The People vs. Martin Shkreli

23 Dec 2015 | Author: | No comments yet »

Can’t get enough of Martin Shkreli? Here’s his live stream.

A few months ago, Martin Shkreli, the thirty-two-year-old founder and former C.E.O. of Turing Pharmaceuticals, became a poster child for everything that’s wrong with American business when his company raised the price of its drug Daraprim, which is used to treat life-threatening parasitic infections, by a cool five thousand per cent. He posted a cool $5 million in bail late Thursday, after being charged with misleading investors in his hedge fund and looting a publicly traded company to cover his misdeeds. But, while Shkreli had to weather plenty of bad publicity, he had a ready-made defense: though his strategy for Daraprim may have been egregious, it was also perfectly legal. But his strategy of finding an old drug, raising its price, and taking the profit is one that’s increasingly common among a new breed of drugmakers.

US police officials arrested Shkreli on Thursday and charged him with a brazen fraud scheme in which he lied to investors, moved money between investments to cover losses in other vehicles and siphoned off cash for personal expenses. Disdaining a business model dependent on expensive research and development, companies like Shkreli’s Turing Pharmaceuticals AG, Valeant Pharmaceuticals International Inc., Rodelis Therapeutics and others have taken advantage of inefficiencies in the U.S. health-care system.

The government’s indictment alleges that Shkreli deceived investors in hedge funds that he ran prior to founding Turing, and that he paid some of his hedge-fund investors back with money that he took from Retrophin, a biopharmaceutical company he started in 2011. (Shkreli denied the charges, and was released on a five-million-dollar bond. The move — and Shkreli’s arrogant response to the controversy — was angrily denounced by US politicians, including Democratic presidential contender Hillary Clinton. “We remain committed to ensuring that all patients have ready and affordable access to Daraprim,” he said. “Turing Pharmaceuticals is poised for great success in the coming years.” Shkreli is also chief executive of KaloBios Pharmaceuticals, which has not commented on his arrest. But what’s striking about most of the offenses the government says he committed earlier in his career is just how straightforward and unsophisticated they seem.

The company announced today that Shkreli has resigned as CEO. “Shkreli has become the Wolf of Pharma Street — he’s basically come to represent everything that was bad and wrong with pharma,” Art Caplan, a medical ethicist at New York University, said by phone. For instance, he allegedly told one investor that the fund had thirty-five million dollars in assets, when at the time it actually had seven hundred dollars in the bank.

And while Shkreli may be reviled, said Caplan, “he’s not doing anything in terms of prices that other companies haven’t done.” Like Shkreli, Valeant Chief Executive Officer Mike Pearson has excelled at finding cheap drugs, boosting their cost and reaping the rewards. Rodelis was working to ensure “long-term availability” of the tuberculosis drug, and planned to maintain patients’ access, the company said on its website. The drug’s rights were returned to the nonprofit Purdue Research Foundation, who sold it to Rodelis earlier this year, in September after an outcry over the price increase.

Investors in both of his hedge funds wanted their money back, but Shkreli didn’t have it, even though he’d been telling them that their investments had returned healthy profits. But when Retrophin’s auditor, quite reasonably, questioned this—since Retrophin bore no responsibility for Shkreli’s hedge-fund losses—Shkreli allegedly came up with a different scheme. And he’s taken pains to distance himself from Turing and Shkreli. “To compare us to Turing is ridiculous,” Pearson said during a Dec. 15 interview with CNBC. “That is a single-product company.” Valeant declined to comment for this story.

This behavior would be a classic case of what lawyers call “self-dealing”—an executive acting in his own interests rather than in the interests of his company. Yet Pearson has criticized Big Pharma companies for overspending on research, and the company has said that it looks for products that can be sold better and more profitably by Valeant.

In Daraprim, and other drugs, Shkreli may have seen the same opportunity. “If you talk to anyone in pharma, maybe I don’t have the same resources as Pfizer, I may not have the same experience as Merck, but I’m crafty as f—,” Shkreli said in a Dec. 16 interview with the publication HipHopDX. For instance, when American Apparel’s board fired Dov Charney as C.E.O. recently, one of the causes it cited was that Charney used American Apparel money to pay for his family members’ travel expenses. (According to Bloomberg, Charney’s attorney, in a letter to American Apparel’s lawyers, called the allegations baseless and argued that the company was aware of the expenses.) That would be self-dealing on a relatively small scale. The drug industry’s lobby group, Pharmaceutical Research and Manufacturers of America, has gone after both Valeant and Turing, saying in September that Turing doesn’t represent its values, and in October that Valeant’s strategy “is more reflective of a hedge fund than an innovative biopharmaceutical company.” Turing fired back that other drugmakers raise prices frequently. Companies like Turing and Valeant that acquire drugs instead of developing them are the “exceptions and not the rule,” said Robert Langer, a professor at MIT and co-founder of more than 25 biotechnology companies. But what the executives who have got into trouble for this have either failed to understand or willfully ignored is that, once you bring on other shareholders, a company is no longer truly yours.

Miller has been a frequent critic of drugmakers, and he sits at the other side of the negotiating table, managing pharmaceutical costs for health insurers. “We have a new class of leadership at these organizations that no longer feels encumbered by the social contract that had previously existed,” Miller said. That’s why Mark Zuckerberg, even though he has complete voting control over Facebook, couldn’t have had the company simply donate billions of dollars to his foundation.

Shkreli and the CEOs of other major drug companies should be called to testify before Congress immediately,” Cummings said Friday in a statement. “They should be required to produce all of the documents that have been requested of them.” Until Thursday, Shkreli had been flying high despite the personal scorn his business practices had brought upon him. Last month, he acquired a majority stake in a floundering drugmaker, KaloBios Pharmaceuticals Inc., sending its shares soaring, and named himself CEO. And his alleged self-dealing at Retrophin is a perfect example of why this behavior is problematic: in the absence of rules preventing such practices, it would be far too easy for founders to loot the companies they run and leave other shareholders in the lurch.

Indeed, in his purported use of sham contracts to defraud his own company, Shkreli has something in common with the most storied—and probably the most lucrative—example of self-dealing in American history: the Crédit Mobilier scandal of the eighteen-sixties and eighteen-seventies. In 1864, after Union Pacific got the charter to build the western part of the transcontinental railroad, it outsourced the actual laying of the track to a company called Crédit Mobilier of America, which conveniently happened to be owned by the Union Pacific’s biggest stockholders. Crédit Mobilier then massively overcharged Union Pacific for the construction of the railroad, allowing Union Pacific’s founders to line their pockets at the expense of their own company (and the government, which ultimately ended up footing the bill). That’s pretty much what Shkreli is accused of doing with Retrophin, only in his case the money allegedly went to his defrauded investors instead of directly into his own pocket.

So if the government is right, Shkreli ended up paying his investors back, in part, with money they themselves helped provide—a perfect circle of self-dealing fraud.

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