When wunderkind Martin Shkreli famously jacked up the prices of Daraprim from $13.50 a pill to $750, he unknowingly triggered a series of events that continues to wreak havoc on Wall Street today, with Valeant Pharmaceuticals tumbling down the stock market. This March, the FDA announced new rules intended to tamp down on Shkreli-style price gouging, and soon after Valeant revised its revenue projections downwards.
After the Shkreli price-gouging story first broke, the young entrepreneur became a whipping boy for the pharmaceutical industry at large, particularly among companies like Valeant, which made billions using the same pricing tricks.
In a comprehensive profile of Shkreli this February, Vanity Fair cited one anonymous biotech banker who explained, “He basically ruined the concept for other companies.”
In reality, there are a variety of “concepts” that sketchy pharmaceutical startups can use to make profits in the short term. Only a tiny percentage of new drugs will ever leave the research and development phase of production; about 1 in 5,000 will eventually pass through clinical trials and gain FDA approval. An unscrupulous investor or biotech company could invest in one of these drugs, make phony claims about its potential, and make large amounts of money until the drug is eventually shelved.
Or there’s the Shkreli approach. Companies like Valeant buy important but little-known drugs. Once they have an effective monopoly on the medication, they jack up the prices.
According to Ars Technica:
“Valeant has dramatically raised the prices of several drugs, including Isuprel, which is used in emergency situations to prevent fatally slow heart rates. The company raised the price from $50 to $2,700, leading some hospitals to put it under lock and key and pull it from medical carts that are used in life-threatening situations.”
Or, as Vanity Fair so eloquently put it: “small biotech companies, some of which thrive thanks to loopholes, legal frauds, pipe dreams, and stock promoters — and a smattering of real science, just enough to ignite fantasies of fame and fortune. Those who know how to game the system can make huge profits without creating anything of value.”
For years, firms could play these games without anyone noticing, using rising healthcare prices as a cover. But Shkreli accidentally brought attention to these strategies. His Daraprim antics were so outrageous that both the U.S. House of Representatives and Senate summoned representatives from Turing and Valeant to the capital for questioning.
Now, Valeant’s investors are paying the price. After slashing its 2016 revenue report this March, the company’s stock price dropped by 46% in a single afternoon of Nasdaq trading.