The Oliver Twist

This article appears in the August 2023 issue of The American Prospect magazine. Subscribe here.

About a decade ago, a hedge fund manager (who asked to remain nameless) got a call from a young short seller about a pharma company whose stock price they were both betting would fall. The company, Questcor, had been a 50-cent stock just a few years earlier, but a new CEO had raised the price of its flagship product by 1,300 percent, and now the stock was approaching 50 dollars.

The flagship drug, HP Acthar, positively reeked. The Food and Drug Administration had initially approved it in 1952, before trials were required to prove a drug’s efficacy, for numerous inflammatory diseases. It was most commonly used for treating epilepsy in infants. Yet Medicare, not known as a major insurer of infants, was spending billions of dollars on Acthar. It was being marketed to neurologists as a remedy for multiple sclerosis patients; 80 percent of the physicians who filed Medicare claims received “speaker fees” or “other perks.” Questcor’s new owners, the brothers Claudio and Paolo Cavazza, the former of whom was arrested and placed on probation for bribing the Italian health minister to put drugs he and his associates controlled on the national formulary, failed repeatedly to prove Acthar worked any better than far cheaper alternatives. For that reason, a major insurance company had dropped the drug from its formulary. And yet prescriptions for the $28,000 vials kept rolling in, the stock kept going up, and all the bearish bets were now bleeding red ink.

But the kid had a plan. He’d recently founded a biotech company of his own, which was in the final stage of negotiations to acquire the domestic distribution rights to a European drug that was almost a precise synthetic equivalent to Acthar, minus a few amino acids—so it wouldn’t be covered by any exclusivity deal. EU data suggested the drug, Synacthen, would work exactly the same as Acthar, but its owner had never applied for FDA approval. The neurological disorder was rare enough that clinical trials would be fast and cheap, thanks to federal policies that strongly privilege so-called “orphan drugs” and make them exponentially cheaper to bring to market than drugs affecting a wider population.

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To ease the process of raising cash to finance the trials, the kid had also recently merged his biotech startup into a shell company incorporated by an Atlantic City casino manager, and now it was worth close to a half-billion dollars on paper. He just needed to figure out the sweet spot, price-wise. Acthar was so crazily priced, he could undercut it by a factor of ten and still profit handsomely. But he’d do more damage to Questcor—and make more money on the short—if he gave it away for free.

It sounded like a pharma version of The Big Short, only instead of getting rich speaking truth about a tidal wave of foreclosures that was about to wipe out the global banking system, they’d get rich saving babies’ lives while immiserating a bunch of sketchy corporate executives. It was a perfect plan, with one little flaw: There were these things called securities laws. “STOP TALKING NOW,” the hedge fund manager interrupted. “You can’t be telling me any of this!”

Now that the kid had merged with the penny stock shell company, everything that came out of his mouth arguably constituted “insider information.” Depending on how the kid timed his trades, they could both be subpoenaed for the conversation they were having. “You’re running a public company now,” he gently reminded the kid. Maybe too gently.

The hedge fund manager also suspected the kid was underestimating Questcor. When he hired a private investigator to contact a rheumatologist who’d abruptly stopped prescribing Acthar, the hedge fund had found itself served with a threatening letter from the company’s high-powered attorneys with shocking alacrity. It was almost like they had spies in the shortosphere. What made the kid so sure they weren’t fixing to foil his brilliant plan?

A few months later, the day before the kid was scheduled to wire over his $16 million and assume the distribution rights to Synacthen, Questcor swooped in and bid $135 million, plus a handful of potential bonuses the kid figured would more than double the sticker price.

The kid was fucked.

Not long ago, six-figure drugs were real outliers; since 2020, roughly half of newly launched drugs cost $150,000 per year or more.

While his biotech company was superficially thriving thanks to a lucrative gallstone drug franchise it had picked up, his short position in Questcor, coupled with a host of other shorts in suspect drug companies that refused to shrivel promptly, was likely killing him. And that was a problem, because what the hedge fund manager did not know then was that the kid seemed to have launched the biotech company solely to pull himself out of a deep rabbit hole he’d dug with some of his shorts.

The kid was maybe too young to grasp, the hedge manager thought, that the cliché references “snake oil” for a reason. Selling dubious cure-all potions was the nation’s second-oldest profession; you had to choose your battles wisely. The kid’s public criticism of pharma companies had made him more enemies than he could probably comprehend; it was almost like his emotional intelligence was inversely proportional to his intellectual intelligence.

Within a year, the boy genius’s enemies had him excommunicated from the company he had founded. At which point, even the kid realized his “If you can’t beat ’em, join ’em” moment had arrived.

ABOUT 18 MONTHS AFTER QUESTCOR BEAT HIM, the kid lined up $55 million to buy a drug. He didn’t have enough time for even abbreviated clinical trials or a bare-bones sales team, so he homed in on the kind of medication pharma doesn’t make anymore, because it actually cures people of the need to buy more of it. Insurance companies likely wouldn’t mind paying for it, given that it was only generating about 10,000 prescriptions per year. The kid approached the owner, offering to pay a premium for the marketing rights in exchange for an agreement to withdraw the drug from its normal distribution channels and work exclusively through a specialty pharmacy (Walgreens), making it more of a challenge for generic drugmakers to source enough of the stuff to work on their own version.

The kid was Martin Shkreli, the vampiric Albanian janitors’ son with the smirk that launched a thousand cease and desist letters. And the day after he bought the rights to Daraprim, he raised the price from $13.50 a pill to $750.

The New York Times story a month later was almost scrupulously fair to Shkreli, quoting a hospital medical director commending his efforts to ensure rapid supply of the medication and containing the vital sentence: “Turing’s price increase is not an isolated example.” As Andrew Pollack, a veteran biotech reporter who would unfortunately accept the newspaper’s early-retirement offer the following year, explained it, the young “Pharma Bro” was merely the latest in an industry epidemic of astronomical price hikes on off-patent drugs: Rodelis Therapeutics, Marathon Pharmaceuticals, and of course Valeant Pharmaceuticals, a particular bête noire among Shkreli’s old short-seller buddies for having pulled his move on more than 100 relatively ancient medications.

It is easy to forget now that, during the Autumn of the Pharma Bro, it seemed as though the government might do something about not just Shkreli but pharma profiteering, full stop. While Donald Trump, then on the campaign trail, pilloried the “young guy” who “looks like a spoiled brat to me … a spoiled brat,” House Democrats convinced the majority Republicans to expand an inquiry into Daraprim to focus on bigger fish like Valeant. The Department of Justice indicted an Allergan executive and imprisoned a Valeant executive, and successfully convicted the CEO of a company that specialized in extortionately priced fentanyl spray and four of his executives on racketeering and conspiracy charges. DOJ exhumed old cases against Purdue Pharma and Jazz Pharmaceuticals.

Of course, they also threw the book at Martin Shkreli and sentenced him to seven years in a low-security prison—though that particular case had nothing to do with drug prices. Then in 2022, a federal judge banned him forever from the pharmaceutical industry. But by that time, it was clear that Shkreli was being used as a punching bag. The Pharmaceutical Research and Manufacturers of America (PhRMA) exploited his distinctly repellent personality to advance the narrative that he represented some sort of anathema—“More Lab Coat, Less Hoodie” was the working title of this branding campaign. But at the same time, the pharmaceutical industry was literally remaking itself in Shkreli’s image.

Shkreli’s scheme—find a drug that only an unlucky few cannot live without, and balloon the price—was already a booming growth business before he got his hands on Daraprim. But afterward, it became something more like the prevailing business model, as endemic to the drug industry as outrageous add-on fees are to airlines and ticket brokers. By the time the Pharma Bro was released from prison in 2022, the $60,000 price tag of a typical course of Shkreli’s Daraprim was about the same list price as the best-selling drug in America, AbbVie’s 20-year-old Humira.

IT’S NOT EXACTLY NEWS THAT PRESCRIPTION DRUGS cost a fortune in America. But the pace at which drug prices inflated during Shkreli’s prison sentence is so staggering that when I read some of the figures in a recent issue of The Journal of the American Medical Association, I thought they were a misprint. In 2015, the year Shkreli jacked up the price of Daraprim, the median launch price of a new or reformulated pharmaceutical was roughly $10,000 a year. The median launch price of a drug launched in 2021 was $180,000 a year; by the time I went back to fact-check that figure, it had jumped again in 2022, to $222,000. Not long ago, six-figure drugs were real outliers; since 2020, roughly half of newly launched drugs in the U.S. cost $150,000 per year or more.

The biggest drivers of this hyperinflation are so-called “orphan” drugs, obscure treatments for rare diseases believed to afflict fewer than 200,000 Americans, the very niche in which Shkreli specialized. Orphan drugs are privileged under the law via a special para-patent system housed at FDA that guarantees drugmakers seven years of marketing exclusivity of their chemical formulation, even if the drug’s patent is long expired. But they also benefit from plenty of privileges even after all the legal protections expire.

At some point, industry norms determined that orphan drugs should cost much, much more than their mass-market contemporaries. Their launch prices from 2008 to 2018 have been roughly seven times their general-population counterparts. They are also, paradoxically, much cheaper to bring to market. The clinical trials are subsidized by the government. The affected recipient populations are so small they often require as few as 30 recipients, compared with thousands in the average clinical trial. The patients are often well organized by nonprofit advocacy groups, which are simultaneously vital resources staffed by activists of utmost sincerity and cynical astroturf ventures that exploit the desperation of patients to extract free lobbying and public relations out of them and silence populist outrage about drug prices. And in marketing, there are fewer doctors to court, fewer sales representatives to pay, far less negative press to endure if the drugs injure or kill someone, and less negativity in general, thanks largely to the hope miracle cures can arouse.

This has all served to deflect mainstream attention from the extent to which rare-disease medications have swallowed the pharmaceutical industry. Orphan drugs now comprise between 35 percent and 45 percent of the new drug approvals in any given year, and are projected to be at least one-third of the overall drug development pipeline, and close to one-fifth of drug sales, period, an amazing amount for medications that by definition serve a limited patient population. That number does not include pseudo-orphans like Daraprim and HP Acthar, whose legal protections are long expired, but which by various mysterious machinations regularly wind up on the top 10 most expensive lists.

The Orphan Drug Act subsidized companies that conducted clinical trials for treatments of rare disease.

A more accurate barometer of the magnitude of the rare-disease drug bonanza is the ballooning portion of the annual American drug spend consumed by so-called “specialty” drugs, which are generally injectables, though anything above $600 a bottle is generally sold through specialty channels. In 2010, specialty drugs comprised 24 percent of pharmaceutical spend; by 2021, it was 50 percent. Amgen’s recent proposed $27.8 billion acquisition of Horizon Therapeutics, a company whose origins make Shkreli’s Turing Pharmaceuticals look like the National Institutes of Health, demonstrates that this normalization is continuing, full speed ahead.

Mick Kolassa, a Memphis blues musician and former industry consultant who wrote a book, The Strategic Pricing of Pharmaceuticals, advising executives on how to stop worrying and hike drug prices, says the magnitude of the greed that consumed the business post-Shkreli finally drove him out six years ago. “I got this call from a major drug company and they said, ‘Listen, we’ve got this drug for a very rare kind of asthma about 3,000 patients have.’ And I said, ‘OK, with 3,000 patients you have the potential for a very high price because it’s an orphan.’ And they said, ‘Well it works on regular asthma, too.’ And I told them, ‘Well then you have to sell it to the biggest market.’ And they said, ‘Oh, we already are! We just wanted to know if we can charge more for patients with the rarer form of it.’ I said, ‘Because they were unlucky enough to get an unpopular disease?’ and then politely declined to take the job. It just wasn’t the industry I entered anymore.”

Where Kolassa once advised companies to push the limits on pricing, he now believes the government should establish an American version of the United Kingdom’s National Institute for Health and Care Excellence, which decides which drugs the National Health Service will provide patients and how much it is willing to pay for them.

Sean Tu, a doctorate pharmacologist turned law professor at West Virginia University who is an expert on patent abuse and other drug industry machinations, sees pharmaceutical research as a standard example of the so-called “trolley problem,” a moral dilemma defined by the philosopher Philippa Foot as the decision that faces the operator of a derailed trolley racing down a hill. “If you go down the hill, you probably kill four people; if you pull the lever and swerve into an alley, you’ll kill the one man walking down the alley. If that’s the choice before you, you have to swerve into the alley,” said Tu. “If I’m trying to maximize social welfare, shouldn’t I spend my money on diseases that kill more people?”

MORE THAN TEN MILLION PEOPLE DIE of infectious diseases each year, but an intervention designed to correct a simple market failure has begotten an even more obvious moral failure.

Congress passed the Orphan Drug Act in 1983, following a curious grassroots lobbying campaign orchestrated almost entirely for a television show. Abbey Meyers, a mother of three children with Tourette syndrome, had found a “wonder drug” called Orap that minimized their tics, but a friend had gotten the medication confiscated by Border Patrol agents when they attempted to bring it home from Canada. Her letters to Congress inspired an entire hearing on the subject.

Maurice Klugman, producer of Quincy, M.E., a popular television show about a medical examiner played by his brother Jack, was struck by the issue, because he himself had a rare bone cancer. He decided to dramatize the predicament with a series of “true story” episodes about the struggles of patients with diseases too obscure to plant dollar signs in the heads of pharma execs. For the final episode, the producers decided to stage a fake “March on Washington” for rare-disease sufferers, and charged Meyers with rounding up some 500 extras with real-life rare diseases to star in it.

The year the law passed, Meyers formally incorporated one of its most critical legacies, the National Organization for Rare Disorders. The group launched an early CompuServe database with a grant from the Generic Pharmaceutical Industry Association. Today, NORD serves as a vital umbrella of rare-disease foundations, which in turn serve as conduits between patients, doctors, and pharmaceutical companies. The annual budget of NORD alone is $50 million.

The rare-disease dilemma exemplified a simple paradox: Because the U.S. health care system was a creature of the pursuit of profit, the big drug companies focused all their marketing and development efforts on afflictions they deemed prolific moneymakers, like cancer and heart disease, while other patients suffered hopelessly, even when perfectly effective drugs were available. No big drug company would bother ponying up the funds to submit a drug to the rigors of the FDA approval process that would only ever have a few thousand customers. Tourette sufferers suspected that companies were sitting on scores of drugs like Orap, which was produced by a Johnson & Johnson subsidiary but never marketed in America.

The Orphan Drug Act subsidized drug companies that conducted clinical trials for treatments of rare disease, and extended seven years of marketing exclusivity to any un-patentable drugs that passed the trials. The industry felt the ODA was too imprecisely worded and not generous enough. So a 1984 amendment defined “rare” as “believed to afflict fewer than 200,000 Americans,” so it could be used for promising new treatments for narcolepsy and multiple sclerosis, and a 1985 amendment extended the seven years’ exclusivity to patentable drugs.

The first documented episode of a drug company exploiting the new law to engage in what doctors deemed “needless and shameless price gouging” occurred not long thereafter.

CHARLES KRUPA/AP PHOTO

John Kapoor, who led the first company to exploit the Orphan Drug Act by jacking up the price of a drug

LYPHOMED WAS A SMALL CHICAGO DRUG MANUFACTURER backed by the pharma giant Abbott Labs and led by an enterprising chemist named John Kapoor, who claimed to have been asked by the Centers for Disease Control and Prevention to apply for an orphan-drug designation for an antimicrobial drug it produced called pentamidine. Originally developed in the 1940s as a remedy for African sleeping sickness, pentamidine was also a first-line treatment for a rare form of pneumonia called pneumocystis, which happened to be the leading cause of death in individuals infected by the AIDS virus, which was surging through American cities at the time.

Following its award of market exclusivity, LyphoMed quadrupled the price of pentamidine; by 1987, an average three-week course cost hospitals $2,000. Kapoor endured a cycle of bad press, but the same activist community who shamed him brought him a new business opportunity: a spray form of the drug administered via a nebulizer, which AIDS sufferers smuggled into the country from France and used as a preventative treatment to avoid hospitalization. Preventative treatments are generally much more profitable than hospital drugs, and LyphoMed’s aerosolized pentamidine soon fetched as much as $200 a vial, eight times its price in France. By the end of the Reagan administration, LyphoMed’s future looked bright enough that Kapoor was able to sell the company to a Japanese firm for nearly a billion dollars; he walked away with $130 million, though the Japanese company ultimately clawed back some of that money after suing him for racketeering and fraud.

It’s worth pointing out that Daraprim (pyrimethamine), a very similar drug to pentamidine that treated the second big infection associated with AIDS, toxoplasmosis, sold for as little as 18 cents a pill in 1989. Its owner, Burroughs Wellcome, was already the target of consumer boycotts over the cost of its new orphan AIDS treatment AZT. That year, the Bush administration reportedly contemplated revoking its AZT patents, using a 1910 law that had not been invoked in 30 years. While they never followed through, the AZT scandal drew attention to other pharmaceutical companies using “orphan” status as an excuse to set astronomical prices for drugs. The newly formed company Amgen’s $8,000-a-year EPO and Eli Lilly’s $10,000 growth hormone were frequent targets of criticism.

By 1990, the ODA’s co-sponsor Henry Waxman was distancing himself from the monster he had created, proposing amendments that would severely curtail the bonanza, following a fight with Amgen over its inaugural drug Epogen, which treated anemia in dialysis patients and cost $8,000 a year. But those amendments failed to pass. “I always thought one of the biggest problems with health care is that it became a business,” Waxman told the Prospect recently. “It’s no longer a noble activity.”

In 1991, the buzzy biotech firm Genzyme released the world’s most expensive drug, an enzyme replacement therapy for the genetic disorder Gaucher’s disease called Ceredase (which the company produced from human placentas) that commanded as much as $400,000 a year. Gaucher’s is suffered by somewhere between 2,500 and 6,000 Americans, many of whom complained about being constantly harassed by pushy salespersons.

Ceredase was a gravy train for more than just Genzyme: Its primary distribution partner was a Memphis company called Accredo Health Group, a spinoff of the Methodist Le Bonheur health system that specialized in delivering high-priced injectable drugs to patients, teaching them how to administer them, and haggling with their insurance companies. Accredo boasted in its 1998 prospectus that it grossed “within the range of $150,000 to $200,000 per patient” from this relationship, or close to $100 million a year during the late 1990s off Gaucher’s patients, showcasing the deal for decades to come in internal strategy documents.

Genzyme CEO Henri Termeer initially suggested Ceredase’s price would come down once manufacturing costs fell, but he kept the price basically unchanged when the company introduced Ceredase’s synthetic analogue, Cerezyme, which was far cheaper to produce. “What’s the difference between charging $200,000 or charging $175,000 to a patient? No one can afford it without insurance,” he reasoned in 2005, voicing a nihilism that would become far more common in the industry over the decade ahead.

MARTIN SHKRELI LIKELY FIRST LEARNED ABOUT GENZYME as a 17-year-old intern at Jim Cramer’s eponymous hedge fund, where he worked during the early 2000s. He gravitated toward pharma stocks, for reasons an old friend from the era interviewed by the journalist Christie Smythe couldn’t recall. “Why would you pick that industry? I have no idea. It doesn’t capture the hearts and minds like the internet companies do.” (Shkreli would not comment for this story, emailing, “I dont support journalists or ‘antitrust’ ‘law’ enforcement, sorry,” in response to an email I sent identifying myself as a journalist and fellow with an antitrust think tank.)

And yet when Shkreli nabbed an invitation to a pharma analyst’s party, “he was like a little kid at Disneyland,” the friend said. Perhaps inspired by the famous successes of the short sellers of the era, profiting off the demise of everything from Enron to mezzanine collateralized debt obligations, Shkreli gravitated toward the bearish side of the business. His first recorded success was a biotech company called Regeneron, which had spent its first seven years bringing to market a lackluster ALS drug that ended up adding three months to the life of the average patient; the company was testing out its efficacy as a weight loss drug, which didn’t work. Shkreli advised his bosses to short the stock, and they made a killing when the FDA ultimately rejected it.

While he had no formal medical training, Shkreli quickly developed a reputation within the short-seller community as one of Wall Street’s most sophisticated readers of a clinical study. Some of his early picks are still up at the investment website Seeking Alpha, where he posted takedowns of long-forgotten stocks like Neoprobe, Nektar, and MannKind.

Though nearly all his takes were substantively correct, Shkreli’s timing often wasn’t. He lost $7 million on a single trade shorting a company hyping another weight loss drug he doubted. That company ultimately filed for bankruptcy protection—seven years later, when Shkreli was living in a New York federal prison.

Horizon’s first major drug, Duexis, was a combination of two widely available drugstore pills that together cost $10 a month.

The fundamental challenge of shorting biotech firms is that their stock prices are as much a function of the strength of their lobbyists as the efficacy of their drugs. Shkreli often accompanied his trades with letters to the FDA, encouraging the agency to reject the applications of what he suspected to be poor drugs. In 2012, the watchdog group Citizens for Responsibility and Ethics in Washington wrote the SEC demanding an investigation into Shkreli’s correspondence. It’s not clear what triggered CREW’s indignation, but Shkreli was at the time close with Steve Eisman, a famous short seller CREW similarly denounced in 2010 for testifying about the predatory practices of for-profit universities while shorting the stocks of many of them. CREW’s attack turned out to have been funded by the family who founded the University of Phoenix.

Far more perilous than the CREW crew, though, was the market’s penchant for remaining irrational. Such was the case with Questcor, the company that jacked up the price of Acthar from $40 a bottle to $40,000, and stymied Shkreli’s attempt to acquire a potential competitor. In the months after the company outbid Shkreli for (and predictably shut down) Synacthen, an allied short seller, Andrew Left, decided to solve a big mystery about Acthar: what even was in the stuff. Questcor’s CEO—whose last company ran municipal airports and Pentagon facilities—was strangely cagey about this, claiming that it was harvested from the pituitary glands of pigs, but cryptically adding in investor presentations that it may contain active ingredients other than the main one listed, a hormone called corticotrophin.

Left actually retained a laboratory to examine a sample of Acthar. Astonishingly, the lab found that the drug contained no corticotrophin whatsoever, only the degraded refuse of the hormone. With the help of a former senior FDA attorney, Left compiled the findings into a 300-page report and sent it to the agency in December 2013; the agency never formally responded. (The Federal Trade Commission, for its part, did investigate and ultimately sue over Shkreli’s formal complaint about Questcor’s Synacthen acquisition, though the Pharma Bro was out on bail and awaiting trial on securities fraud charges by that point.) In 2014, the world’s largest manufacturer of pharmaceutical opioids bid $5.6 billion for Questcor, a 27 percent premium to its already inflated stock price and an utter fiasco for shorts.

PERHAPS SHKRELI’S MOST DISASTROUS BEAR CALL was Horizon Pharma, then a Deerfield, Illinois, drugmaker he pronounced “an attractive short” in 2012 after reading the fine print of an amendment to its latest SEC filing detailing the terms of a $60 million secured loan it had just taken out. The debt covenants explicitly required the company to post minimum revenue of $20 million for the quarter to avoid default; Shkreli thought Horizon was unlikely to eke out much more than $15 million. Even if it did, the threshold for the following quarter was $30 million.

Horizon had spent much of the past five years securing FDA approval for a drug called Duexis, a combination of ibuprofen and famotidine, the active ingredient in Pepcid AC. Its “inventor” had patented the drug in 2005 with the apparent idea of capitalizing on the controversy surrounding COX-2 inhibitors, a class of blockbuster anti-inflammatories that had been recently discovered to involve heightened risk of cardiac arrest. But the fact remained that the drug was a combination of two widely available drugstore pills, which together cost $10 a month at maximum.

Sales had been tepid, and various generic manufacturers had already challenged the company’s patents in advance of launching their own versions. Somehow, Horizon had amassed $60 million in debt bringing Duexis to market. A more obvious short has perhaps never existed: At one point in March 2012, so many traders were shorting Horizon’s stock that the short positions outnumbered outstanding shares of the stock nearly 5 to 1.

SUSAN WALSH/AP PHOTO

Martin Shkreli began his career short-selling biotech firms, developing a reputation as one of Wall Street’s most sophisticated readers of a clinical study.

Improbably though, the company crawled out of the hole. Management simply raised the price of Duexis, first to $500 a bottle and later to $2,500, then used the proceeds to spend $35 million buying its primary competitor, Vimovo—which combined naproxen with esomeprazole, better known as Aleve and Nexium—from its developer AstraZeneca. It hiked Vimovo’s price even higher, to $3,000 a bottle.

Critical to this business model was a Long Island mail-order pharmacy called Linden Care, recently purchased by a small private equity firm called BelHealth Investment Partners, where famous “voodoo economist” Arthur Laffer is an adviser. Linden Care employed a special team of 50 representatives solely to move Vimovo and Duexis; one lawsuit against Horizon estimated a similar “captive” mail-order pharmacy booked a $100 fee for each Horizon prescription it fulfilled. Because CVS and Walgreens were unlikely to stock Duexis or Vimovo, Horizon sales reps encouraged doctors to direct patients to Linden Care, offering to cover their co-pays as an inducement. Linden Care then filed directly with patients’ insurance companies.

Linden was skilled at fast-tracking the authorization process in part because its only other consequential client was Insys Therapeutics, an Arizona company founded by the inimitable John Kapoor, the original Martin Shkreli of the 1980s, who had followed up his sale of LyphoMed by becoming the purveyor of the world’s most expensive opioid medication. Insys Therapeutics charged between $6,000 and $40,000 for a 30-day supply of the Subsys fentanyl spray, and while the only approved indication for the drug was the so-called “breakthrough” pain of terminally ill cancer patients who are severely opioid-tolerant, it sold $330 million in 2015 to patients who overwhelmingly did not have cancer.

But Linden made a rookie mistake with its bounty from Horizon and Insys: It failed to share enough wealth with the pharmacy benefit managers (PBMs), in particular Express Scripts, which in October 2015 very publicly severed its ties with Linden Care and Philidor, a mail-order pharmacy with a dizzying maze of sham subsidiaries that was secretly controlled by Valeant, a Canadian rollup that had run the Shkreli playbook on hundreds of drugs.

ALL THROUGHOUT THAT AUTUMN OF THE PHARMA BRO, Express Scripts had taken on an unusually public role. Pharmacy benefit managers typically operate outside public view, in part because their business models are inextricable from the rise of drug prices. Ostensibly, they negotiate drug discounts on behalf of large groups of payers. In reality, the “rebates” PBMs extract, which they then skim from for their profits, are higher when a drug’s list price is higher.

Express Scripts relished any opportunity to cast itself as the solution to runaway drug prices, however, and Shkreli gave them an unprecedented opportunity. In November 2015, the company’s medical director Steve Miller gave an exclusive interview to the venerable Times reporter Pollack, sharing its plan to produce a cut-rate version of Daraprim in conjunction with a compounding pharmacy. A few days later, Miller publicly confronted Shkreli at the Forbes Healthcare Summit, provoking a fascinating series of retorts from Shkreli, who claimed that Express Scripts was happily complicit in his activities and had further been “begging for my business” just months before when he was pinning down a “closed distribution” partner. (He’d gone instead with Walgreens, whose specialty pharmacy division, incidentally, largely consisted of John Kapoor’s old company Option Care, Inc.) While Business Insider posted a dispatch on the exchange, almost no one comprehended its significance.

A Philadelphia attorney named Don Haviland was the exception. He was working on behalf of a handful of small self-insured health plans that had somehow been induced to spend millions of dollars on HP Acthar, the $40,000-a-vial pig pituitary potion. In the process, he had unearthed, inter alia, a May 2015 Express Scripts internal email that described pitching Shkreli’s Turing on an exclusive distribution deal with Express Scripts for Daraprim. The further he dug, it seemed that Express Scripts had played the pivotal role in enabling Questcor to sell billions of dollars’ worth of Acthar.

A recent study calculated that PBMs extract an astonishing 53 percent of the sales of insulin.

Like all PBMs, Express Scripts was preposterously conflicted when it came to its putative purpose of cost containment. A recent study calculated that PBMs extract an astonishing 53 percent of the sales of insulin, and that’s a situation where it’s sharing the wealth with three pharma giants. The lawsuit Express filed against Horizon over Linden’s Duexis sales alleged that the company had failed to pay $166 million in rebates, even though Horizon had only posted total sales of about $400 million up to that point.

Horizon “only” ended up paying $65 million to settle the lawsuit. From there on, it pivoted hard toward something that looked a lot like the Shkreli model. Horizon acquired a 25-year-old drug Genentech had developed in the 1980s, followed by a third-line gout medication whose clinical trials had bankrupted a New Jersey biotech, and a rare eye disease medication that Hoffman La Roche had offloaded to a private equity–owned shell company in 2011. The company paid nosebleed valuations with borrowed money for every drug, but quickly earned back the cash flow to make its interest payments. The gout drug Krystexxa went up tenfold; a new time-release version of an old treatment for the childhood kidney disorder cystinosis it picked up from a University of California, San Diego–affiliated startup went from $250,000 a year—itself so high that the startup’s CEO protested—to as much as a million dollars a year, leading the Canadian drug price ministry to demand price cuts.

While the Justice Department continued to sniff around Horizon’s $3,000 Duexis business, it declined to intervene in a whistleblower lawsuit brought by a marketing executive who alleged that Horizon had disseminated fraudulent literature to give doctors the impression that Krystexxa’s terrifying 26 percent incidence of adverse events could be easily preempted with the use of simple blood tests. The complaint included a shocking statistic: As many as a quarter of Krystexxa prescriptions in 2019 had been written by just two doctors, both of whom Horizon had paid tens of thousands of dollars to deliver speeches on the drug’s benefits. Nevertheless, the company recently said it expected Krystexxa to reach annual sales of $1.5 billion—certified blockbuster status—over the next couple of years; at almost $400,000 per year for many patients, it doesn’t take too many of them.

Accredo, the company that made all that money off of Ceredase and Cerezyme in the 1990s, now dispenses all Horizon medications. Express Scripts purchased Accredo back in 2011. There’s been no pushback by Express Scripts on pricing from Horizon or any other orphan manufacturer. “To be very frank, we are a price acceptor when it comes to ultra-orphans,” Express Script’s Miller said in 2016, referencing the subset of orphan drugs that treat diseases affecting fewer than 50,000. “There’s no competition. It’s pharma that’s putting these prices out there. There’s nothing we can do.”

But documents produced in a putative class action lawsuit against Express Scripts suggest the PBM has gone out of its way to accommodate companies that choose to adopt what Questcor termed an “orphan pricing model”—to Shkrelify their businesses, that is.

The case study of HP Acthar would certainly suggest as much. Back in 2007, when Questcor’s stock was hovering around 50 cents, Express agreed to serve as the exclusive distributor, pharmacy, and patient assistance hub of HP Acthar, in exchange for a cut of the drug’s revenues. The venture was called ASAP, or the “Acthar Support and Access Program.” Using four Express subsidiaries, ASAP fast-tracked prescriptions through prior-authorization regimes thanks to “our extensive relationships with payors,” facilitated a Questcor-subsidized payment assistance program for patients who couldn’t afford co-pays, maintained a 1-800 hotline to answer questions from patients and doctors and, most damningly, coordinated the relentless series of price hikes that launched the drug’s price tag from $40 in 2001 to more than $40,000 a vial in 2014.

WILFREDO LEE/AP PHOTO

Express Scripts, through its subsidiary Accredo, dispenses all Horizon medications, with no pushback on pricing.

Internally, ASAP was considered a spectacular success story. An internal email from a senior Express Scripts executive in 2013 described the drug as “our most profitable product” and noted that each Acthar prescription brought about $3,000 in to the company. A source familiar with the Acthar program says Express specialty pharmacy execs often mentioned the drug in the same breath as the illustrious Genzyme program of the 1990s. But there’s a critical difference between Genzyme’s drug and Questcor’s: The former delivered patients decades of relief from debilitating symptoms, while the latter, outside the population of epileptic infants, did not do much of anything a $25 cortisone shot wouldn’t do. Despite this, the vast majority of its patients were adults. At Questcor, Acthar’s dubiousness was a point of pride. “Just step back for a moment and realize what it is we are doing,” Questcor exec Steve Cartt wrote colleagues in 2011. “We are selling perhaps the most expensive drug in the industry at $5k a day in a non-orphan situation. This is very different, unheard of really before we did it.”

“Acthar is one of those vampire drugs that is just a poster child for everything wrong with the PBM industry,” says Robert Seidman, the former chief pharmacy officer for the health insurer WellPoint, who left a few years after it was swallowed by Anthem Blue Cross. “It should have been relegated to the dustbin of pharmaceutical history.” Instead, “they sent the Kens and Barbies out to detail the doctors and it flew under the radar, and began consuming so many health care dollars.” Ultimately, he says, “PBMs realized at some point that there was far more room for abuse in the orphan drug space.”

This is the other major danger of orphan drugs. While rare-disease sufferers lobby aggressively, and often successfully, for the FDA to approve treatments even in the absence of legitimate efficacy data, the more nebulous a drug’s mechanisms and benefits, the higher potential a drug stands of turning a profit in the off-label market. From the cataplexy drug (and onetime exclusive Accredo partner) Xyrem, which was offered for everything from depression to fibromyalgia, with deadly consequences, to the liver-damaging genetic disease medication Juxtapid, which was given for run-of-the-mill high cholesterol, there are litanies of orphan drugs that attempted to go Hollywood. Both of those drugs, by the way, are exclusively distributed by Express Scripts. Horizon’s newest blockbuster Tepezza appears to be one of the latest: a second-line treatment for a severe form of Graves’ disease that causes hearing loss in about 10 percent of patients, it is currently being heavily marketed on television as a salve for what seem from the commercials like bad cases of bloodshot eyes.

It’s illegal, of course, for pharmaceutical companies to promote drugs for anything other than FDA-approved uses. It’s also very common, which is why regulators and insurers installed guardrails like “prior authorization” protocols in the first place. But a whistleblower retaliation lawsuit filed by a former Mallinckrodt employee in 2018 claims the company prevented her from speaking forthrightly with insurance companies about the company’s efficacy data on off-label uses of the drug—and that a Blue Cross manager complained that representatives of Express Scripts’ Accredo were harassing the insurer about its coverage of the drug. Even more perversely, while insurance plans automatically receive rebates totaling about a quarter of the cost of brand-name drugs, the average rebate on “specialty” drugs distributed through mail-order pharmacies like Accredo is much lower and small payers may receive no rebates whatsoever on those drugs—another reason Express may have been “begging” for Shkreli’s business. “Since 2007, [Express Scripts] has built a multi-billion dollar specialty distribution business centered around pulling retail pharmacy drugs, like Acthar, off the pharmacy shelves and ‘re-launching’ them as so-called ‘specialty drugs’ by simply limiting distribution and raising the prices,” alleges Haviland’s putative class action lawsuit.

In an excellent price-fixing and conspiracy lawsuit filed earlier this year against an industry he derided as “modern gangsters,” Ohio Attorney General Dave Yost slammed Express and its major rivals as “the solution that becomes the problem.” However, the mechanisms by which they and the rest of the industry operate are so opaque that it’s still not entirely clear how they are making their money and what we should do to stop them. But after the FTC voted unanimously to commence a comprehensive study on the issue last year and asked the public to weigh in, patients flooded the system with complaints about Accredo. “I work for Cigna which owns Express Scripts and Accredo, and you would think I would get treated better than to have my cancer drug cut off due to my financial assistance running out of funds after i signed up,” wrote one patient, who added that they were forced to call Accredo four times and pay $4,500 to begin receiving their drugs again.

“It was easy for them to go after Shkreli for the same reason it was easy for everyone to go after him,” says Haviland. “He was a small player, and it was just one drug with one indication, and of course it was outrageous. But in this case he was actually a whistleblower.”

Maureen Tkacik is investigations editor at the Prospect and a senior fellow at the American Economic Liberties Project.

August 3, 2023

5:30 AM

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