  5. It is utterly common in federal contracting for private companies to deliver goods and services and the basis of negotiated “fixed-price” or “cost plus fee” compensation (think also private entity regulated “public utility” model). Absent “free-market competition” to determine lowest costs, it does not have to be inevitable that a monopoly gouger can just set arbitrary, prohibitive prices for vital commodities. That we allow this kind of crap to happen is, well, Bad on us.

  6. “What would have been an acceptable price increase?”

    Good point John. At what price point would we be satisfied with? Do we really know how pharma arrives at a price, or even hospitals charge master?

    The whole system is rigged with no oversight other than public shaming, if shame was something Wall Street understood.

    I’m not sure how effective India’s NPPA is but at least it’s doing more than our richly rewarded congress is. Onward, onward, unfettered “free market” into the valley of death.

  7. This punk unabashedly says he’s “a capitalist who plays to win.” “Plays”? “Win”? Peoples’ lives and health are a GAME?

    How much you wanna bet that “Turing Pharmaceuticals” is one more “Built-To-Flip” company? A vehicle intended by Shkreli to cash out once again.

  8. Nailed it right here: “what is being defended is not free market capitalism, but a political economy that is the union of the ugliest wart of capitalism – greed – and the most sterile part of socialism – lack of competition. Drugonomics is not Adam Smith’s invisible hand. It is Gordon Gekko’s visible middle finger.”

    Every person I know who works in pharma is tearing their hair out daily (as fistmat pointed out in a previous comment) over the lack of leadership wood on what Jha calls Homo Economicus. Capitalism isn’t inherently evil, but the greed that winds up polluting its water supply sure is. In some ways, I suppose we might wind up grateful to Shkreli for making this issue so very crystal clear … but the weight of money is so heavy on the side of status quo, I wonder if I’m just high on Pollyanna pills.

  9. Barry, Excellent point! On the internet you could readily find a Mumbai India pharma company to send you some. You might want to hire a US lab to test them to make sure it is what you paid for. The black market and gray market will surely respond to this kind of opportunity as they do for many other pharmaceuticals…not kidding.

  10. I suggest we send a courier to India with a few dozen prescriptions for 90 pills each that he can buy for ten cents per pill at a local pharmacy for cash, fly back to the U.S. and give them to the patients who need them or add them to the hospital’s inventory. Even with the plane fare factored in, the cost per pill would be a heck of a lot less than $750. No?

  11. This is a great article about a person who gives pure, unvarnished greed a bad name.

  12. Don’t conflate the actions of this pirate with “pharma” in general.

    Those of us in industry have been tearing our hair out over the relative silence of our leadership over this behavior. Shkreli is using arbitrage (in this case, of the regulatory variety) in the most inhumane manner I can imagine.

    Please don’t paint us with that brush!

  13. What would have been an acceptable price increase?

    $1 – $100 – $350?