Who is the real "pharma bro"?

The Martin Shkreli story was a good one for the Twitter age.  It is both easy to understand and outrageous when a "pharma bro" purchases the rights to an essential anti-AIDS medicine (one whose patent expired sixty years ago!) and then raises its price from $13.50 to $750 a tablet.  Those numbers are still astonishing, even now, six months after the scandal broke.  The optics were good, too.  Shkreli has a cartoon villain's smirk that would go well in a low-budget Batman feature.

From the beginning observers who are knowledgeable about the pharmaceutical industry raised storm flags about personalizing this story about one greedy hedge-fund capitalist.  They argued that all of Big Pharma was doing even worse.  Now, the collapse of Valeant Pharmaceutical stock prices is offering a different window into that world.  In August, right when Shkreli bought the rights to pyrethamine, Valeant was trading at $263.70 a share.  At the moment I write these words, the price is $27.13 a share, and falling.

One question might be, "How does a company lose 90% of its value in seven months?"  An equally interesting one, though, is "What was the source of Valeant's value in the first place?"  After all, it was trading under $70 a share only three years ago.  Five years ago its price was close to what it is right now.  Valeant's business model was not dissimilar to Shkreli's: Obtain the rights to drugs and then jack up the prices. They had a few additional components, though.  Instead of buying drugs that they considered undervalued, Valeant was buying the entire companies that owned those rights and then firing all their scientists!  Valeant was a drug company with no interest in developing new drugs unless they could do it on the cheap.  For decades Big Pharma has been justifying their outsized prices as the cost of developing new cures.  Valeant simply declared their indifference.

Then they stopped paying taxes.  Buying a whole drug company instead of just its rights gave Valeant the ability to shift their corporate headquarters to the home of the company they purchased.  If it was a place with lower taxes they could -- and did! -- claim that as their home and pay their taxes there.  Like overpricing its products, like refusing to invest in research and development, reducing the corporate tax bill helped boost profit rates.

Finally, there were the secret mail order divisions.  Ordinarily when a customer goes to the local drug store (or even to a legitimate mail order pharmacy like Express Scripts) the pharmacist will look at a brand-name prescription and recommend a lower-priced generic substitute if one exists.  By refusing to sell through the normal outlets and making their drugs available only through their own mail-order subsidiaries, Valeant was able to leave pharmacists completely out of the loop and keep patients from getting that advice.  This is how a company makes super-profits on a medication which is no longer protected by a patent.

All this is why Valeant was the darling of the investor class and why its stock price was bid up so very high.  And that is how other pharmaceutical companies could be pressured to imitate their disgusting practices.  If investment is flooding into a scam artist that means it is leaving elsewhere and if those CEO's want to keep their companies capitalized, well then the market is telling them what to do!  And this means that those other companies have been imitating some of those practices -- especially avoiding taxes and reducing research -- for several years.

Valeant's initial fall began back in September when their deceptive practices regarding mail order sales came to light.  Just because hedge fund managers want to profit from robbing sick people doesn't mean they want to pay for lawsuits related to fleecing the public.  So they start unloading their shares and the price falls.  But what interests me even more is the drop three days ago when Valeant opened at $69 a share and closed at $33 a share.  What happened that day to this company to make the fund managers lose so much trust over the course of a single trading day?

They promised to stop their deceptive mail order tactics.

That is the beauty of the market.  The only thing worse than being caught robbing the people is deciding to stop robbing the people.  The pharmaceutical industry spends millions lobbying our representatives to reduce regulation.  So does the finance industry.  We cannot possibly match their influence.  But we can never forget why they are willing to forego all those millions of dollars spent on lobbyists: it is because their returns on that investment are in the billions.