By
Robert Reich
Martin Shkreli, the former hedge-fund manager turned pharmaceutical CEO who was arrested last week, has been described as a sociopath and worse.
In
reality, he’s a brasher and larger version of what others in finance and
corporate suites do all the time.
Federal
prosecutors are charging him with conning wealthy investors.
Lying
to investors is illegal, of course, but it’s perfectly normal to use hype to
lure rich investors into hedge funds. And the line between the two isn’t always
distinct.
Hedge
funds are lightly regulated on the assumption that investors are sophisticated
and can take care of themselves.
Perhaps prosecutors went after Shkreli because
they couldn’t nail him for his escapades as a pharmaceutical executive, which
were completely legal – although vile.
Shkreli
took over a company with the rights to a 62-year-old drug used to treat toxoplasmosis, a devastating parasitic infection that
can cause brain damage in babies and people withAIDS. He then promptly raised its price from $13.50 to $750 a pill.
When
the media and politicians went after him, Shkreli was defiant, saying “our shareholders expect us to make as much
as money as possible.” He said he wished he had raised the price even higher.
That was too much even for the Pharmaceutical Research and Manufacturers of America, Big Pharma’s trade group, which complained indignantly that Shkreli’s company was just an investment vehicle “masquerading” as a pharmaceutical company.
Maybe
Big Pharma doesn’t want to admit most pharmaceutical companies have become
investment vehicles. If they didn’t deliver for their investors they’d be taken
over by “activist” investors and private-equity partners who would.
The
hypocrisy is stunning. Just three years ago, Forbes Magazine praised Shkreli as one of its “30 under 30 in Finance” who was
“battling billionaires and entrenched drug industry executives.”
Last
month, Shkreli got control of a company with rights to a cheap drug used for
decades to treat Chagas’ disease in Latin America. His aim was to
get the drug approved in the United States and charge tens of thousands of
dollars for a course of treatment.
Investors
who backed Shkreli in this venture did well. The company’s share price
initially shot up from under $2 to more than $40.
While
other pharmaceutical companies don’t raise their drug prices fiftyfold in one
fell swoop, as did Shkreli, they would if they thought it would lead to fat
profits.
Most
have been increasing their prices more than 10 percent a year – still far faster than
inflation – on drugs used on common diseases like cancer, high cholesterol, and
diabetes.
This
has imposed a far bigger burden on health spending than Shkreli’s escapades,
making it much harder for Americans to pay for drugs they need. Even if they’re
insured, most people are paying out big sums in co-payments and deductibles.
Not
to mention the impact on private insurers, Medicare, state Medicaid, prisons
and the Veterans Health Administration.
And
the prices of new drugs are sky-high. Pfizer’s new one to treat advanced breast
cancer costs $9,850 a month.
According
to an analysis by the Wall Street Journal, that price
isn’t based on manufacturing or research costs.
Instead,
Pfizer set the price as high as possible without pushing doctors and insurers
toward alternative drugs.
But
don’t all profit-maximizing firms set prices as high as they can without
pushing customers toward alternatives?
Unlike
most other countries, the United States doesn’t control drug prices. It leaves
pricing up to the market.
Which
enables drug companies to charge as much as the market will bear.
So
what, exactly, did Martin Shkreli do wrong, by the standards of today’s
capitalism?
He
played the same game many others are playing on Wall Street and in corporate
suites. He was just more audacious about it.
It’s
easy to go after bad guys, much harder to go after bad systems.
Hedge
fund managers, for example, make big gains from trading on insider information.
That robs small investors who aren’t privy to the information.
But
it’s not illegal unless a trader knows the leaker was compensated – a looser
standard than in any other advanced country.
Meanwhile,
the pharmaceutical industry is making a fortune off average Americans, who are
paying more for the drugs they need than the citizens of any other advanced
country.
That’s
largely because Big Pharma has wielded its political influence to avoid cost
controls, to ban Medicare from using its bargaining clout to negotiate lower
prices, and to allow drug companies to pay the makers of generic drugs to delay
their cheaper versions.
Shkreli
may be a rotten apple. But hedge funds and the pharmaceutical industry are two
rotten systems that are costing Americans a bundle.
ROBERT
B. REICH is Chancellor’s Professor of Public Policy at the University of
California at Berkeley and Senior Fellow at the Blum Center for Developing
Economies. He served as Secretary of Labor in the Clinton administration, for
which Time Magazine named him one of the ten most effective cabinet secretaries
of the twentieth century. He has written fourteen books, including the best
sellers “Aftershock, “The Work of Nations," and"Beyond Outrage,"
and, his most recent, "Saving Capitalism." He is also a founding
editor of the American Prospect magazine, chairman of Common Cause, a member of
the American Academy of Arts and Sciences, and co-creator of the award-winning
documentary, INEQUALITY FOR ALL.
