Martin Shkreli, former chief executive of Turing Pharmaceuticals, departs U.S. federal court in New York in December. (Lucas Jackson/Reuters)

 

In late May of last year, Turing Pharmaceuticals, then a little-known drug company, was nearing a deal to acquire Daraprim, a 62-year-old drug that fights a rare but severe parasitic infection.

"Very good. Nice work as usual," the company's young chief executive, Martin Shkreli, wrote to the chairman of the board. "$1 bn here we come."

In August, he wrote to someone outside the company that hiking the price of the drug would bring in $375 million a year — "almost all of it is profit," which he predicted would continue for three years.

"Should be a very handsome investment for all of us," Shkreli wrote. "Let's all cross our fingers that the estimates are accurate."

By the end of that year, Shkreli would be a minor celebrity — a "pharma bro" notorious for his unapologetic drug price increase, which cast an intense spotlight on how the pharmaceutical industry operates. Turing, the company that promptly jacked up the price of a single pill of Daraprim by more than $700, would be under congressional investigation.

In the run-up to a Thursday hearing, Rep. Elijah E. Cummings (D-Md.), ranking member of the House Committee on Oversight and Government Reform, released two memos summarizing some of its key findings so far. The committee received more than 250,000 pages of documents turned over by Turing and more than 75,000 pages from Valeant Pharmaceuticals International, a second company that appears to have built its business model around significant price increases of drugs that it did not invent.

The internal documents provided by Turing provide a window into its operations, showing that the skyrocketing drug price was part of the plan from the beginning. The company anticipated that the drug's main audience — the organized community of HIV patients whose weakened immune systems make them vulnerable to infection — could pose a problem because of their expert use of advocacy. But Turing thought that this could be kept under control by making sure patients had access to the drug even as the list price shot up. Although the company has emphasized that its patient assistance programs and discounts meant that no patients paid full price for the drug, the internal documents reveal that some did experience high co-pays, with at least one patient facing a $16,830 coinsurance payment and others charged $6,000.

"We may need to make some updates based on co-pay amounts we've been seeing since the price change ... there are patients waiting now for product who have a $6,000 co-pay," Tina Ghorban, director of business analytics and consumer insights at Turing, wrote in an internal email in August.

But even as these wrinkles developed, the company continued to make significant revenue from the drug.

In mid-September, Ghorban forwarded an order that had come through for 96 bottles of Daraprim internally. Previously, a bottle of the medicine cost $1,700 — but the company had recently raised the price to $75,000. That single order nearly equaled the annual sales of the company Turing had bought the drug from, according to the report.

"Another $7.2 million," Ghorban wrote. "Pow!"

Hospitals also began to contact the company to let it know that the price increase had made it difficult to obtain drugs and some switched to another medication. Massachusetts General Hospital in Boston complained to the company in early October that after spending a week trying to obtain Daraprim for an uninsured patient, they had not had success and had received inaccurate information from the team.

"I think we are acting a little like a deer in the headlights, and need to take some action steps now," Ed Painter, head of investor relations, wrote in an email. "If a hospital like Mass General is having issues, we are in trouble."

Shkreli stressed that the company was giving away the drug to those who couldn't afford it, for example saying that the price to Medicaid was very low: "90%+ off the list price," he wrote on Twitter.

In internal communications, that compassionate tone shifted. When Shkreli was told that Medicaid patients accounted for 23 percent of the drug it was selling to Walgreens, he responded: "Nice, so only 23 percent of drug is being given away?"

As media attention continued to focus on the company, internal and public relations strategy was debated. In one email back and forth, the head of investor relations floats the idea that Turing could publicly make a commitment to reducing the price by X percent per year, in part to discourage generic competitors from coming online.

"I don't think so," Patrick Crutcher, director of business development at Turing, responded. "Think it's best we don't PR [press release] a something like that unless it's something we're willing to commit to doing."

An outside consultant brought in during October suggested that Shkreli be removed as chief executive and the drug price be slashed.

"This will force reporters to focus on the byzantine nature of drug pricing and health care and ensure the patient message gets out," the consultant wrote.

Instead, Shkreli stayed and the price did not budge.

It was not until Shkreli was charged with securities fraud counts for his actions at previous companies, unrelated to the drug price hikes, that Shkreli stepped down as chief executive.

“These new documents provide a rare, inside look at the motivations and tactics of drug company executives,” Cummings said in a statement.  “They confirm what Americans across the country have experienced firsthand for years — that many drug companies are lining their pockets at the expense of some of the most vulnerable families in our nation.  The documents show that these tactics are not limited to a few ‘bad apples,’ but are prominent throughout the industry.”

PhRMA, the trade group representing the drug industry, has distanced itself from Turing and Valeant, saying the two companies' strategies more closely resemble hedge funds than innovative pharmaceutical companies.

Turing responded to the memo with an emailed statement that said the company has invested all of its net profit and 60 percent of its revenue in research and development. The price was set by the value of the medication, the small patient population and the need to fund research for the development of new therapies.

The hearing will be a strange line-up. J. Michael Pearson, the chief executive of Valeant Pharmaceuticals, one of the companies that has drawn scrutiny for raising drug prices, has been out on medical leave since December  after being hospitalized with severe pneumonia. So Howard Schiller, the interim chief executive, will attend in his stead.

The documents provided by Valeant reveal that the company bought two heart drugs administered at hospitals with the intention of increasing the price.

"This would have to be a price play," Steven Sembler, the general manager of neurology for Valeant wrote in an email in late 2014, as the company was considering buying the two drugs, Nitropress and Isuprel.

In doing their due diligence, company leaders examined the likelihood they could make price adjustments. A consultant said that the drugs were so old and "have been in the system for so long that reviews are practically rubber stamped," suggesting the price increases wouldn't cause a problem.

An email sent to Andrew Davis, the senior vice president for business development, noted that the price projections "are leading to high gross margins (more than 99 percent)." He replied, "I'm not surprised they are extremely profitable."

Ultimately, the company tripled the price of Nitropress and increased the price of Isuprel by more than 500 percent.

The star of the hearing is inarguably Shkreli. The company's current chief commercial officer, Nancy Retzlaff, will be there, but Shkreli, who has become a celebrity of sorts for his carefully cultivated social media personality, is the one people will be interested in — although his presence may be disappointing, since he has vowed to take the Fifth Amendment.

Shkreli has a garrulous social media stream and never seemed to shy away from saying what he thinks before, but if there's one thing the last few months have revealed about him, it's that he loves surprising people.

"They can ask me any question,"  Shkreli told Bloomberg News.  "‘What color is the sky?’ 'Fifth Amendment.' "