How one start-up caused a 4% drop in biotech stocks in a single day.

Lost in the recent Volkswagen mayhem is the carnage in Biotech based holdings. The iShares NASDAQ biotech index is down about 5% in the last week or so- much of it in a single day. Even crazier is the reason behind this precipitous fall.

A little known anti-parasitic drug called Daraprim is used to treat very rare forms of protozoal infections. It was selling at about $13 till last week. Overnight, the start-up which owns the current US rights, Turing Pharmaceuticals, decided to jack it up by 5000% to $750. Crazy drug price increases are not that uncommon, but this particular story was covered by the New York Times. Who should come across it, but democratic presidential front-runner Hillary Clinton, who tweeted her outrage about “price-gouging”. Lo-and-behold, the entire biotech industry shares took a beating that is yet to reverse.

A little back-story – the compound Pyrimethamine was discovered in the 1950’s and had been sold by GSK for about a buck for the longest time. The price was revised to (a very modest) $13 in 2010. And there it stayed until Turing (started by a former hedge fund guy) decided to buy the rights and take advantage of the fact that no-one else made it currently. Mrs. Clinton tweeted a good point.

I recently watched Turing’s CEO Martin Shkreli on CNBC. He had the whole “I-don’t-have-time-for-this while-I’m-busy-conquering-the-world” hedge fund dude air about him throughout the interview, which I guess some people find cool. What was definitely uncool was a series of unscientific answers he gave to questions about the price hike. Admittedly he was asked some pretty juvenile questions (“Do you believe in free-market capitalism?”). But he started by saying that the profits from the price hike will be used to better the existing drug – though the current version has done the job excellently for over 6 decades. He then said that his 25 person research team needs the money to work on future products – on top of the $90M they have raised in venture capital. I’m all for playing the part of expensive scientists, but there is no science in that statement!

Lastly, he compared the drug to Sovaldi – the recently released Hep C drug by Gilead. According to Mr. Shkreli, Hep C affects a lot more people, and Sovaldi costs a lot more than Daraprim. Therefore we are after his start-up for the wrong reasons as his move is not all that drastic.

Hedge fund dude knows full well how moronic that statement is. But let me spell it out for him anyway: Sovaldi is patented and developed after billions of dollars in R&D spend. Gilead is entitled to recouping those costs and working towards a profit. A 60 year old drug with no protected patents – that used to sell for a buck – involves none of those costs.

The good news? Mrs. Clinton need not worry. Asian generic manufacturers (who are the key reason for low prices of unprotected drugs), never saw an opportunity in making Daraprim and getting it through the US regulatory process at its previous low price. Any move like Turing’s will only make them jump on it and bring costs down. The new world of drug making is democratized. And oligarchs don’t do too well in a democracy.

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