55x price hike on "Essential Medication" - Smart move?

Turing Pharmaceuticals, led by former hedge fund manager Martin Shkreli, upped the price of Daraprim from $13.50 to $750 per pill after acquiring the marketing rights.

Not surprisingly, this instantly made him "the most hated man on the internet / in the world" on Twitter, etc., with his use of Eminem quotes to respond to criticism not helping his image in the public eye / the media. He claims that the drug previously was massively underpriced and that R&D for an improved version needs funding.

What do you guys think? Smart business move or did he go too far? Backlash left aside, would a $750 really lead to higher $-sales, given that patients/doctors may start looking for alternative treatment?

Current story:
http://uk.businessinsider.com/martin-shkreli-of-turing-twitter-2015-9?r…

Company's answer:
http://www.turingpharma.com/media/news

Bloomberg feature with background on Shkreli:
http://www.bloomberg.com/bw/articles/2014-04-17/retrophins-martin-shkre…

 

This man is not a good man. He harassed a friend of mine and his family. There is no excuse for his behavior.

********"Babies don't cost money, they MAKE money." - Jerri Blank********
 
tropos:

This man is not a good man. He harassed a friend of mine and his family. There is no excuse for his behavior.

wtf is this?
 

The drug doesn't have a patent, but there's two main reasons why there isn't a generic.

1) There's not a whole lot of patients taking the drug (8,000-12,000 per year), so there's little space in the market for more than one supplier. 2) Daraprim went to a controlled-distribution model almost immediately before the Turing acquisition (and the CEO stated it was a major factor they considered during the acquisition). This means that even if another drug maker wanted to make a generic, they'd have a hard time getting a big enough sample to do so.

 

Drugs that old have special status because they are exempt from FDA regulations (since they pre-date the FDA). So you could set up a generic factory, but you would be subject to FDA rules, so nobody does it. Thus, they have a kind of de-facto monopoly, even though it is a 62 year old drug. There are also a host of other benefits to pre-dating the FDA.

 

That is very interesting. In-fact you made me google this topic. I believe the FDA cutoff period was 1938 which was 77 years ago. Therefore a 62 year old drug would need FDA approval. I am certain that this drug was FDA approved.

"Daraprim, which is also used to treat malaria, was approved by the F.D.A. in 1953 and has long been made by GlaxoSmithKline. Glaxo sold United States marketing rights to CorePharma in 2010. Last year, Impax Laboratories agreed to buy Core and affiliated companies for $700 million. In August, Impax sold Daraprim to Turing for $55 million, a deal announced the same day Turing said it had raised $90 million from Mr. Shkreli and other investors in its first round of financing."

But that is an interesting fact - so thanks for sharing.

 

Hopefully Turing doesn't have essential relationships with US Universities in their pipeline/development process. If so, I think the abrupt price change coupled with Martin's cold, snarky comments would be enough to ruin existing goodwill.

 

He posted this to twitter after HIilary Clinton tweeted about the outrageous prices in bio-tech. Since she tweeted that yesterday the bio-tech index - IBB is down about 4%. He's actually a high school dropout.

"It seems like the media immediately points a finger at me so I point one back at em, but not the index or pinkie," Shkreli wrote on Twitter with a link to the Eminem song "The way I am."

He seems like a really smart dude, taking full advantage of pricing unique drugs...

http://money.cnn.com/2015/09/22/investing/aids-drug-martin-shkreli-750-…

twitter: @StoicTrader1 instagram: @StoicTrader1
 

When I look at this entitled little shitstain and read about the way he's conducted himself in business thus far (look up the harassment suit against him), all I see is a guy who is going to hate himself in ten years. Hell, he probably does now and just can't help himself. Some people are just harvesters of sorrow.

The most ironic thing is that the Internet has turned him into a cartoon villain and he's probably revelling in all the attention because he's never been anything before in his life.

 

My question is...who is this guy's investors? There are so many other ways to invest your money - how does this guy get the funding to do this kind of stuff acting in the manner in which he does. I've seen rich people - they normally consider character first, then profit.

 

Oh, idk...probably the same people who invest in IPXL, JAZZ, VRX, and CXRX?

This guy is an evil genius. He figured out how to do what the large public pharma businesses have been doing for the last decade, except without all the infrastructure.

He's a PR moron, but don't be fooled - he's not doing anything new. This strategy has been around for a long time and the above-stated public companies have disclosed their practices publicly. Its just that nobody cares when large institutions do this kind of stuff.

But when one entrepreneurial guy does it alone, then we get a ton of haterade.

(but dont get me wrong, he's still a moron for encouraging all this bad publicity)

Array
 

This whole story is incomprehensible and it's blowing up all over the internet. It doesn't make any sense.

  1. How can you just increase the price 55x and increase profits?

  2. Why didn't the original owner do this?

  3. If the drug is this valuable, then why didn't the experts at Pfizer, Merck, Roche, etc., buy it? How did this asshole get it?

  4. Why wasn't the purchase price higher?

  5. How can a 62 year old drug still have patent protection?

Makes no sense.

“Elections are a futures market for stolen property”
 

1) Its a free market. Welcome to capitalism 2) As noted in his interview, in 2014 it did $5mm of revenue. This is a pittance in the pharma world. Was easier to just punt it rather than waste resources on managing this drug. 3) Same as #2. Scale.
4) Well, he bought it for 11x LTM revenue... not sure how much higher you want to go? Learn to value? 5) It doesnt have patent protection.

Array
 
Cries:

1) Its a free market. Welcome to capitalism
2) As noted in his interview, in 2014 it did $5mm of revenue. This is a pittance in the pharma world. Was easier to just punt it rather than waste resources on managing this drug.
3) Same as #2. Scale.
4) Well, he bought it for 11x LTM revenue... not sure how much higher you want to go? Learn to value?
5) It doesnt have patent protection.

Let's go point-by-point

  1. So apparently, in your understanding of capitalism at least, a businessmen can charge whatever price he or she likes for a product and it will lead to higher profits. So that begs the question: Why don't all businessmen pursue this profitable price strategy?

  2. But apparently they could have increased the product's revenue 55x instantaneously! If only they knew what this mastermind apparently knows.

  3. You're saying that the drug isn't valuable but upon purchase, you're able to instantaneously increase revenue 55x. You don't see a problem with this?

  4. He bought it at 11x LTM revenue but .2x forward revenue - valuation isn't about trailing multiples and historical financials

  5. If it doesn't have patent protection then how is he going increase sales and protect his margins from generic competition?

In short, you don't know shit about economics or finance. You're completely unfamiliar with how the price mechanism functions, the principle of substitution, price elasticity, or the pharmaceutical sector. Thank you for your contribution anyway though.

It's obvious that this dude is a clown and that his strategy will not be successful in elevating profits. This nonsense is getting attention only because it's useful to leftist idiots that know nothing about economics but who hope to use this non-event in order to promote their backwards agenda.

Thank you Cries for allowing me to make my point.

“Elections are a futures market for stolen property”
 

I can't add value in terms of whether or not the price hike was justified as I don't know the economics of pharmaceuticals. I just love how it made everyone on the internet a biotech analyst...an industry that even real analysts don't even touch with a ten foot pole. I also liked how this asshole trolled everyone on twitter.

Value investor working in the hedge fund industry. Portfolio Manager, Analyst at a $380+ million Texas-based value investing HF. Former Research Consultant, Analyst at a NYC-Based deep value and special situations HF.
 

Not sure if this was directed at me, but I would just point out this is not biotech. Its generic drugs that generally look more like annuities than high growth/innovative biotechs.

Certainly not a biotech analyst, but I have covered a fair number of both public and private companies that aggregate these generics in the lev fin world. Have seen this strategy play out so many times. So many other businesses out there that do the exact same thing.

Array
 

not directed at you bud...just a general observation after reading random internet comments

Value investor working in the hedge fund industry. Portfolio Manager, Analyst at a $380+ million Texas-based value investing HF. Former Research Consultant, Analyst at a NYC-Based deep value and special situations HF.
 

The guy has a point about the cost of research in the pharmaceutical industry. The FDA is the single biggest culprit in pricing market for pharmaceutical drugs. For example, recently the FDA changed the classification of components in almost every cough and cold medication on the market. The new classification required a multi year studies into the possible side effects of a cough suppressant. The irony is that these same chemical components have been used in cough suppressants for like 75 years. They have basically been in a massive human study for 75 years but because that study wasn't actually carried out by a lab the small pharmaceutical companies that made these products have now for the most part gone out of business. They can't afford to do a multi year study that would likely costs tens of millions of dollars to get the okay to use a chemical they have been using for years on products with very low margins. Not to mention products that are extremely easy to copy.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 

Look dude, I'm just trying to answer your questions with quick facts. There were no opinions in there. However, that didnt stop you from making a lot of ignorant comments asserting that I included my entire opinion on the future success of his pricing actions & the reasonableness of the price paid.

I never asserted how much profit he was going to make, nor did I imply anything about the relationship between price & volumes of this particular product. Customers can certainly vote with their feet here. However, I did try to imply was that this product was ripe for upcharging due to a variety of circumstances (distribution methods, near-orphan status, etc).

Lastly, I'd just like to point out that it sounds like you have never bought or sold anything of opaque value in your life. Securities, companies, and products have different values to everyone - especially in cases where they are managed differently or where there is asymmetric info. Transactions like this happen all the time, particularly in the private market. If you lowball enough bids, then eventually you will snipe an asset at a low price (relative to your assigned value). It could be for any number of reasons (ex: lucky; you can hit targets that nobody else can even see; or you are wrong about the value).

I would recommend considering the possibility that you don't understand the dynamics at play here. These trades happen literally all the time. Look at every drug that CXRX has ever bought. Look at Isuprel at VRX. Outside of the drug space, look at every turnaround ever. Why did Heinz sell to 3G at such a "low" multiple when they knew 3G would double the cashflow run-rate within a year?

You've got a long way to go if you think markets are perfectly efficient, as implied by your statements.

With that said, it remains to be seen how successful he will be. Without the benefit of foresight, someone is going to be wrong here. Either the seller hit the lowball, or he overpaid. Either way, the market was inefficient.

Array
 

Given the significant amount of publicly available information around this situation, chalking this up to a 'opacity' issue seems inadequate for addressing the severe disconnect in price. I say this for the following reasons: 1) Opaque markets, excluding distressed asset situations, should favor the seller. Given this, the implication would be that the 55x increase in price (or any material increase in price) was deemed destructive to value by the seller. This is problematic, given that OP's article indicates that there 'isn't an alternative'. 2) As you point out, this sort of trade isn't uncommon. This appears to stand in direct contrast to your point, which is that this trade occurred in a market with limited visibility. 3) Finally, your argument about scale seems pretty superficial - if the owner effectively has unilateral pricing power and is already maxed out on production (i.e. producing the only drug for an orphan disease), scale shouldn't matter. Nobody owns the rights to a drug for several years and then says "wow, I could price this at (insert multiple) of the current price and not lose a meaningful number of customers. Eh, making that announcement would be too much of a distraction to my core operations."

Also, the point that Esuric was initially making - that the internet backlash is whipping up a frenzy without thinking about the economics underlying the move - seems valid to me. I don't know the specifics, but the framing of the issue presented by these articles requires that we assume that one of the parties has a child's grasp of economics.

PS - making comments like "Its a free market. Welcome to capitalism", "Learn to value?" isn't "answering a question with quick facts". To be honest, I'd classify that as making uninformative, inflammatory remarks with the intention of looking 'intelligent' on the internet.

Life's is a tale told by an idiot, full of sound and fury, signifying nothing.
 

They pay off the competitors. Win-win for both parties.

If any serious threat enters the game, they'll just slash the prices...and since the drug was dirt cheap to begin with, it would be far too expensive to build something from the ground. You don't spend hundreds of millions to produce something that costs nothing to sell, and only has a tiny user-base.

He said the company was aiming to at least break even, and hopefully make a small profit. Who knows what his original plan was. Milk the insurance companies?

 

In the world of "we can't have nice things", this is a prime example of such. There's capitalism, then there's social responsibility - needs to be somewhat balanced.

All of us on WSO probably earn at least 2-3x more than the average American. Pricing, capitalism aside, if you were in dire need of this drug, wouldn't you be upset? This guy makes Bernie a hero and it's guys like him that will ruin it for the rest of us.

If $ is the end all be all, then you've lost the meaning of life.

 
Whiskey5:

In the world of "we can't have nice things", this is a prime example of such. There's capitalism, then there's social responsibility - needs to be somewhat balanced.

All of us on WSO probably earn at least 2-3x more than the average American. Pricing, capitalism aside, if you were in dire need of this drug, wouldn't you be upset? This guy makes Bernie a hero and it's guys like him that will ruin it for the rest of us.

If $ is the end all be all, then you've lost the meaning of life.

"If you were in dire need of this drug, wouldn't you be upset?" True this.

Fortes fortuna adiuvat.
 

I actually think it was a good idea from a financial incentive, albeit it brought about bad PR undoubtedly. But, one thing that must be considered is that drugs are not like normal goods, whereby the price determined is a function of supply and demand of the product. There are several economic reasons for this: 1 the customer is not paying for the drug given 3rd party insurance skewing pricing 2 available of substitute products is often limited, such that once a patient starts using a particular drug he won't switch off it unless tehre are adverse events, thus drugs are wholly sticky to patients and that is the reason why big pharma focuses so much on acquiring "de novo" patients for their products 3 the ultimate decision maker for a drug is often not the patient but the physician, who has no financial obligation in paying for the drug.

Thus, if he jacks up the price by 5000%, it is good, but good for a set period of time. In the short run, customers will be forced to pay for the drug since they have been using it in the past and if it works, their willingness to pay will remain high (their portion of the drug price). So, he will see a huge jump in revenues since Q is not expected to fall. In the long run, however, it may not work. He acquired old products that no longer have patent exclusivity. If his hihg drug price in the market sustains, generics will surely come along (Teva, Watson, etc) and file ANDAs to get their drugs into the market which the FDA would likely fast track in order to bring about competition and bring pricing down. If pricing is sustained, generic players will have this motive to enter the market so they can be profitable. The question is the time period in which this happens, and ANDAs take time to get through FDA approval.

This guy is a genius, so I'm sure in his IRR model he factored in both the pricing and the time in which he could succeed wiht this insane price hike to acheive his yields. I wouldn't argue that the previous owner priced competetively in the market since again these are small drugs and if the previous owner had blockbuster drugs that were driving its cash flows, then they could've taken a hit on this drug in order to push off any bad PR like this guy si incurring from jacking up the price to be profitable given the small volume of patients taking it.

 

I had this write up about how this actually Makes sense But it doesn't. Someone is wrong somewhere. Throughout the comments these claims are made. Supposedly this drug was only 13.5 to begin with. Supposedly, there are only about 8000-12000 prescriptions per year. Supposedly, Turing bought the company for 55 million which was 11x sales. Either the price is off or the prescriptions are. Or maybe even the acquisition price. 13.5 * 12000 is 162000 and a 55 million acquisition price would be 339x sales.

Someone did say revenue was 5 mil in 2014, but were there more prescriptions that year or was the price higher?

Anyways, I'm sure this dude got it right. What happened here is he thought no one would rattled on him when he raised the price, and that was wrong and every one found out, and he ended up in PR hell. The controlled distribution logic as to why generics can't compete has been explained. People who need this drug other option is basically to die. So, he kinda really can set it at what he wants. It's pretty cheap when you think of it that way. Need real numbers to speculate as to why it didn't get bid up, but there's no law that all acquisitions must reach the maximum price for the seller. Impax Didn't want to pursue this guys method because it is a publically traded company and this would have killed its shares value.

 

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