Privately-profitable, publicly-destructive

Martin Shkreli has been in the news recently, and he is pretty interesting. His past exemplifies a privately-profitable, publicly-destructive strategy.

Lately he’s been an executive of a private patent acquisition company. He’s described as being in pharmaceuticals but his strategy of late has not been developing new drugs but instead acquiring patents on drugs whose users have high switching costs and for which there are barriers to substitutes like generics emerging. (For more on the problems the pharma industry is facing innovating new drugs, and the substitution of innovation with an acquisition strategy, see this article on MedTronic from the Star Tribune. For a company that can innovate, see the story of Dyson’s innovation from the LATimes.)

Shkreli’s basic strategy seems to be abusing people with temporary infinite switching costs to generate cash to cover his failures. For example, he’s under investigation for his work at a previous company where he appeared to use the pharma company’s patents to generate money to pay off investors in another failed company. The pharma company acquired the maker of a low-cost drug for a chronic disease and dramatically increased the price. That drug was off patent, but Shkreli knew a generic company would take several years to get through regulatory approval processes. (See this New York Times story for the background.)

Why does he keep getting investment backing? Two reasons jump out. He has an aura of intellectual brilliance, which Wall St. believes justifies investments. See Karen Ho’s work on the hiring practices of Wall Street investment banks for evidence that an aura of intelligence can be enough to justify commitment of resources to people. Second, investors seem to think they can cash out before the switching costs disappear.

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