Last week, when the 15 minutes of fame, or rather infamy, of Turing Pharma CEO Martin Shkreli came and went following his now ill-fated attempt to boost the price of a toxoplasmosis drug by 5000%, we said two things: "Martin Shkreli's (who started his Wall Street career working for Jim Cramer, and apparently still owes the Lehman estate $2.3 million for a Put trade gone wrong) decision to disturb the fragile equilibrium in the biotech industry"and "now that Shkreli's 15 minutes of fame are over and his Twitter profile is now in "private" mode the attention should shift to the real villains - those truly big pharma companies, who do what Shkreli did but on a far vaster and grander, if less obvious, scale taking advantage of the price cushioning effects that Obamacare provides."
Today, this is precisely what happened, when as we reported previously Democrats on the House oversight committee sent a letter demanding that serial biotech rollup Valeant Pharmaceuticals should provide documents explaining hefty price increases for two heart drugs.
As the WSJ adds, "Valeant refused early this month to provide documents sought by Rep. Elijah Cummings (D., Md.) and Sen. Bernie Sanders (I., Vt.) explaining the 525% and 212% price increases the company took on the two drugs the day it acquired their rights, saying the requested information was “highly proprietary and confidential."
That probably would have been the end of it... had it not been the NYT article from last weekend blasting Shkreli's decision to bring the attention of the entire country to the biotech space in general, and price gougers such as Turing and Valeant in particular.
The immediate reaction to today's news was a historic collapse in Valeant's share price, which crashed by 17% leading to $600 million in losses for Bill Ackman, and forcing the continued brutalizing of biotech stocks, which just suffered their worst day in 4 years.
Which brings us back to Shkreli's action - the ridiculous (or very savvy, if as we suppose he had a massive short biotech trade on to begin with) decision to bring attention not only to himself but the entire drug space with a 5000%+ price hike. As a reminder, what Shrekli did was not in any way unique: everyone else did it too, they were just much smarter about how to do it.
In a report issued just hours after the subpoena news hit, famed short-seller Citron research, which was just waiting for the news about the Valeant's potential subpoena, declared that VRX stock is worth at best $135/share in the short term (which would mean the end of Pershing Square) and "worse" in the longer-term, because all the company does is serially acquire numerous small companies simply to raise the prices of their existing drug portfolio into the stratosphere.
Or rather, just below cloud level. Because this is where the difference between Valeant and Turing is to be found. While the entire US population was shocked, appalled and outraged at Shkreli for daring to boost the price of one drug by 5000%, apparently nobody had a problem with Valeant jacking up the prices of nearly 30 drugs by anywhere between 90% and 786% on the high end, with one solitary outlier, Ofloxacin ear drops seeing its price soar by 2288%.
Valeant's price increases, or gouging as some would call it, are shown in the chart below courtesy of Citron:
And there you have it: boost the prices of dozens of drugs in the span of 1-3 years anywhere between 100% and 800% and nobody notices (thank you insurance companies). But hike the price of one drug by 5,500% and suddenly all of America thinks you are satan incarnate.
Indeed, as Citron concludes, "In the Twitter-storm furor over Turing’s recent one-drug price gouge attempt, the media has overlooked the reality that Martin Shkreli was created by the system. Shkreli is merely a rogue trying to play the gambit that Valeant has perfected."
But, as Citron also adds:
"Martin Skrelli has put a face to the gouging of America by pharmaceutical companies. The media seems roused to demand answers. Now Senate Democrats are demanding action, and this is the stimulus."
And just like Shrekli burst the Valeant bubble and led to broad contagion across the biotech sector, Valeant's far more egregious pricing strategy, in the words of Citron, "jeopardizes the entire US pharmaceutical industry, and its status as a leader in the development of drugs for the entire medical system."
Finally, perhaps the Shkreli-Valeant episode should serve as a wake up call to the US public and the media that "serves" it, and serve to answer the question: just what is the threshold that activates popular aversion - why is it one instance of a grotesque price increase which in the grand scheme of things has a small nominal impact has such a vastly greater impact on the popular psyche over thousands of smaller cases which however when combined, lead to far greater spending on drugs by a far greater group of people... and yet snuck by unobserved for so long.
In any event, absent some massive bribe by the biotech lobby of Congress, the glory days of the biotech bubble are now over.
Oh, and in conclusion now that Hillary's populist fury at price-hiking biotechs is so tangible one can almost taste it, we conclude with what we said one week ago:
We also are curious to see how Hillary's populist outrage at Shkreli will be explained when the public realizes that it is only thanks to the benefits of socialized insurance programs such as Obamacare, of which Hillary is a staunch supporter, that such price gouging was possible in the first place.
As Citron notes, "The US is the only developed country without some form of control over drug pricing; we have the highest pharma prices in the world. Most of the reason devolves from a backroom deal cut when the Bush administration set in motion the Medicare Drug benefit and inexplicably (if you’re not a lobbyist) gave away the rights of the US Government -- the nation's largest buyer of pharmaceuticals -- to negotiate drug prices with suppliers."
Surprise: the ultimate patsy in this latest get rich quick scheme is... you, dear taxpayer.
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Full Citron letter below (pdf)