By Stewart Lyman
"There is not in the world a more ignoble character than the mere money-getting American, insensitive to every duty, regardless of every principle, bent only on amassing a fortune."
Remind you of anyone? Teddy Roosevelt used these words to characterize the robber barons, businessmen in the 19th and early 20th centuries who used exploitative financial strategies to accumulate great wealth. They used a variety of approaches to do this, most of which were perfectly legal but were widely considered amoral at the time. Among their favorite approaches was the practice of acquiring competitors in order to create monopolies and raise prices. Their enormous wealth gave them unprecedented political power, enabling them to influence legislation that either enhanced their own wealth or inhibited the activities of competitors.
The robber barons operated during the so-called Gilded Age and were well known for their conspicuous consumption (enormous estates, art collections, etc.). This term was popularized by economist Thorstein Veblen in his classic tome The Theory of the Leisure Class: An Economic Study of Institutions, published in 1899.
These days, the term rent seeking is used to describe those who attempt to increase their wealth by the "extraction of uncompensated value from others without making any contribution to productivity." The practice is considered by many economists to contribute significantly to the increase in income inequality in both the U.S. and other countries. Unfortunately, it's not difficult in the biopharma world to find examples of companies whose business focus is not on R&D and the creation of new drugs, but is on buying drugs and simply raising their prices. Turing Pharmaceuticals, and its CEO, Martin Shkreli, have become the poster boys for this practice.
What characteristics defined the robber barons?
They were unbelievably rich. Some of the robber barons rank among the wealthiest people of all time, even correcting for inflation. They also liked to engage in conspicuous consumption. They were graduates of the "if you've got it, flaunt it" finishing school. Many of their great estates are still around today, including G.W. Vanderbilt's Biltmore in North Carolina and John D. Rockefeller's Kykuit in Pocantico Hills, NY.
Shkreli showed off the size of his wallet and his capacity for flaunting his wealth when he purchased the only copy of an album by the legendary rap group Wu-Tang Clan for a reported $2 million. He reportedly hasn't bothered to even listen to it yet, saying, "I think I'm going to kind of save it for a rainy day." When the Wu-Tang Clan members found out about Shkreli's business practices, they decided to donate a "significant" amount of their proceeds to charity.
While many of the robber barons wound up being great philanthropists (e.g., Andrew Carnegie, Andrew Mellon), a number of them didn't give much of a hoot for the common people. Their philosophy was best exemplified by William Henry Vanderbilt, at one time the richest man in the world, who said, "The public be damned. … I don't take any stock in this silly nonsense of working for anybody's good but our own because we are not. When we make a move we do it because it is our interest to do so, not because we expect to do somebody else some good. Of course, we like to do everything possible for the benefit of humanity in general, but when we do we first see that we are benefiting ourselves."
Martin Shkreli is best known in the business world for several things: He was fired as CEO of the drug company Retrophin ($RTRX) amid charges of securities fraud. On Dec. 17 he was arrested and charged by federal prosecutors for illegally taking stock from Retrophin and using it to pay off unrelated business dealings. As CEO of Turing Pharmaceuticals, Shkreli acquired the rights to an older drug, pyrimethamine (Daraprim), and jacked up the price per pill from $13.50 to $750, leading to accusations of price gouging. When the news hit the fan, he promised to reduce the price of the drug by 10%. Mere words. Never happened. He reneged on this offer and instead made some token changes in the drug's distribution system that were only designed to make his company more money.
More recently, Shkreli bought a majority stake in KaloBios ($KBIO), a company that makes benznidazole, a drug used to treat Chagas disease (a common parasitic disease in South America). Plans were announced to raise the price of the drug more than 100-fold. If KaloBios can successfully get FDA approval for benznidazole in the U.S. (where there are very few cases each year), it will earn a sellable priority review voucher that can be used by any biopharma company to speed up the review process of any one of their drugs at the FDA. These vouchers are extremely valuable, with one selling this summer for $350 million.
The circus surrounding Shkreli raises several important questions: When the teachers in the nation's business schools discuss Shkreli and his business practices, what do they say? Is he excoriated for jacking up drug prices, or commended for figuring out such clever ways to make money? Is his purchase of KaloBios a brilliant business tactic, or is this another case of corporate exploitation? Do people in the business community view him as a modern-day robber baron, or is he simply a sharp operator exploiting opportunities that others have missed? Are his financial backers at Turing considered to be as morally bankrupt as he is, since they were well aware of his business plans, or are they considered smart investors? One thing seems clear: his arrest likely released a tidal wave of schadenfreude that will be inducing numerous smiles on the faces of his critics.
Stewart Lyman is the owner and manager of Lyman BioPharma Consulting.