One Jerk != Systemic Failure

So by now you’ve heard of this stellar example of humanity

Tirrell concluded by asking if Shkreli would consider lowering the price because “doctors and patient groups are saying they can’t access this drug.”

Shkreli responded with one word: “No.”

Now of course in a complicated question regarding the pharmaceutical marketplace the natural result of such an odd outlying case is for everyone to approach it with the subtle nuance we should have when examining outliers in public policy…

… heh…

No, seriously, instead let’s all cram this story into our favored narratives! It is so much more fun that way.

It would appear the villain, at least in this case, is not the non-existent free market, but the controls imposed by the FDA granting a regional monopoly.

Sigh.

No, the villain is still Martin Shkreli, who is the agent of action here.

The existing system worked just fine for years to provide this drug at a reasonable profit to a small company with some subsidy from the government to cover the fact that the positive externality of the drug’s availability is not reflected in its market price (an awful lot like most vaccinations.) The “Orphaned” status granted by the FDA is explained here.

In the specific case of Daraprim (aka pyrimethamine), the drug was granted orphaned status in 2011. So, for four years, the drug was produced by Tower Holdings, Inc, at a price of less than $14 a pill, and Tower Holdings, Inc. made money off of that price point. Then in March of 2015, Tower Holdings, Inc was purchased by Impax Pharmaceuticals, which then turned around and sold the rights to Daraprim to Turing Pharmaceuticals in August.

The *exploit* is the fault of the FDA, that is certainly true (and Shkreli is backpedaling furiously today because he certainly doesn’t want the FDA to patch the exploit).

It should be fixed, no argument there.

But there is a category error in this article, with the underlying assumption that these sorts of exploits are a feature of regulated markets but not unregulated ones.

For example, earlier in the article:

It appears that Mr. Shkreli is one of those regulatory “entrepreneurs” using the power of the state to manipulate things in his favor. It has been alleged his investment fund shorted various pharmaceutical stocks and then filed complaints against the companies with the Federal Drug Administration, thus causing an investigation. The investigation would then negatively impact the price of the stock, and Shkreli would profit.

Yes, and this tactic is also used and employed in deregulated or industry-regulated problem domains. Manipulating the reputation of a company to cause a change in its stock price is not something unique to a regulated market… and it’s implied here that it is… which is bananas.

You can call it a loophole if it’s in a tax code, or an exploit in a software system, or a failure in the regulatory mechanism if it’s a government regulated market, but they’re all basically the same thing:

Some folks find a gap where actual value can be manipulated on one end, and jump in there and manipulate it to profit. This is a baked-in aspect of the profit motive, the negative side to the positive force of the profit motive.

The agent is still the villain.


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Patrick is a mid-40 year old geek with an undergraduate degree in mathematics and a master's degree in Information Systems. Nothing he says here has anything to do with the official position of his employer or any other institution. ...more →

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60 thoughts on “One Jerk != Systemic Failure

    • I’m actually quite amused at the cluelessness of Mr. Shkreli. I’m betting he looked at the sales for the drug, figured that probably 10 people in the developed world use it, and no one would much notice the spike. His response to all this hubbub has been to say that he failed to adequately explain the rationale for the price hike, which is the dumbest excuse ever. The fact that a large number of people are exhibiting a growing concern over the rising cost of drugs, especially drugs to treat uncommon & rare conditions (let’s set aside the growing difficulties & costs of finding & producing those drugs for the moment) seems to have escaped his notice, which tells me that he isn’t paying attention & probably has no business being in charge of a drug company.

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        • Forget the boneheadedness of the price hike itself, I can’t believe he thought it a good idea to not hire someone (I hear Justine Sacco is available) to do his PR for him, so he personally didn’t look like such a knob. I mean, it’s one thing to hear “Company X pulled this stunt”, it’s another to have your name and face personally-associated with such a PR debacle.

          Maybe Trump’s example is emboldening people to just brazenly bluster through.

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    • He also seems, per a Newsweek article, under investigation for LOTS of stuff he’s been doing.

      Since at least in January, Shkreli has been under criminal investigation by the United States Attorney’s Office for the Eastern District of New York, court records show. And Shkreli is not alone—some of his business associates have also received grand jury subpoenas in the case.
      […]
      The criminal investigation involves Retrophin, a public company where Shkreli served as an officer, director, and 10-percent owner of the outstanding stock before being ousted amid multiple allegations of misconduct. Retrophin focuses on the development, acquisition and commercialization of therapies for the treatment of catastrophic or rare diseases, and was founded by in 2011 by Shkreli.

      The inquiry, according to court records and people with knowledge of the inquiry, involves such a vast number of suspected crimes it is difficult to know where to start. A quick summary of the government’s theory: If there was money, Shkreli took it. If there were facts to be revealed, Shkreli hid them. If there were securities laws, Shkreli broke them.

      The bolding is mine. He does sound like quite the modern capitalist, eh? Enron, VW…thieves and criminals in 3000 dollar suits, held up as the pinnacle of American ambition.

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      • This is totally non-scientific, but everytime I see a picture of the guy, all I can think is that he looks oily & untrustworthy. I have to wonder how this guy managed to convince people to let him be in charge of things before the age of 35? He does not strike me, at least visually, to be someone I would be willing to follow into the bathroom, much less trust with anything of value.

        Of course, I got the same visual impression of Hitler, and yet see what he managed…

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  1. If someone facing imminent death because they were no longer able to afford Daraprim were to take unorthodox measures to change the leadership at Turing, would it be considered self-defense? If not, making it so might be a sensible way to reform the process,

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  2. Patrick is clearly in the pocket of Big Pharma and thinks that it’s perfectly OK for corner-cutting penny-pinchers to provide shoddy, dangerous, hazardous products to unsuspecting consumers.

    Compounding pharmacies are the primary providers of orphan drugs, but they aren’t very well regulated at all–mostly because they invariably fall back on “if we do it any other way it would be too expensive and we’d go out of business, and nobody else in the world makes this stuff”. So consumers get drugs made in someone’s garage, with concentrations of “eh, whatever”, and so-so sterility practices. And if the FDA tries to convince some company to modernise production of an orphan drug–to meet modern safety standards and practices–then, well, you get what we see in the news story.

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    • Glad I linked through. I originally thought ‘compounding’ meant the practice of taking two medicines, combining them, and patenting it as a new drug. Rather than the more informal practice of doing it as a pharmacist.

      Because I’ve had experience with the former, as I was once prescribed a 1500 dollar a month drug that was…Alleve and Nexium. Seriously, I replicated the dose for 50 bucks a month worth of OTC drugs.

      Doctor was shocked when I called him, told him the price, and the fact that my insurance company refused to cover it (for obvious reasons. Because it’s naproxen and Nexium. The actual manufacturing + shipping cost for a month’s dosage was probably under 10 bucks). Pretty sure he stopped prescribing it.

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    • I didn’t see any horror stories about Tower Holdings, Inc. while I was looking for the history of Daraprim.

      I doubt it has been made in someone’s garage with concentrations of “eh, whatever”.

      If you want to have a conversation about the FDA (or any government agency) not having the resources to prosecute scofflaws in the industries they’re supposed to be policing, that’s a conversation we could have but it’s not really germane to this particular story.

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  3. In keeping with my reputation as an uncaring, uncompassionate individual, there’s two ways to price a product: 1) Costs + profit = Price and 2) What customers will pay. He choose the second method. This is done all the time in the economy. From a financial point, he has to price this product not so high that all demand goes away, but still where the majority of the people will pay the higher price. In that regard, he did nothing wrong…..

    He just did it was crappy PR skills.

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    • What customers will pay.

      For drugs necessary to preserve life, this is a tricky thing. People will pay almost anything to stay alive, which makes such things ripe for abuse.

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        • True, but this goes back to the PR aspect. You don’t spike the cost of a life saving drug like that. Again this speaks to the guys cluelessness or tone-deafness. Of course he can legally set the price to what the market will bear, but doing so was obviously a bad idea.

          Now perhaps had he laid quite a bit of PR groundwork, or slowly increased the price until the pain point was hit, he would not be in this mess.

          As I said, a guy who probably should not be in charge of a drug company.

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  4. You know, I am more than willing to defend stuff like a brand spankin’ new drug that did not exist years ago coming out and hitting the market and costing a huge amount and being protected by a patent that lasts for years. The choice for that is between “having the drug” and “not having the drug” and I’d rather have the drug, even if it is expensive and protected for a few years, than not have it (even though, ethically, it’s simpler to deal with merely not having it).

    But this is gaming the system. Value is not being added by this move.

    The negative publicity he’s getting will be associated with his name forever more, for every single google result. He will be the guy who gamed the system and was a jerk and put people’s lives at risk for a little bit of money (something of which he already had bucketsfull).

    And there are people now who are hoping that he dies, that he gets the diseases that would require this medication, that he loses all of his money, and those are the *NICE* people. God knows what the bad people are thinking.

    People will put his name in google alerts hoping to be told the second that he goes from billionaire to millionaire. Waiters will handle his food recklessly if not maliciously. People will whisper behind his back for the rest of his life.

    Good. Sic semper.

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  5. Part of why people leap to a systemic explanation, I think, is our modern tendency to see things this way.

    Its the theory I advanced a while back, that we all were formed by the Modern preference for viewing the world in scientific ways, where things like human behavior could be explained by psychology and economics, and the affiliated political systems that used them.

    An example of price gouging 200 years ago wouldn’t have elicited a public response that there was something wrong with how people bought and sold things generally, so much as it would be explained, and corrected, with theories of human evil and goodness.

    One of the powerful advances of modernity was to classify things and apply abstract principles.
    The laws of gravity acted the same way on cannon balls and tennis balls, and all consumer goods responded to market pressure in a similar fashion. Human bodies behaved much like animal bodies, and so on.

    Except the classification systems are themselves inherently arbitrary.

    Lifesaving medicines may respond to market pressures just like toasters, but do we really want them to?

    Choosing the classification system means defining our goals, that is, what outcome do we want to reach?

    Patents were an invention, a societal construction intended to serve a goal of spurring invention. How do we respond when they do that, but also allow monopoly and misery?

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      • A better phrasing would have been, do we want to leave it at that?

        Meaning do we want to have only market pressure as the method of controlling medicines, or can we apply other controls?

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        • Well as a soulless neoliberal I, of course, think that controls beyond the market are sometimes needed but I don’t try and pretend that such controls don’t have costs, sometimes steep ones.

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          • Its a point worth taking.

            I think its also worth discussing why we assign certain things to be delivered via lightly controlled markets, others more heavily controlled markets, and other things not at all via markets.

            Examples are how you have to buy a ticket for a train, but can drive on a freeway for free.
            The distortion of the freeway market and its associated costs are unremarkable, since no one* ever thinks about how it could be delivered differently. The status quo is simply assumed to be a naturally occurring phenomenon like rain.

            *Present company excluded.

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            • Yes, certainly, but when considering whether it could be delivered differently one must also consider whether it should be delivered differently and if the transition costs from one method to another make changing methods worth it or not.

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  6. You could also equally say that the problem here is that the U.S. is alone in the Western World in letting pharma set their own prices. Everywhere else drugs are a regulated utility

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    • Regulated utility? You mean like electricity, water, sewer, gas, cable tv, internet, trash collection — ie essentials of modern living that also happen to be natural monopolies?

      How dare you suggest that drugs, especially orphaned off-patent drugs, fit into that category? What are you, some kind of socialist? Don’t you read Megan McArdle? Don’t you know that the American drug development / patenting / pricing system is the best of all possible worlds?

      [not my best work. too underslept to get the appropriate level of outrage going]

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    • The marketeers claim that is why so many drugs get developed so quickly which is an interesting claim because the only way to test it would be to impose drug price ceilings everywhere and even then what would ya compare the progress to? But it is far from a toothless retort.

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      • If “we” (for some version of we, such as US voters) want new drugs, then we should pay for new drug development. We could dole out grant funding and give prizes to winners. But the current system of patent protection plus Medicare pricing plus VA pricing plus private insurer pricing plus out-of-pocket pricing seems verrrrry inefficient. Who is actually bearing the true cost of development, the shareholders of pharma companies or US taxpayers? (Socialize the risk, capture the benefit may be how big companies actually work, but I see no reason to be resigned to that reality.)

        The diseases of developed nations are largely the same. So to the extent that US taxpayers are bearing a disproportionate burden of drug development costs, that’s (a) unfair and (b) a stupid way of doing things. But if I’m a German politician and the Americans insist on acting like idiots, why should I stop them? Free-riding is great! (until it’s not, and we’re actually spending less on drug development than is optimal.) But since drug pricing is explicitly political in the EU, paying for drug development (that is useful both to Europeans and Americans) is necessarily political too.

        Hey, sometimes markets fail. It’s really not the end of the world (for most people) to recognize that the government has a proper and useful role in the provision of certain goods.

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          • While searching for an answer to how much Pharma gets in subsidies, I found this

            Finally, half of the DiMasi estimate is not real R&D costs at all but highly inflated estimates of what companies would have made had they put their money in an index fund and not developed new drugs in the first place! Given the staggering cost estimates in Forbes, it looks as if drug companies should do just that and become investment banks.

            Our own estimate of pharmaceutical R&D is often misquoted as an average of $43 million, which commentators reject as absurd without actually reading what we wrote. In fact, we make clear this estimate in 2000 does not include the cost of discovery (because no one has accurate figures and it varies from 3 months to 30 years), nor the ?cost of capital? (for reasons explained in our article). It is also the net cost after taxpayers cover about 50% of corporate R&D expenses and the median cost, which is not biased up by 35% to the average cost by a few costly R&D projects. Any 2000 figure is 30% more in 2011..

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            • @oscar-gordon: Taking cost of capital into account is a perfectly legitimate thing to do here. Suppose you have an investment opportunity that will return a guaranteed 3% in one year, and another investment opportunity that will return a guaranteed 3% in ten years. The former is obviously a much, much better investment.

              Note that when a business funds its investments with bond sales, the cost of capital (interest payments) are counted as expenses. Economically, this is not really different from funding investments via cash holdings.

              Now, “highly inflated” may be an issue, but given that this article is just a catalog of the stupid fallacies that economically illiterate leftists invoke to justify regulating the profits out of drug development, I’m not inclined to take his word for it. I’m surprised he didn’t manage to work in the one about spending more on marketing than R&D.

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  7. Let me see if I’m following what’s going on here, because, like most people, I was baffled by the idea of an exclusive right to produce a drug that’s been known for decades. Here is how I understand this:

    Basically, there are known-good drugs that no one produces, and, for some reason their effectiveness and lack of side effects has never been documented to FDA specifications, and now if you want to make those drugs you have to test them?

    So, in return for a company doing the tests required, and in return for them producing the drug, the company gets the exclusive right to make it for X years, *and* a subsidy on production?

    Assuming I’m right, I have a few questions:

    No one in the legislature bothered to put any sort of cap on the price, or set the price *in advance*, or anything like that? I feel I must point out if the price was low enough, no one would have a problem with them having exclusive rights for a very long time. Give them the equivalent of a 20 year patent, and set the price at a level designed to recap the testing getting it FDA approved plus reasonable profit…and if that’s too expensive, subsidy the price, or just give them a damn chunk of money.

    If the legislature *really* can’t quite figure that out, they can instead set up a system where the FDA *pays for testing* and makes it so everyone can use the drug. (Remember, we’re not talking about inventing new stuff here.) This is a few million dollars here, a drop in the bucket for the government. What is this, frickin rocket science?

    I’m pretty certain this *is* a systemic failure of the government, guys. It’s just in almost exactly the opposite direction that libertarians think.

    It’s the national, bi-partisan inability to grasp the idea that if the market fails, and we want the thing the market can’t make, *maybe the government should just pay for those things* instead of setting up complicated incentives to make the free market be willing to produce it. And if we *do* set those incentives up, we need to remember we did that and have the duty to regulate the outcome there, because that isn’t meddling in the free market, it’s meddling in a market we, ourselves, built.

    We did the same damn thing with college pricing, and now college prices are insane(1), we did the same thing with health insurance and were smart enough to super-regulate that and we’re still hitting problems with narrow networks and whatnot.

    It’s like we’ve decided that it makes more sense keep adding patches after patches onto non-working parts of the free market instead of just having the government *buy things from the lowest bidder and give them to us*, Or worse, having the government actually produce those things. Because SOOOOOCIALISM.

    1) Hilariously, with colleges, it often *is* ‘the government’ producing those things, but it’s basically state governments sucking off the Federal government’s teat. No one in the Federal government says, ‘You know, for half the cost we’re paying to subsidize student in these colleges, I’m pretty certain we could just run *our own* colleges.’

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