Three weeks after Turing Pharmaceuticals CEO Martin Shkreli jacked up the price of niche toxoplasmosis drug Daraprim 55-fold after acquiring it from Impax Laboratories Inc. (NASDAQ: IPXL) many in the biotech world are saying that the public outcry will deaden the appetite for such buy-and-raises in the future. But that may not be the case.
In August, Shkreli bought the rights to Daraprim, a little-known drug that treats toxoplasmosis, a fungal infection that is usually asymptomatic but can become serious in patients with weakened immune systems. One month later, Shkreli jacked up the price of Daraprim from $13.50 to $750 a pill, daring any potential competitor to undercut him. The reason Shkreli and other buy-and-raisers can get away with something like this is that there are so few Daraprim prescriptions filled annually that the costs of manufacturing a generic version outweigh the potential revenues.
The question is, if Shkreli can do it, why couldn’t Impax do the same when they owned it? The answer only seems to be one of personality. The 32-year-old, baby-faced Shkreli already has shown himself to be over-the-top in his business practices, having been fired as CEO of Retrophin Inc. (NASDAQ: RTRX) for questionable promotion practices, alleged misuse of company funds and allegedly threatening his employees. He is now under investigation by securities regulators and has pleaded the fifth to avoid testifying at his trial.
True to form, Shkreli has said he would lower the price of Daraprim back down but hasn’t actually done it. He probably figures that if he can outlast the initial wave of negative publicity, people will just forget about the whole thing and he’ll have left his detractors holding the bag. He may be right.
Going forward though, one of two things may happen. Either generics giants like Teva Pharmaceutical Industries Ltd. (NYSE: TEVA) and Mylan N.V. (NASDAQ: MYL) will start preempting the Shkreli-type sharks and do their own slightly less audacious buy-and-raises, or the government will outlaw these types of price raises, ending the practice.
The latter move would be extremely dangerous, as it would provide a precedent for price controls in medicine, which could end up causing medicine shortages. So if the government refrains from interfering directly here, aside from a few choice tweets from Hillary Clinton, what we are likely to see is the larger generics companies engaging in the same practice, just not as egregiously. After all, if Shkreli can raise prices by a factor 55, Teva or Mylan could certainly do the same by a factor of, say, two or three, given economies of scale, and save us all the difference.
While some biotech executives like Allergan PLC’s (NYSE: AGN) Brent Saunders have suggested that these deals will slow dramatically following public outcry, this is probably just a PR move. The fact is, the small patient populations that make the buy-and-raise possible in the first place are a double-edged sword, because very few are actually affected by the price raise, cutting off any fuel line that would prolong an outcry. So far, Shkreli has not lowered Daraprim’s price back down at all. If he doesn’t very soon, he probably never will because the public relations storm will subside with every passing day.
And if he never does, and the government stays out of it, the bigger players will start thinking if you can’t beat ‘em, join ‘em. In that case, we should start to see larger companies like Teva and Mylan preempting the Shkrelis of the world and completing their own buy-and-raises, carefully calibrated so as not to stoke as much public ire and tweets from politicians as Shkreli’s did. Either that, or the original companies themselves will start raising the prices of any drug with a small enough patient population to get away with it.
In other words, any way you look at it, higher prices are coming.