Chapter 3, Part 1: Orphan Drugs
This next section of SMIRK describes the context surrounding the Daraprim price hike, which turned Martin Shkreli into the "most hated man in America."
Let’s rewind a bit, to the act that made Martin Shkreli the “most hated man in America:” When his company, Turing Pharmaceuticals, acquired the rights to a drug called Daraprim — the brand name for pyrimethamine — in August 2015, and then promptly raised the price from $13.50 to $750 a tablet.
The price increase was reported by the New York Times in a straightforward news article on Sept. 20, 2015: “Drug Goes From $13.50 a Tablet to $750, Overnight.” The reporter Andrew Pollack described the Turing CEO as having a “reputation for both brilliance and brashness,” and included comments from Martin defending his actions.
“This isn’t the greedy drug company trying to gouge patients, it is us trying to stay in business,” Martin said in the piece. “It really doesn’t make sense to get any criticism for this.”
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But criticism came swiftly, like a tsunami, as soon as the article was published. It came even though the Times article noted that a dramatic price increase of life-saving drugs was hardly unique for the industry. (The same article mentioned that a treatment for drug-resistant tuberculosis, cycloserine, was jacked up from $500 for 30 capsules to $10,800 overnight, but the owner Rodelis Therapeutics walked back the price hike after the story went viral.)
And the criticism kept coming even though Turing pledged to ensure patient access and affordability in November 2015, along with making lower-priced bottles of Daraprim available to hospitals. Such comments and public statements appeared to fall on deaf ears. Martin was already by that point christened the “Pharma Bro” in the media and his face was already known around the world as a symbol of greed.
Looking at the context of what was going on in the pharmaceutical industry in the U.S., the perennial waves of outrage from the public over high costs, and the ever-increasing pressures on drug companies to maximize profits, the reaction wasn’t entirely unforeseeable.
A tinderbox of pent up hate at the industry had been building up for quite some time. All it took was the right sort of person, rebellious and unapologetic, to walk straight into it and light a match to set off an epic explosion. And that person was Martin Shkreli.
A few things first of all about Daraprim, the drug which served as the catalyst for this controversy: The drug, first approved by the FDA in 1953, was on the World Health Organization List of Essential Medicines, and was considered to be a standard treatment for toxoplasmosis, an infection caused by the parasite Toxoplasma gondii.
T. gondii is an extremely common parasite, capable of infecting virtually any warm-blooded animal. In the U.S., people often pick it up by eating undercooked meat, drinking contaminated water or by handling cat poop. (Dogs can also carry the parasite, but unlike cats they don’t shed it in their feces.)
It’s very likely that you’ve had toxoplasmosis yourself at some point in your life, and maybe you still have it, and don’t even know it. Something like 2 billion people on this planet, and an estimated 60 million in the U.S., are chronic carriers. The Centers for Disease Control and Prevention estimate that there are about 800,000 infections each year in the U.S.
But most are not symptomatic. Of those that are, only a few thousand or so are serious enough to require treatment like Daraprim. Those cases usually are found in people with weakened immune systems, including people with HIV, AIDS and cancer. Pregnant women who are infected also need medication because the parasite can be deadly to unborn babies.
In press interviews, Martin attempted to justify the astonishing price increase for Daraprim by saying the profits would go toward research into other treatments, and into improving the existing toxoplasmosis drug. Although it was widely considered safe and effective, Daraprim was known to have serious side effects.
This explanation was not unusual. Americans had heard it many times before from other pharmaceutical executives following the same playbook, and rationalizing high drug costs.
Throughout its history, the drug industry had constantly veered between being publicly lauded for heroic innovations (like the rapid development of coronavirus vaccines, for instance) and being publicly flogged for bloodthirsty profiteering. There were compelling motives behind the profit-seeking, and it wasn’t all because of naked greed. The huge expense and risk associated with drug development set the tone.
To offer a sense of scale, drug companies globally spend about $200 billion a year on research and development (or roughly the entire net worth of the world’s richest man, Elon Musk). Meanwhile, only about 10 percent to 14 percent of drugs that even get to the clinical testing stage secure approval from the Food and Drug Administration to be sold in the U.S. And the U.S. is by far the biggest and most important market in the world for pharmaceutical companies.
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So as many as 90% of drug ideas that make it to the testing phase are dead ends. Failure happens a lot. Getting a single drug to market might take as long as 15 years and $2.6 billion in funding. But the lure of immense returns from a successful drug — a blockbuster — keeps investors sinking cash into new ventures.
The term “blockbuster” drug was coined in the 1980s to refer to treatments that could bring in $1 billion in sales in a year. There have since been dozens of blockbusters — including arthritis medication Humira, cholesterol-lowering drug Lipitor, antidepressant Prozac, a host of cancer drugs, and of course, the runaway success that was erectile dysfunction treatment Viagra.
But not every drug can be a blockbuster, and smaller pharmaceutical companies had to look for other means of achieving big profits. Enter rare diseases and orphan drugs.
Long before Martin Shkreli ever stepped into the picture, and before he was even born, executives at small pharmaceutical and biotech firms dreamed and schemed about hitting the big time by charging high prices for medications targeting serious but obscure diseases. (The presumption being that the high price tag was justified by low volume, and because insurers were normally expected to cover the cost.)
The Orphan Drug Act of 1983 offered a host of incentives for developing drugs for diseases with patient populations of less than 200,000, including grants, tax credits and seven years of exclusive marketing rights. The law created a roadmap for small drug and biotech startups to build business plans around trying to find cures to rare blood, child development and neurological disorders rather than competing directly with Pfizer, GlaxoSmithKline and other big companies.
The former CEO of Genzyme Corp., Henri Termeer (who died in 2017), is credited with being a trailblazer in the orphan drug business. Under Termeer’s leadership, Genzyme developed the one and only treatment for Gaucher disease, a rare genetic disorder which results in bruising, fatigue, anemia and an enlarged liver and speen.
Cerezyme, an injectable medication, required only 37 cents a unit to make — but the company charged $3.70 per unit for it, or roughly 10 times the production cost. In 2014 — when Genzyme brought a new Gaucher disease drug to market — the annual cost for Cerezyme was $300,000. The new product was priced at $310,250 per year.
For comparison, after Martin raised the price of Daraprim in 2015, a full course of toxoplasmosis treatment would have ordinarily cost about $112,000 to $336,000 before rebates and discounts.
In an explanation that sounded more or less the same as Martin’s for jacking up the price of Daraprim, Genzyme justified its generous profits from Cerezyme by saying it would put them to use researching treatments for other rare diseases.
Unlike Martin, Genzyme’s CEO Termeer was a far more traditional corporate executive with a limited profile outside of biotechnology communities. Within those communities, he was lionized as a “pioneer,” and not scorned for his aggressive pricing strategies.
Similarly, organic chemist and Vertex Pharmaceuticals founder Joshua Boger was painted as a daring maverick, challenging the establishment of Big Pharma — not an evil profiteer — in journalist Barry Werth’s book “The Billion-Dollar Molecule.” Boston-based Vertex, which still enjoys a stellar reputation in the industry, makes cystic fibrosis drugs which cost upwards of $300,000 per year.
Published in 1994, the book describes developing high-priced drugs as part of a bid for companies’ survival, in an arena beset by competition and periodic bursts of outrage from public interest groups.
“Without the specter of enormous profits, stocks could only go lower, investors would flee, capital would dry up, innovation would flag, companies would die,” Werth wrote. “Despite its extraordinary success, high-risk research, the presumptive justification for all those profits, was besieged, demonized, as perhaps no other time in its history.”
Orphan drugs, cancer drugs and others with super-high price tags rapidly became a major segment of pharma. More than half of the 53 drugs approved by the FDA in 2020 were aimed at treating rare diseases. These products came to be viewed as a “lifeline” for the industry as much as for patients.
Over time, companies also started experimenting with finding older drugs that had the same market characteristics as rare disease treatments (a small, limited patient population for whom the drug was the best or only option) and jacking up the price enormously.
One notable example was Ovation Pharmaceuticals’ purchase of Indocin, a drug that treats deadly heart defects in premature babies, and the drug’s only competitor, NeoProfen, in 2005 and 2006. Having a monopoly, Ovation raised the price of both drugs by about 1,300 percent to $500 per vial.
The Federal Trade Commission sued the company over the deals and resulting price hike, but remarkably the agency lost the battle in court. Years later, the agency was much more successful in its case against Martin over claims that he suppressed generic competition for Daraprim. It won a $65 million judgment against him and a ruling barring him from the industry for life.
After buying a 40-year-old, off-patent treatment for brain tumors and Hodgkin lymphoma in 2013, another small pharmaceutical firm, NextSource Biotechnology LLC, began hiking the price that drug. The treatment, lomustine, which had no generic competitor, cost $50 a pill in 2013. By 2017, NextSource was charging 1,400 percent more, or about $768 per pill.
One area where drug companies usually proceeded with caution was pricing for AIDS and HIV-related treatments. That was because AIDS and HIV-related organizations were capable of assembling arguably the loudest and most effective campaigns against high prescription costs.
In 1987, when Burroughs Wellcome Co. started selling revolutionary antiviral drug AZT — then the most expensive drug ever at $8,000 a year — it was “besigned and vilified,” and protests instantly broke out, Werth wrote in “The Billion-Dollar Molecule.” The experience was enough to give Vertex pause about researching AIDS drugs.
When Abbott Laboratories tried hiking the price of one AIDS drug, Norvir, by 400 percent to encourage more sales of another drug, Kaletra, company executives fretted and strategized extensively about how to avoid public blowback. The action still sparked government investigations and multi-million-dollar legal settlements with consumers in 2008.
In 2012, when Gilead Sciences received approval from the FDA to sell Truvada as the first-ever pre-exposure HIV prophylaxis drug, it also faced massive backlash about the cost. The list price was initially about $14,000 per year. Although insurers generally covered the drug, high copays and cost-sharing kept a lot of patients from using it.
In response to the outcry, the Centers for Medicare and Medicaid Services, Department of Labor and Department of Treasury mandated that insurers pick up the entire cost of the drug, without passing along any amount to patients.
Given the long-simmering discontent with high drug prices, which the industry viewed largely as a necessary evil for staying in business, pharmaceutical executives were seemingly always one ill-conceived step away from stirring up a flurry of ugly headlines, Congressional inquiries, government sanctions, and new regulations.
But most would not have dared to raise the price of a single drug 5,000 percent overnight, especially one as closely associated with the AIDS and HIV patient communities as Daraprim was.
There were people who tried to discourage Martin from raising the price of Daraprim, and apparently they warned him he was flirting with reputational suicide. He ignored their advice…and proved them right.
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