The Good, the Bad and the Stupid

Before I start writing new post, I just want to say out loud that if any of the facts you read on this blog prove to be wrong, I would be very happy if you point them out to me. Mistakes can be made, facts can be overlooked and I don’t balk from apologizing if I’m wrong. This applies to this post and every post from now on.

So, as I promised in my last post, I will be talking about the mess with the Daraprim treatment and Turing Pharmaceuticals. As they tend to do, the press covered the story with the usual shallowness and they missed their target far and away. Yes, Martin Shkreli is a douche-bag and, yes, his move with Daraprim pricing is borderline, psychopathic villainy, but the main issues in this story remain unresolved, undiscussed and, mostly, unmentioned.

So, let’s start from the beginning. Toxoplasmosis is a parasitic disease caused by Toxoplasma gondii and infections with toxoplasmosis usually cause no symptoms in healthy adult population. Rarely, it might involve mild flu-like illness for a few weeks. Problem is, it can cause severe symptoms (such as seizures) in population of weak(ened) immune systems, such as newborns and patients with AIDS. Preferred treatment is pyrimethamin, better known as Daraprim in both USA and EEA area, taken alongside folic acid. The thing is, AIDS-infected patients often have to take that medication for life. There are other treatments, such as sulfadiazine or clindamycine, but doctors prescribe Daraprim because the side effects of Daraprim are well known and they feel safest when administering that drug. Other reason is that they avoid prescribing antibiotics if they aren’t absolutely necessary. Usage of antibiotics leads to development of antibiotic resistant bacteria and that might be the greatest health care issue of 21st century. I will talk more about it in a separate post. Daraprim is on the market since mid 20th century, patent protection ran out in ’70-ies and it was pretty cheap and easily accessible to the patients and everyone were happy until now.

GlaxoSmithKline was the holder of Daraprim up until 2010 when it sold the rights for selling of the Daraprim in the USA (and the USA alone – GSK still holds the rights on Daraprim in all other EEA countries AND Canada) to CorePharma. CorePharma sold it to Impax Laboratories. Impax laboratories did not do much with the drug, only major thing they had done with Daraprim was a change in distribution system – they went from typical wholesale distribution to a smaller and more tightly controlled, specialty drug distribution network, making development of new generic drug virtually impossible. Making generic drug is pretty straightforward process and there is only one critical step – you have to prove that your new (generic) drug has absolutely the same properties as the original drug (originator). If you cannot acquire enough of the originator or if owner of originator gives you “bad” drug (drug from production batch with some error or outright wrong formulation) and you embarrass yourself (and lose hundreds of millions of dollars in the process) in front of regulatory agencies, you cannot develop novel generic drug. Impax Laboratories did nothing with Daraprim per se, they only made making generic version of Darapim virtually impossible.

Enter Martin Shkreli.

Impax Laboratories sold the Daraprim market rights to Turing Pharmaceuticals, start-up company led by a young hedge fund manager Martin Shkreli. Right after acquiring market holding rights of Daraprim in the USA, Turing Pharmaceuticals raised price from $13.50 a tablet to $750, shocking 5555,56% increase in price. Mass hysteria ensued, Skhreli was dragged in the mud all across the Internet, pharmaceutical industry was (once again) vilified, everyone had all of a sudden had (the same) opinion about the pharmaceutical industry, American presidential candidates had speeches about it and promised to end the outrageous pricing of drugs. Yes, Martin Shkreli is an idiot devoid of all sense of morality (and if we were all wrong, and he did have a plan to make good use of the money he had intended to plunder with this Daraprim pricing, I will publicly apologize and cover the story about good guy Martin Shkreli) and that is where this story should end.

First of all, he is not the first to do this and he is not the only one to do it this year. Second of all, he is not a scientist, he is not an engineer, he is not a leader and he will never build anything except his bank account. He is hedge fund manager and his (and all the other hedge fund managers) interest is in short-term monetary gain. Players like these do not understand how does the pharmaceutical industry work, they do not understand the principles in building pharmaceutical empire, they do not understand that you have to spend 10 to 20 years on one (ONE!) drug to start making profit. These players enter the field of pharmaceutical industry, they wreck havoc for a couple of months, they sell the market holding rights back to pharma-savvy (yes, I made this phrase up right now) company and situation normalizes afterwards.

What is most important fact in this story, patients are not and will not be endangered by this move. First of all, there are stocks of Daraprim in hospitals (although they are dwindling). Second of all, in November 1992, the US Congress created the 340B program which is codified as Section 340B of the Public Health Service Act. This law protects specified clinics and hospitals from drug price increases and gives them access to price reductions. This law requires pharmaceutical manufacturers participating in the Medicaid program to enter into a second agreement with the Secretary of Health and Human Services – called a pharmaceutical pricing agreement (PPA – btw, hello Ubuntu users) – under which the manufacturer agrees to provide statutorily specified discounts on “covered outpatient drugs” purchased by government-supported facilities, known as covered entities, that are expected to serve the nation’s most vulnerable populations.

In other words, Medicaid patients and hospitals who service those patient, are protected by American Federal law from the burden of large increases like this. The 340B program is one of the most powerful contractual pharmaceutical pricing systems in the world to protect those people who are in need of expensive medications that are on those contracts. Moreover, Medicare and private insurance patients also have access to those prices if they can demonstrate need.

In other words, only population that would bear the burden of this increase is rich population covered by platinum level health insurance, even if Shkreli had not backed down on his decision to increase the price. I’m sure that those pitchforks would not be needed.

Shkreli’s failure was actually not of business logic, his plan was actually perfect on that side. He bought the drug that was in use for more than 60 years, there are no generic version of it and previous market holder had made virtually impossible to develop generic drugs. Poor and middle-class population is protected by the Federal law and Shkreli was to make money on perversely rich and AIDS infected population. Great plan. And it would have worked if Shkreli invested in one thing – marketing. His failure was not of business strategy, his plan flopped because he had lacked proper PR.

People brought pitchforks up because of overpriced medication that is mostly used by a very tiny percentage of AIDS infected population (that really is a niche of a niche on pharmaceutical market) but no one is bringing pitchforks to Apple headquarters for overpricing their technology. Moreover, for absolutely the same business strategy, Apple is applauded as the best tech company and it is currently ranked as world’s greatest company and the most profitable one. OK, that might be completely wrong example, iPhone or iPad are matter of luxury, not survival. Let’s try to find more suitable example.

Pricing of bread – in ideal world, ration of price of wheat to flour to bread is 1 : 2 : 3. First part of the equation adds up and ration of price of wheat to flour is about 1 : 2. Things completely break down in other part of the equation. Currently (in Europe), ration is 1 : 2 : 10. OK, let’s say that bakeries have many expenditures, they are bogged down by regulations just as anyone else and the ratio would be 1 : 2 : 5. Where are other 5 parts of the price? Pure extra profit. Where are the pitchforks? Why is there no public outcry for this example of profiteering?

The answer is simple – we are used to it. That is just the way things are and we live with that fact and for all of our lives, we are overpaying the commodity that is essential for all of our lives. Just as drugs are. If Shkreli had had a pinch of patience and good PR team behind him, he wouldn’t have raised anyone’s eyebrow.

Now, on to the other points that remained under the radar. Daraprim is on the World Health Organization Model list of Essential Medicines. Daraprim tablet cost in USA was $13.50 and nobody had had any problems with that fact. Nobody had mentioned the fact that the same drug in UK costs 13£ for 30 tablet pack – that is approximately 0.43£ (0.65$) per tablet, making Daraprim treatment around 2800% pricier in USA than in the rest of the world – BEFORE Turing Pharmaceuticals’ price increase. Even worse, there are various pyrimethamine tablets in India for the price of 0.08$ per tablet. Now, one could say that unregulated markets of India and southeast Asia where drugs could kill you just as they could cure you are not comparable to the market of USA, but markets of European Union are comparable to the market of USA. Difference in price of 2800% is unjustifiable. So why is there such a difference?

People and media are accusing capitalistic system and pharmaceutical industry as a whole, saying that drugs can’t be commodities. The problem is exactly lack of capitalism in this case. How could it be allowed that Daraprim – drug on WHO’s list of essential drugs – became commodity under monopoly of one company that closed the wholesale distribution of Daraprim and made it harder to obtain than the high quality crystal meth or cocaine on the street?! This situation is prime example of what happens when competition is stifled. This is not the story about greedy capitalist (although it is caused by one), this is story of failed system, system that became bogged down with unending sea of bureaucracy, system that actively discourages investment, competition and progress – system where it was non-profitable to develop generic version of a drug that was overpriced for 2800%. Just imagine, margin of 2800% was not enough to make a profit. That is the state of the legislation of pharmaceutical industry today, that is the amount of money the state takes for itself for every drug. And government of USA knew that and subsidized that drug, consciously overpaying each treatment for 2800%. I don’t know how you call that, but I call it cartelization – and that is not a sign of a healthy, capitalistic system, it is a sign of corrupt, bureaucratic (one could even say fascist) system.

And what was the reaction of politicians and policy makers? They want to regulate and dictate the price of drugs EVEN MORE! And what happened after those remarks? Whole sector of biotechnology fell and lost millions of dollars of worth in just one day.

At this point, I’m not worried about price of Daraprim treatment increase one bit – I’m more worried about politicians meddling in the affairs they are not qualified one bit, potentially destroying entire sectors of research in biology and chemistry that will improve all our lives. Every meddling of politicians in pharmaceutical industry resulted in destruction of entire companies and slowing down of research in certain areas for entire decades.

To conclude this post – yes, Martin Shkreli is a shortsighted, greedy man and Daraprim price increase is, to say the least, sickening. He will wreck havoc in this sector for a month or two and he will become history. I’m far more concerned about increase of the state legislation and start of the dictated economy, similar to fascist and communist economies, that will ultimately destroy years of research, years of hard work and the greatest victims of this event will be you and every one of us, all children, all men and all women. Innovation and progress cannot be dictated. We should keep hedge-fund managers out of pharmaceutical business, but we should not forget to keep out the politicians as well.

So, the question remains – why are drugs so expensive?

That will be the subject of my next blog post.

‘Till then,