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, heâs 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 itâs perfectly normal to use hype to lure rich investors into hedge funds. And the line between the two isnât 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 couldnât nail him for his escapades as a pharmaceutical executive, which were completely legal â 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 with AIDS. 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 âour shareholders expect us to make as much as money as possible.â 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 Pharmaâs trade group, which complained indignantly that Shkreliâs company was just an investment vehicle âmasqueradingâ as a pharmaceutical company.
Maybe Big Pharma doesnât want to admit most pharmaceutical companies have become investment vehicles. If they didnât deliver for their investors theyâd be taken over by âactivistâ investors and private-equity partners who would.
The hypocrisy is stunning. Just three years ago, Forbes Magazine praised Shkreli as one of its â30 under 30 in Financeâ who was âbattling billionaires and entrenched drug industry executives.â
Last month, Shkreli got control of a company with rights to a cheap drug used for decades to treat Chagasâ 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 companyâs share price initially shot up from under $2 to more than $40.
While other pharmaceutical companies donât 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 â still far faster than inflation â on drugs used on common diseases like cancer, high cholesterol, and diabetes.
This has imposed a far bigger burden on health spending than Shkreliâs escapades, making it much harder for Americans to pay for drugs they need. Even if theyâre 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. Pfizerâs new one to treat advanced breast cancer costs $9,850 a month.
According to an analysis by the Wall Street Journal, that price isnât based on manufacturing or research costs.
Instead, Pfizer set the price as high as possible without pushing doctors and insurers toward alternative drugs.
But donât all profit-maximizing firms set prices as high as they can without pushing customers toward alternatives?
Unlike most other countries, the United States doesnât 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 todayâs capitalism?
He played the same game many others are playing on Wall Street and in corporate suites. He was just more audacious about it.
Itâs 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 arenât privy to the information.
But itâs not illegal unless a trader knows the leaker was compensated â 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.
Thatâs 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 Reich is Chancellorâs Professor of Public Policy at the University of California at Berkeley and Senior Fellow at the Blum Center for Developing Economies. He was Secretary of Labor in the Clinton administration. Republished here under a Creative Commons License from RobertReich.org.