You're Missing the Point on Why Martin Shkreli's Arrest Is a Good Thing

Image source: Flickr user Victor.

Karma really is a funny thing.

One moment you're the CEO of an up-and-coming microcap biotech whose shares had soared more than 1,000% in less than a month, and the next you're sitting face-to-face with federal prosecutors after being charged with two counts of conspiracy to commit securities fraud, three counts of conspiracy to commit wire fraud, and two counts of securities fraud.

Christmas comes early

For some Americans, it felt as if Christmas came early on Thursday. Martin Shkreli, dubbed "the most hated man in America" by the BBC, was removed from his Midtown Manhattan apartment in handcuffs and humbled, if just for a moment, by his arrest. Mind you, this is the same Martin Shkreli who, as head of privately held Turing Pharmaceuticals, purchased toxoplasmosis drug Daraprim in August and, in September, upped its price from $13.50 per tablet to $750 per tablet, a nearly 5,500% increase. When speaking at a Forbes summit in New York earlier this month, Shkreli said that his only regret was that he didn't raise its price even higher.

Image source: Flickr user David Goehring.

Based on the current allegations, Shkreli is believed to have, in collusion with lawyer Evan Greebel, been running multiple Ponzi schemes. As Brooklyn U.S. Attorney Robert Capers explained at a press conference following Shkreli's arrest, Shkreli is alleged to have illegally taken funds from biotech firm Retrophin , a company he was once the CEO of, and used those funds to pay off investors he owed at previous hedge funds he ran. Right now, these are only allegations, and Shkreli's guilt will be decided in federal court. However, you'd like to think that federal prosecutors wouldn't have acted unless they had substantive evidence against Shkreli.

You're thrilled for the wrong reason

But amid the cheering about Shkreli's getting a taste of karma, many people are missing the real reason behind why his arrest is a good thing.

Shkreli's arrest on Thursday had nothing whatsoever to do with the fact that Turing Pharmaceuticals raised the price of Daraprim by almost 5,500%. Nor did it relate to his plans as KaloBios Pharmaceuticals CEO to jack up the price of benznidazole, a treatment for Chagas, a type of parasitic infection most commonly seen in Central and South America. KaloBios recently acquired the license for benznidazole, and Shkreli had plans to raise its costs from a few hundred dollars for two months of treatment to perhaps as much as $100,000 for two months of treatment.

Image source: Flickr user Phil Roeder.

Instead, Shkreli's arrest indicates that the Securities and Exchange Commission is doing what it can, where it can, to keep the playing field as level as possible for investors of all sizes.

Is the SEC perfect? By no means. The SEC overlooked clues that could have led them to Bernard Madoff, arguably the orchestrator of the biggest Ponzi scheme in history, a lot sooner. But simply having a watchdog group that's responsible for policing the activity of investment firms and the actions of corporate leaders is often enough to keep people on the right side of the fence. Shkreli's high-profile arrest is another caution to would-be investing crooks that it's just a matter of time before they're caught.

Shkreli's arrest will do little to alter prescription drug pricing

One thing Shkreli's arrest won't do is fix rapidly rising prescription drug costs. According to the Milliman Medical Index, U.S. prescription drug prices spiked by 13.6% in 2015. This exceeds the average prescription drug cost growth of 9.4% per year since 2001.

What's behind rising prescription drug costs? Aside from the introduction of specialty drugs which tend to treat smaller and more focused pools of patients, there are a number of reasons.

For starters, people often forget that drug developers use the revenue generated from an approved drug to cover more than just the research and development costs tied to that drug. Drugmakers need to cover the costs of all of their failed studies in the clinical, preclinical, laboratory, and discovery settings; they need cash to cover legal fees to defend their patents; and they need money to support marketing their approved products.

Image source: Flickr user

But there's more than just R&D costs that go into drug pricing. I have a list of ten reasons your prescription drug prices are so high that you can read if you're interested in a more in-depth discussion, but I'll also summarize partially here. The United States has a high standard of living relative to other countries around the world, which means that high prescription drug prices domestically allow drug developers to dramatically cut their prices and improve access to potentially life-saving medicines in underfunded and underdeveloped markets that couldn't otherwise afford them.

The lack of universal single-payer healthcare in the U.S. is a component as well. Additionally, governments in many other rich countries negotiate drug prices down before agreeing to allow their sale. Medicare isn't allowed to do that -- thereby hamstringing our government's ability to force lower prices. Long periods of patent exclusivity also play into drug developers' hands. Typically, drug developers get 20 years of exclusivity on a compound once human trials begin. However, since it can take around a decade to complete clinical trials, most drug developers tend to pump up drug prices to get as much as they can out of their exclusivity periods.

Lastly, insurers simply don't fight back successfully against high drug costs very often. Although you will see some battles being fought over costly drugs, pharmacy-benefit managers and insurers are fully aware that excluding certain drugs from an approved list of reimbursable products could cost them members in their network. And the drug companies know this too -- thereby (I suspect) giving them the upper hand in negotiations.

Shkreli's arrest probably isn't going to do much of anything to change any of those factors. His actions at Turing have caused Congress to increase its vigilance in monitoring the validity of drug price hikes at a small handful of companies, but no prescription drug reform proposals are on the table that appear to have any chance of being signed into law at the moment.

If you want something to cheer about, send your applause in the direction of the SEC.

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The article You're Missing the Point on Why Martin Shkreli's Arrest Is a Good Thing originally appeared on

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy .

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