Sep

23

(I understand that Shkreli has announced that he will reduce the price but has not said what the new price will be. This is no matter. This analysis stands whether the price is $100 or $750 per pill.) The vilification of Martin Shkreli, who the Internet has dubbed "The World's Biggest Asshole", raises a number of interesting issues.

Questions:

1. What is the proper price for the drug Daraprim?

2. Why was it selling for far less very recently?

3. Is Shkreli, in fact, an asshole?

4. Who is more moral, Shkreli or the Internet Masses?

Answers:

1. Roughly $750 per pill.

2. Because the previous owners were more concerned about their reputations than Shkreli is.

3. Yes, he is, that is why he was able to realize the revenue maximizing price.

4. Shkreli

Let's examine the issue: Daraprim (despite being called an HIV drug in the media) is a drug that treats toxoplasmosis, which is caused by a T. Gondii infection. Some of these patients are sickened because their immune system is weak from HIV. T. Gondii hospitalizes approximately 9,000 people in the U.S. per year. It kills about 700 of those 9,000. It is preventable as long as you wash your hands after exposure to cat excrement. It is also important to properly prepare your food.

Congenital Toxoplasmosis effects about 3 per 100,000 live births. Turing has stated that at $13.50 per pill revenues are about $5 million per year. $5 million/ $13.50 = ~370,000 pills produced per year. At roughly 9,000 patients hospitalized per year, that equals 41 pills per patient.

What's the right price for these pills? For many years Glaxo sold them for $1 per pill. Glaxo sold the rights to Core Pharma in 2010. Core Pharma over a few years raised the price up to $13.50. Core than sold to Turing, which raised the price to $750 per pill.

So, in a relatively short period the price went from $1 per pill to $750 per pill. Why is that? From the drug marketer's point of view, there is a pricing sweet spot that maximizes revenue. The payors (mostly insurance companies, and various government programs) do a cost benefit analysis on treatments to decide which treatments they are going to cover.

The analysis can be complicated, but for the purposes of this article it comes down to "is it cheaper for us to pay for this treatment, or to pay for an alternate treatment and/or the side effects of not treating at all?" Ideally a drug marketer would price his drug at the perfect price where it is just high enough that the payors are willing to cover that price.

What is the ideal price point for Turing? I sure don't know, but I do know this: Shkreli has done this before, and backed with $90 million of venture capital money has surely done the most in-depth analysis of the matter, considering all the many variable involved. So, in answer to question 1, the revenue-maximizing price is $750. From the standpoint of the business owner, that is what the price "should" be.

If that is the case, why didn't Glaxo or Core raise the price that high? Were Glaxo analyst's idiots who could not figure out that the sweet spot was well over $1 per pill? Were Core Pharmaceuticals analysts slightly better than Glaxo analysts, raising prices from $1 to $13.50 but not realizing that it could have been raised to $750? When analyzing the price to sell Daraprim at that analysis must take into account not just the potential revenues but also the liabilities. As this case has proven there is a downside to sharply raising drug prices, namely, the wrath of the public and politicians.

In this case it is not a surprise that the price that the three companies were willing to sell Daraprim at is inversely proportional to their size. Glaxo is a massive company that carefully navigates public opinion and the halls of Washington to maximize it's profits, which includes doing things that make it look bad to the public for little or not gain. Core Pharma is a smaller company. I can't find the financials at the moment (appears to be private), but it is far smaller than Glaxo, although it has a few big drugs such as Adderall. Core was willing to take some reputational risk as an expanding company that needed the revenues, but again not wanting to bring the wrath of Washington or the public down upon it.

So just who exactly could wring the last cent of value out of Daraprim? Why, none other than the internet's Asshole of the Year, Martin Shkreli, who has shown over the years that he is not concerned in the least about his reputation. And besides, for a company his size the money to be made here is such that even if forced out of business after a few years he would retire a very wealthy man.

So, in essence, (and in answer to question 3) all of this happened because Martin Shkreli is an asshole, and doesn't care if the public hates him. Having settled that Shkreli is an asshole, does that make him more or less moral than the Internet masses? Let's examine this for a moment. We have already determined that the best guess for the revenue-maximizing price for the drug is $750 per pill. The Internet masses insist that the drug should be sold for $13.50. That is, society wants Turing to bear a loss of 736.50 per pill. There are three groups of people who can possibly bear this cost.
1. The payors (most of them huge insurance companies or government medical care).

2. The marketing, Shkreli

3. Society at large.

Morality is of course subjective, but I see no reason why it is more moral for society to demand that Shkreli bear this cost while not demanding that the payors bear some of it, and, more importantly, for outraged individuals not being willing to bear some of it themselves.

Further, let's not forget that Core Pharmaceuticals could very well have kept marketing this drug at 13.50 per pill as a sleepy little operation, but decided to cash in instead, knowing full well what Turing was going to do. The same goes for Glaxo when it decided to sell to Core.
I for one could not have done what Shkreli did, but I am also not demanding that anyone else pay to alleviate my outrage.

Solutions: This entire episode is already grist for more government regulation. However, if society is as outraged as it claims then there are some fairly easy free-market solutions.
There is no reason why the insurance companies, perhaps with the assistance of large charities, can't band together to buy the marketing rights to out-of-patent rare drugs and market them at a more "normal" profit margin. The outraged of the Internet could also chip in as well, as could companies like Glaxo and Core. Ehen they want to get rid of marketing an old drug such as this instead of selling out they could simply contribute it for free or at a reasonable price to such an organization.

Instead, expect to see the Pharmaceutical companies engage and rent seeking and look for government subsidies in order not to raise the prices on these drugs too much.


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3 Comments so far

  1. jayson on September 23, 2015 9:25 pm

    The correct price may have been $750 or higher if he had chosen a slow rise. Curiously, he deliberately chose an abrupt, highly public and highly abrasive jump.

    Almost as if he had a strategic short position somewhere. I guess time will tell if his similar action at Retrophin was a training exercise or not.

  2. Jim Davis on September 23, 2015 11:48 pm

    Rule number 1,2 & possibly 3.

    If you’re running a scam don’t get too greedy.

    They will notice you and shut it down.

    Shkreli’s congenital assholity got th better of his judgment.

  3. Matthijs on September 27, 2015 1:21 am

    Without knowledge of the total cost for the pill, the morality of the whole affair cannot be properly judged.

    Labeling the potential sale at a price of 13.50 as “a loss of 736.50 per pill” is highly questionable. Any argument (about morality) based upon this premise, is therefore weak.

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