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Business and Markets

Dying By the Sword

There have been several developments in the T*ing/Valeant world, that supposedly risk-free gravy train where you wait for others to discover the drugs, then you take over and raise the prices. An outfit called Imprimis Pharmaceuticals is moving in on Daraprim (pyrimethamine), Martin Shkreli’s infamous fifty-fold price increase drug. Shkreli’s model of restricted distribution is still in effect – and to the best of my knowledge, he has not announced the promised lower price for the drug, either. So Imprimis is doing an end run around that end run: they’re making the ingredients available to compounding pharmacies, for the equivalent of about a dollar a pill. Their formulation is actually pyrimethamine and leucovorin (folinic acid), a reduced form of folic acid. This has already been used for years as an addition to high doses of DHFR compounds like pyrimethamine, to mitigate effects on bone marrow.

As the Imprimis press release says, “Imprimis’ finished compounded drug formulations do not have an FDA-approval label for recommended use.  Imprimis compounded formulations are not FDA approved and may only be prescribed pursuant to a physician prescription for an individually identified patient consistent with federal and state laws governing compounded drug formulations.” That’s exactly the situation, but (as stated), in many cases prescriptions can still be written for these formulations, and I think that insurance companies may be quite enthusiastic about not having to reimburse for the T*ring drug.

You may remember the case of KV Pharmaceuticals and another generic drug, Makena. They got market exclusivity for it after a trial to “de-grandfather” the old medication into the modern regulatory system, and promptly raised the price steeply. Compounding pharmacies stepped in on that one, too, and the FDA basically stated that it saw no reason to take any action on KV’s behalf. Imprimis, for their part, seem to be targeting other generic compounds whose prices have been raised substantially, taking advantage of the same loophole. This is just the sort of thing that an economist would tell you to expect in such a situation, and I’m happy to see it happening.

Meanwhile, the trade group PhRMA has been more assertive about pointing out that the business models of companies like Valeant and T*ring have very little to do with the research-based drug industry. I’m glad to finally see them doing this; it took long enough. These companies are, in fact, sheer business/accounting plays, which is why some of Valeant’s large investors have loved the stock so much over the last few years. It’s a model that they can understand and appreciate – most of these folks don’t know much about biology or medicinal chemistry, naturally, but what they do know is that it’s risky to bet on that stuff, and they’re not into taking unnecessary risks. And that’s why the Valeant story is being fought out in classic Wall St. fashion – it’s about financial disclosure and accounting practices, not about medicine at all. When PhRMA says that such companies operate more like hedge funds than drug companies, they’ve got a point (although the use of the term “hedge fund” is probably thrown in there because the one thing most people know about them is that they don’t like them).

Hillary Clinton and other politicians have certainly cast a lot of uncertainty over Valeant with their statements about its pricing policies. But the people who (in the end) are doing the most damage to Valeant right now are the short-sellers and financial skeptics, like the ones I wrote about the other day (Citron, Bronte Capital) and the likes of Jim Chanos and Jim Grant, who were publicly wondering about Valeant’s debt-fueled strategy (and its obfuscatory financial statements) early in 2014. Regulatory uncertainly is a bad thing for investors, but the sudden realization of a lack of financial transparency (and the suspicion of outright fraud) is even worse. The former will depress your company’s stock; the latter will put a hole in it under the waterline.

Update: more on compounding pharmacies and the FDA here. And more on Valeant, Philidor, and another pharmacy operation in California here – none of it disclosed by Valeant, of course.

Second update: here’s even more oddness about Valeant and their specialty pharmacies. Not looking very good. The company is supposed to be explaining all this on Monday, and that should be quite something to watch.

14 comments on “Dying By the Sword”

  1. Peter Kenny says:

    The market is a good servant but a poor master…

  2. anon says:

    Are you sure that the title is appropriate considering what just happened in Sweden?

    1. cthulhu says:

      Maybe Derek should have put “trigger warning” (or should it be scabbard warning in this case) above the title?

      Sorry, I see no good arising from allowing the actions of reprehensible people to remove perfectly reasonable figures of speech from our arsenal. (Whoops, another one.)

  3. Nick K says:

    Live by the sword, die by the sword. I wonder if Valeant will now start whining about unfair competition?

  4. biotechtoreador says:

    VRX’ murky accounting has been an issue for some time now (at least since the last time it was in the 90s), so is nothing new.

    The political jaw-boning on pricing makes for good sound bites, It’s not a new issue, though:

    Drug pricing was an issue in the 90s, as well:

    Bush II worried about it in 2000:

    In 2003, Abbott garnered some opprobium for raising the price of Norvir by 400%: ABT/ABBV have had their ups and downs since then, but are still doing OK.

    And Senator Sanders himself raged against drug prices in 2002:, not sure how much he got accomplished there in the 13 years he sat in the Senate…..

    So risk of government price regulation has been around a while, and it likely to go nowhere now, just as it has in the past. At some point people will realize the current model of pharma pricing in unsustainable, but there will be plenty of profit in the meanwhile (disclosure, I did buy shares of VRX yday when it dipped <100).

    It will be interesting to see what % profit the govt thinks a biopharma in entitled to, and how much of that it has to spend on R&D. Hopefully this all-powerful government will also be able to regulate how many drugs succeed!

  5. If history repeats itself (a la KV Pharmaceuticals and Makena), T*ring/Shkreli will now drop the price of their Daraprim pill to one-third of its current asking price–say, to about $250. As a result, they’ll gain/maintain some market share at this still-outrageous sum. Imprimus’s job is to not f*ck this up. Namely, they must ensure the quality of their pyrimethamine supply chain and assure the public of that quality, as well as the sterility/good practices of their compounding pharmacies, Because sure as the Sun rises in the East, T*ring is going to try to undermine the quality of Imprimus’s pyrimethamine and point a generalizing finger at the dangers of compounded medications–a la the New England Compounding Center, c2012.

    1. Sorry, to any finger-wagging school marms: I should have written “Imprimis.”

  6. Brett Gaspers says:

    What will be interesting is to see Express Scripts reaction to all this. If you’ve been paying attention, Express Scripts has been on a tear recently ripping compounding pharmacies pushing overpriced compounded drugs (e.g., taking API, compounding it into a syrup and pricing it at a high markup to the reference drug). This must really put them between a rock and a hard place.

  7. Veylon says:

    Called this a couple weeks ago. Monopolies require government power to hold them up, whether that be in the active sense of upholding a patent or in the passive sense of ensuring that a resource on owned land goes unstolen. Since this involves neither, it is/was naturally unsustainable.

    I expect Valeant and it’s owners to discover that good will is a valuable resource hard to come by but easily lost. They spent a lot of it in pursuit of a fleeting advantage.

  8. Sal Wolffs says:

    Called it. Then retracted it because people started pointing out that it wouldn’t be possible, but still, sorta called it.

    Shkreli got way too greedy, and drew a lot of negative attention to him and the pharma industry. That earned him a lot of enemies in the industry, the smallest of which still have teams of lawyers to protect their interests, and they know the restrictions, protections and loopholes because they either grew up with them or helped design them. Also, they do know how to make the drug, so it really is just a legal issue. Initial guess was something like “I don’t know how, but they’re going to make him regret this. And there’s no way he has the lawyers to cover all angles”. Pity I then backpedaled.

    And now they have shown us how. Well played, Imprimis.

  9. tangent says:

    Did Imprimis take a short position on Shkreli’s company before announcing this? I don’t know if there’s an SEC issue with that (they don’t have any non-public information about the stock to be traded in, right?), but I’d find it beautiful and fair.

  10. Joe Pharma says:

    For a site that asserts itself has having some sort of biopharma credibility and understanding, this is laughable. Imprimis cannot and will not begin distributing this product. Perform a little due diligence for once, please. Imprimis has had a history of compliance issues and simply needed to prop it’s stock price. What kind of reputable company reprints misinformed articles on their social media pages? Pyrimethamine is likely < 0.1% of payor budget, why would they allow sick patients to take an unapproved, compounded drug combination?

  11. DrugA says:

    Shkreli’s pricing is egregious, and I’m not sure what the solution is. But turning to compounding pharmacies to end-run the NDA/ANDA process would set a dangerous precedent. Remember NECC and the fungal meningitis outbreak? Remember all those quack products peddled by compounders? “Bioidentical” hormones, anyone?

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