Biopharma CEOs, VCs, and Hedge Fund Managers: Fifty Shades of Greed


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jack the price up is the antithesis of scientific innovation, although it does actually carry some risk. A paper was recently published suggesting that the high blood pressure medication guanabenz (Wytensin) might turn out to be an effective treatment for toxoplasmosis. If clinical studies are able to confirm the animal data, then this drug might cut deeply into pyrimethamine sales, leaving a schadenfreude-tinged smile on the faces of Shkreli’s numerous critics. What will his shareholders have to say if that happens?

So how should risk taking get rewarded? How should innovation get recompensed? Should these two factors be incentivized in the same way and to the same degree? Is it possible to separate them and set up a remuneration system that a majority of stakeholders on both sides of the cost equation could agree to? This would be a fascinating topic to build a drug pricing conference around.

Biopharma companies make a wide spectrum of profits on their drugs. Some earn a little, others a great deal. People who want to hold back soaring drug costs are not looking to block innovation, just ensure that consumers can afford to get the drugs they need. The drug companies often point out that people’s insurance carriers mostly pick up the cost of expensive drugs. For the most part, this is true. However, folks who don’t have health insurance, or who are stuck with significant co-pays for their medicines, will still be hit with greatly inflated medical bills. And for those of us who are fortunate enough to have insurance, what do you think happens to your rates when your insurer has to spend a lot more money buying you the pricey drug? You don’t have to be a healthcare expert to answer that question.

Many companies don’t raise their drug prices all at once, but overcharge the public by instituting large yearly price increases. According to Deutsche Bank, Big Pharma companies raised the average prices on their drugs by 13 percent in 2014 (by comparison, the U.S rate of inflation was only 0.8 percent). And what is the justification for this? The practice is slower and not as obvious as the egregious price hikes cited above, but it can have the same effect on patients. It’s just another way of saying “pay me later” instead of “pay me now.”

Any Other R&D-Free Ways to Make Money in Biotech?

BIO is clearly okay with its members coming up with and promulgating new (non-R&D based) strategies for making big money in the biotechnology arena. However, it is definitely not a fan of a different moneymaking strategy employed by hedge fund manager Kyle Bass, who leads Hayman Capital Management. Bass created an organization (the Coalition for Affordable Drugs) that identifies companies that have (what he considers to be) low quality patents on their drugs. He then challenges these patents in court via a process known as inter partes review.  These reviews are an administrative legal process that was expanded as part of the 2011 Leahy-Smith American Invents Act. The Act has made it easier to challenge and invalidate drug patents, and some of these challenges have already been successful. Torrent Pharmaceuticals won a patent challenge against Novartis’s multiple sclerosis drug fingolimod (Gilenya), and Noven got two other patents covering Novartis’s rivastigime (Exelon) transdermal patch system tossed.

Bass claims that part of the reason he instituted his hedge fund strategy is to help reduce drug prices. BIO, however, maintains Bass is an exploitative individual, or as James C. Greenwood, the CEO of BIO put it, “There’s nothing in this man’s history to suggest he has any interest in lowering health-care costs.” After Big Biotech Celgene lost a court ruling to dismiss one of Bass’ challenge to one of its patents, BIO responded by saying, “This cursory and erroneous ruling reinforces the immediate need for Congress and the PTO leadership to take clear and decisive action to prevent any further misuse and abuse of the Inter Partes Review process by hedge funds, extortionists and other questionable entities seeking to undermine it for their own financial benefit.”

Am I the only one detecting a whiff of hypocrisy here? BIO is generally supporting the efforts of biotech companies who invented nothing (they bought drugs and jacked up their prices) while at the same time opposing the efforts of a hedge fund manager who has also invented nothing (he shorts stocks and profits when their prices fall). In the case of Kyle Bass’s hedge fund, the fight is being waged in an actual court of law. In the case of the profiteering biotech companies, the battle is being fought in the court of public opinion. And speaking of the public, it’s clear that many people have not bought into Big Pharma’s efforts to tie a “value proposition” to many uber-expensive new drug prices that are often completely untethered from reality.

Interestingly, even some venture capitalists are decrying these “buy and raise prices” strategies. Well known venture capitalist and blogger, Atlas Venture partner Bruce Booth, tweeted that raising prices through the roof, “with no R&D risk-taking, is just not right.” This again leads me to ask: Where is the line is being drawn? Why has there been no outrage directed against the individuals and organizations that funded Shkreli’s strategy? The prospectus for investing in Turing reportedly outlined the exact strategy that Shkreli followed, including a provision that the drug be sold through a tightly controlled distribution system to prevent generic drug makers from acquiring samples of it. Did he somehow dupe his investors, or did he execute on a plan that was precisely what they funded him to do?

Even if your exposure to venture investing is no more sophisticated than viewing the occasional episode of Shark Tank, you know that a primary criterion used by Mr. Wonderful and the gang is to de-risk your investments as much as possible. One would think that the Turing/Valeant/Hayman Capital strategies would be a godsend to such investors. Why waste money chasing elusive, expensive innovations when there are already existing markets with known numbers of willing customers to exploit? The big problem, of course, would be if all biopharma companies acted this way. This would eventually lead to there being no new drugs to buy at any price.

The potential threat of political action to curtail drug costs has hammered down the share prices of most drug companies, including Valeant. Few think, however, that there is any real risk that Congress would actually take some significant action to regulate drug pricing. Well-funded industry lobbyists and anti-regulation Republicans will see to that. This issue, however, is not going to go away. It may simply move to the back burner until the next drug pricing scandal erupts. It’s important to understand that some people who can’t afford their drugs will die as a result of this malfeasance. An outraged public cries out for action, and (nearly all) politicians respond by sitting on their hands. We shouldn’t be standing for it. Nobody is questioning the rights of companies to make a fair return on their investments, but it’s time to curtail the actions of greedy organizations that profit off of outrageous drug prices and questionable business models.

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Stewart Lyman is Owner and Manager of Lyman BioPharma Consulting LLC in Seattle. He provides strategic advice to clients on their research programs, collaboration management issues, as well as preclinical data reviews. Follow @

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