Can Martin Shkreli’s drug companies survive his arrest?

23 Dec 2015 | Author: | No comments yet »

Drug C.E.O. Martin Shkreli Arrested on Fraud Charges.

Martin Shkreli, the former hedge fund manager under fire for buying a pharmaceutical company and ratcheting up the price of a life-saving drug, is escorted by law enforcement agents in New York on Dec. 17, 2015, after being taken into custody following a securities probe.(Photo: AP) The reviled poster boy of drug price hikes perpetuated a Ponzi scheme on investors in hedge funds and a pharmaceutical company he founded and previously led, federal prosecutors and regulators alleged Thursday.As Turing Pharmaceuticals Chief Executive Officer Martin Shkreli contends with charges of securities fraud, major U.S. pharmacies are moving to assure patients of continued access to the company’s key drug, Daraprim.Hundreds of people on Twitter said they hoped the FBI has seized the album as part of the operation, opening up the possibility of the record being obtained using public information laws and eventually being played publicly.

But the FBI dashed the hopes of hip hop lovers, writing on its official Twitter account: “Breaking: No seizure warrant at the arrest of Martin Shkreli today, which means we didn’t seize the Wu-Tang Clan album.” After purchasing the album, it was revealed that Shkreli had controversially bought the rights to life-saving drug Daraprim and increased the price by 5,000%. Shkreli’s arrest was not related to drug prices, but instead stems from allegations by federal prosecutors that he illegally took stock from Retrophin — a biotechnology company he started in 2011 and was ousted from in 2014 — to pay off unrelated business debts. He’s an unabashed self-promoter who livestreams his daily life and boasts he’s “the world’s most eligible bachelor” and “the most successful Albanian to ever walk the face of this Earth.” And he’s an equally unabashed provocateur who jousts online with his critics. Leading pharmacy chain Walgreens Boots Alliance, currently the exclusive U.S. supplier of Daraprim, said it has inventory of the drug, which has a list price of $750 per dose.

But growing public backlash against that price has resulted in the entry of new competitors – compounding pharmacies able to produce similar versions for a fraction of the cost. CVS Health, the No. 2 U.S. drug benefit manager, told Reuters on Thursday it can provide an alternative to Daraprim that is compounded by Avella Specialty Pharmacy, at a price of $30 per 30 pills.

It treats a rare parasitic disease that strikes pregnant women, cancer patients and AIDS patients. (The criminal case doesn’t involve Turing or Daraprim.) But it sparked outrage that resounded from medical centers to the presidential campaign: Hillary Clinton termed it price-gouging, while Donald Trump called Shkreli “a spoiled brat.” Shkreli grew up in Brooklyn, the son of immigrant parents who worked at janitorial jobs. Investigators alleged that Shkreli, 32, siphoned millions of dollars from Retrophin to repay investors he’d defrauded in two defunct hedge funds that focused on health care investments: MSMB Capital and MSMB Healthcare. The CVS arrangement is similar to one between Imprimis Pharmaceuticals, a compounding pharmacy based in San Diego, and Express Scripts Holdings, the largest U.S. manager of prescription drug plans, to offer lower-cost pyrimethamine, the generic version of Daraprim.

Shkreli has emerged as a symbol of pharmaceutical greed for acquiring a decades-old drug used to treat an infection that can be devastating for babies and people with AIDS and, overnight, raising the price to $750 a pill from $13.50. He was also accused of using company funds to settle personal disputes with investors, unjustly enriching himself with company funds and forming false ties to consultants. For example, Shkreli told one investor on Dec. 2, 2010, that his hedge fund held $35 million assets, even though it had only had $700, the criminal indictment alleged. Instead, such pharmacies can prepare medications only for individual patients once they have a prescription, and must comply with state and federal regulations.

Meanwhile, several major medical groups have started to urge doctors to seek out such lower-cost alternatives to Daraprim, providing detailed instructions on how to do so. His company, Turing Pharmaceuticals, and others, like Valeant Pharmaceuticals, have come under fire from lawmakers and consumers for profiting from steep price increases for old drugs.

By his early 20s, Shkreli had his own hedge fund — and had a reputation as an outspoken short seller, or investor who bets a stock’s price will decline. Federal Magistrate Judge Robert Levy later freed Shkreli on $5 million bond secured by funds and other collateral posted by the entrepreneur and family members who appeared with him at a federal court arraignment. Walgreens said in an emailed statement that it has “urged Turing to expand the number of specialty pharmacies to promote greater access, and it is our understanding that they will be doing so in the near future.” Turing officials could not be reached for comment. The lightly-bearded defendant, dressed in a black vee-neck tee shirt and blue jeans, said nothing in court beyond identifying himself, indicating he understood the charges and entering a not guilty plea. Some complaints about his management were oddly personal: An ex-employee at one of his hedge funds has said in civil court papers that Shkreli sent his wife and sons such messages as: “I hope to see you and your four children homeless and will do whatever I can to assure this.” The disclosure came in a suit — against the ex-employee, whom Shkreli had accused of theft.

The move sparked widespread criticism – first by medical groups such as the Infectious Diseases Society of America and the HIV Medicine Association, followed by presidential candidates Hillary Clinton, Bernie Sanders, and Donald Trump. It was eventually settled. “I had two guys parked outside of his house for six months” watching him, Shkreli told the rap news site HipHopDX in a tough-talking, expletive-filled interview published Wednesday, the day before his arrest. He said the MSMB-related transactions “involve complex accounting matters that the EDNY” — prosecutors of Eastern District of New York — “and SEC fail to understand.” “It is no coincidence that these charges, the result of investigations which have been languishing for considerable time, have been filed at the same time of Shkreli’s high-profile, controversial and yet unrelated activities,” spokesman Craig Stevens said.

A music fan since his days in a high school rock band, Shkreli recently emerged as the $2 million buyer of the sole copy of what’s been called the world’s rarest album: the Wu-Tang Clan’s “Once Upon a Time in Shaolin,” which the group auctioned to only one person on the condition that it not be put to commercial use. “I’m staring at a Picasso in my living room right now that’s no different from the Wu-Tang box, except it’s about 20 times more expensive,” he told HipHopDX. Shkreli’s lawyers had informed their client their hourly legal fees had increased by 5,000 percent. “Personally, I think Martin Shkreli has become wealthy at the expense of the public good. Some rap aficionados lamented that the album was in his hands, and the group noted the sale agreement was made before the furor over Daraprim this fall.

I don’t believe for a second that his manipulation of drug prices fuels valuable research as he has claimed,” said Katie Uva, a 2006 alumna of Hunter College High School in Manhattan where Mr. Still, Shkreli mused to HipHopDX about delving further into the rap world: bailing out up-and-coming artist Bobby Shmurda, who is jailed in a drug-gang case, and even writing raps of his own.

Shkreli was president and CEO at Retrophin, which says it focuses on treatments for serious, catastrophic, or rare diseases, until October 2014, when he was fired by the company’s board. Imprimis CEO Mark Baum said that even if Turing’s other investors decided to remove Shkreli, that alone would not be enough to change the fortunes of Daraprim.

A separate securities fraud case filed in December 2014 by Retrophin investors accused Shkreli, Retrophin and other company officials of making false or misleading statements about the firm’s finances. Shkreli as a somewhat shy person who could often be found lingering in the school’s hallways, playing chess, his guitar or looking at stocks in the newspaper.

The complaint said his actions included: • Fraudulently conspiring with Greebel to get Retrophin to issue stock and deliver cash compensation for phony consulting contracts to cover up disputes with MSMB investors over the hedge fund’s performance. Noah Bookbinder, executive director of Citizens for Responsibility and Ethics in Washington, a nonprofit that called for federal investigations into Shkreli in 2012, said in a statement that the arrest “shows that the law applies to everyone. He received the credits needed for his high school diploma through a program that introduced him to Wall Street, placing him at an internship at the Wall Street hedge fund Cramer, Berkowitz & Company. We commend the DOJ for sending a clear message that these types of action will not be tolerated.” Shkreli has gained a measure of public attention by cultivating a flamboyant persona on Twitter, where he aggressively defended Turing’s price hikes.

He also posted long YouTube videos that showed him sitting at his computer, with electric guitars and amplifiers in the background, as he mused about his businesses, his love of rap music and other matters. Shkreli started Retrophin, which quickly adopted a controversial business strategy, acquiring old, neglected drugs used for rare diseases and quickly raising their prices. Shkreli and Evan Greebel, the lead outside counsel for Retrophin, used $3.4 million in Retrophin funds and stock to settle the investors’ claims, even though Retrophin had no responsibility, the indictment says. Greebel created fraudulent consulting agreements for the investors, thinking they could pay the money back without upsetting the auditor, the indictment states.

Even as he defends his strategy on his never-ending Twitter feed, arguing that no one is denied the drugs or pays more than $10 out of pocket, a fair trade-off for more research, he asserts, he still makes time to heckle his critics. Last week, he tweeted: “Should one of my companies change its name to Wu-Tang Pharmaceuticals? (Lawsuits be damned.)” And then there are the bizarre, hourslong live streams, including a conversation he had on Monday with a girl who identified herself as a student at Hunter.

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