Case Study: Turing Pharmaceutical and the 4,834% Price Increase on a Life-Saving Drug

The prescription drug Daraprim is used to treat toxoplasmosis, a parasitic disease that generally occurs in patients with weakened immune systems, such as pregnant women or people suffering from AIDS. Turing Pharmaceutical acquired the patent rights to Daraprim for $55 million. The drug, which was developed in 1957, costs about $1 to produce and had been selling for $13.50 per pill. Upon acquisition of the patent rights, Turing raised the price to $750 per pill, an increase of 4,834%. The Infectious Diseases Society of America and the HIV Medicine Association raised objections to the price increase, explaining that hospitals and pharmacies were no longer able to stock the medication. The two societies offered the following calculations for a year-long treatment: The cost would be $336,000 for those who weigh less than 132 pounds and $634,500 for those who weigh more than that.

According to the Wall Street Journal, Martin Shkreli, 32, Turings then-CEO, had developed a strategy of buying life-saving, one-of-a-kind drugs from companies that he knew would not raise prices on the drugs because of the potential backlash. The Wall Street Journal cited the Food and Drug Administrations (FDA) longstanding over-regulation as the cause of the lack of development of new drugs and competition for these unique drugs. Mr. Shkreli had discovered this niche for profit and created a company for purchasing drugs and increasing prices.

The Turing and Shkreli Strategy

Following the price increase, the backdrop behind the Turing acquisition of Daraprim emerged. Later investigations revealed e-mails in which Mr. Shkreli described his plans for Daraprim upon acquiring the drug, So 5,000 paying bottles at the new prices is $375,000,000almost all of it is profit and I think we will get three years of that or more. Should be a very handsome investment for all of us. Lets all cross our fingers that the estimates are accurate. business analytics and customer insights attached a copy of a purchase order for 96 bottles of Daraprim at the full price, and this comment, Another $7.2 million. Pow! At a panel discussion on the pharmaceutical industry, Mr. Shkreli indicated that he owed a duty to his investors to maximize profits and that he acquires pharmaceutical firms for purposes of acquiring the drugs and then raising the prices of those drugs.

The Backlash to the Price increase and Public Policy

The public appeared to be astonished at the level of the price increase and Mr. Shkreli became in the publics eye what the Wall Street Journal called a jerk and obnoxious. Mr. Shkreli took to social media to defend the price increase. He explained that the drug had been unprofitable, so any company selling it would be losing money. He also noted that there were altruistic properties to selling the drug at that price, because there had not been any new research or development focused on the treatment or cure for toxoplasmosis in 70 years.

However, the public outcry was so great that Turing announced that it would reduce the price. Turing also indicated that it would also create a program that would help patients obtain the drug.

About 2,000 Americans take Daraprim, making it one of the most expensive drugs for any company to produce because of the lack of volume sales. The costs for prescription drugs include the costs of the research, development, and approval of the drugs, generally a 7-to 10-year process. When the drug is widely used, the price is lower because the sales volume is higher. However, Daraprim is one of those very valuable drugs needed by only a small group of patients.

The practice of raising prescription drug prices on drugs that are not widely used is not new, but always results in emotional public reaction. The laws on price gouging generally apply in situations where the price of ordinary goods is increased because of demand that arises through circumstances not controlled by either buyer or seller. Hurricanes, earthquakes, fires, and other large tragic events often result in the shutdown of supply lines and shortages of basic goods such as food, water, and fuel. Many states prohibit price gouging, as defined by percentage increases, in their statutes so as to prevent panic and violence when goods are in short supply.

The situation with prescription drug prices is different from the situations covered by price-gouging statutes because there is no unforeseen change in the market or demand; there is simply a change of ownership or an inability to produce the drug without increased profit margins.

Governmental Reaction to Daraprim

The public reaction continued and congress held hearings on the pricing of pharmaceuticals. In his appearance before the House Committee on Oversight and Government Reform, Mr. Shkreli took the Fifth Amendment. Mr. Shkreli appeared to smirk, look away, and otherwise goad lawmakers. The Wall Street Journal reported that Mr. Shkrelis lawyer explained that any movements or expressions his client made during the hearing were the result of nervous energy and that his client meant no disrespect. Following the congressional hearings, Mr. Shkreli tweeted, Hard to accept that these imbeciles represent the people in our government.

Turings and Mr. Shkrelis conduct continued to infiltrate the political world. When presidential candidate Hillary Clinton asked that he lower prices on drugs, he tweeted, lol. Presidential candidate Bernie Sanders returned Mr. Shkrelis $2,700 campaign contribution.

Scrutiny of Mr. Shkreli

Between the time of the price increase and the congressional hearings, Mr. Shkreli was arrested on securities fraud charges. He was freed on a $5 million bail bond. He was arrested on December 16, 2016 at 6:30 a.m. in his apartment and entered a not guilty plea to charges that he was running a Ponzi scheme at his former company.

The charges were based on Mr. Shkrelis MSMB Capital, a hedge fund that he founded with investments from others of $3 million. The indictment alleges that he spent the money and, at one point, the fund had only $310. When MSMB Capital collapsed, he founded MSMB Healthcare with $5 million from 13 total investors. According to the indictment, instead of the 1% management fee that he had promised investors, he took that as well as a 20% profit incentive for compensation. MSMB Healthcare then invested in Retrophin, another pharmaceutical company that had no products or assets. Retrophin was founded for the purpose of acquiring older pharmaceuticals that would then be sold for higher prices, which was the strategy with Turing and Daraprim.

There is litigation by investors in MSMB over the Retrophin investment. Mr. Shkreli has indicated that he is innocent and that what should be a civil litigation matter has turned into a government action. He insists that investors made money and that he would prevail in both the civil litigation and the government criminal case. Lawyer Evan Greebel was also charged in the indictment. Mr. Shkreli has offered statements in response to the civil action on a pharma blog:

Hi Guys,

This is Martin Shkreli. The 8-k is completely false, untrue at best and defamatory at worst. I am evaluating my options to respond. Every transaction Ive ever made at Retrophin was done with outside counsels blessing (I have the bills to prove it), board approval and made good corporate sense. I took Retrophin from an idea to a $500 million public company in 3 yearsand I had a lot of help along the way.

I am happy to explain any transaction. I am confident that anyone who looked into the transactions would find them perfectly legal, reasonable and quite intelligent (the results of the company speak for themselves). I welcome any scrutiny by any party and have faith any investigation will be resolved without issue--it would not be the first time and it wont be the last that my moves have been looked at--this is not my first rodeo and I have too many scars to do something stupid.

By the way, it is nice to see the rational community here, and I will enjoy joining some of the discourse here on various companies and drugs.

Best,

Martin Shkreli

It seems that part of his defense could be to throw the indicted lawyer under the bus.

The indictment also alleges that Mr. Shkreli used his company as a piggy bank, recruiting new investors to cover his spending and falsifying returns statements to keep the investors believing. One example given in the indictment is that in early December 2015, Mr. Shkreli purchased the only copy of Wu-Tang Chans album, Once Upon a Time in Shaolin, for $2 million.

Following his arrest, Mr. Shkreli was removed and/or resigned as CEO of two of the pharmaceutical companies he had acquired, Turing and KaloBios.

Discussion Questions:

1) Identify the main characters (those who play a major role in the case)

2) Trace the chronological series of events

3) Isolate the problem(s) more than one

4) Propose the solution(s) more than one to the problems based on the facts in the case and your personal and educational experience. Ask, What options might be available?

5) Explore the root problem; one. There is a difference in the possible root problem and symptoms.

6) Root solution (one). What is the most feasible solution/option from the firms available resources, which will best satisfy the stakeholders? Your assessment of the case study will depend on the facts and your reasoned argument.