[Senate Hearing 114-849] [From the U.S. Government Publishing Office] S. Hrg. 114-849 SUDDEN PRICE SPIKES IN DECADES-OLD PRESCRIPTION DRUGS: INSIDE THE MONOPOLY BUSINESS MODEL ======================================================================= HEARING BEFORE THE SPECIAL COMMITTEE ON AGING UNITED STATES SENATE ONE HUNDRED FOURTEENTH CONGRESS SECOND SESSION __________ WASHINGTON, DC __________ MARCH 17, 2016 __________ Serial No. 114-21 Printed for the use of the Special Committee on Aging [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] Available via the World Wide Web: http://www.govinfo.gov ___________ U.S. GOVERNMENT PUBLISHING OFFICE 48-226 PDF WASHINGTON : 2022 SPECIAL COMMITTEE ON AGING SUSAN M. COLLINS, Maine, Chairman ORRIN G. HATCH, Utah CLAIRE McCASKILL, Missouri MARK KIRK, Illinois BILL NELSON, Florida JEFF FLAKE, Arizona ROBERT P. CASEY, JR., Pennsylvania TIM SCOTT, South Carolina SHELDON WHITEHOUSE, Rhode Island BOB CORKER, Tennessee KIRSTEN E. GILLIBRAND, New York DEAN HELLER, Nevada RICHARD BLUMENTHAL, Connecticut TOM COTTON, Arkansas JOE DONNELLY, Indiana DAVID PERDUE, Georgia ELIZABETH WARREN, Massachusetts THOM TILLIS, North Carolina TIM KAINE, Virginia BEN SASSE, Nebraska ---------- Priscilla Hanley, Majority Staff Director Derron Parks, Minority Staff Director C O N T E N T S ---------- Page Opening Statement of Senator Susan M. Collins, Chairman.......... 1 Opening Statement of Senator Claire McCaskill, Ranking Member.... 2 PANEL OF WITNESSES PANEL I Howard Dorfman, Former Senior Vice President and General Counsel, Turing Pharmaceuticals......................................... 5 Adaora Adimora, M.D., Professor of Medicine and Epidemiology, University of North Carolina at Chapel Hill, and Immediate Past Chair, HIV Medicine Association................................ 7 Shannon and Joshua Weston, Parents of an infant born with Toxoplasmosis.................................................. 9 PANEL II Ronald Tilles, Interim Chief Executive Officer, and Chairman of the Board, Turing Pharmaceuticals.............................. 22 Michael Smith, Co-Founder and Senior Director of Business Development, Turing Pharmaceuticals............................ 23 Dan Wichman, Partner and Analyst, Broadfin Capital............... 25 APPENDIX Prepared Witness Statements Howard Dorfman, Former Senior Vice President and General Counsel, Turing Pharmaceuticals......................................... 63 Adaora Adimora, M.D., Professor of Medicine and Epidemiology, University of North Carolina at Chapel Hill, and Immediate Past Chair, HIV Medicine Association................................ 67 Shannon and Joshua Weston, Parents of an infant born with Toxoplasmosis.................................................. 73 Ronald Tilles, Interim Chief Executive Officer, and Chairman of the Board, Turing Pharmaceuticals.............................. 76 Michael Smith, Co-Founder and Senior Director of Business Development, Turing Pharmaceuticals............................ 79 Dan Wichman, Partner and Analyst, Broadfin Capital............... 83 Statements for the Record Special Committee on Aging Hearing Transcripts................... 89 SUDDEN PRICE SPIKES IN DECADES-OLD PRESCRIPTION DRUGS: INSIDE THE MONOPOLY BUSINESS MODEL ---------- THURSDAY, MARCH 17, 2016 U.S. Senate, Special Committee on Aging, Washington, DC. The Committee met, pursuant to notice, at 9:46 a.m., Room 562, Dirksen Senate Office Building, Hon. Susan M. Collins, Chairman of the Committee, presiding. Present: Senators Collins, Heller, Tillis, McCaskill, Casey, Whitehouse, Gillibrand, Blumenthal, Donnelly, Warren, and Kaine. OPENING STATEMENT OF SENATOR SUSAN M. COLLINS, CHAIRMAN The Chairman. The Committee will come to order. Good morning. Last fall, this Committee launched a bipartisan investigation into the sudden enormous price increases on decades-old prescription drugs. Our focus today is on two companies in particular that operate more like hedge funds than they do traditional pharmaceutical companies, Turing Pharmaceuticals and Retrophin. The Committee has investigated how these companies devised their business models to impose and protect egregious price hikes and what policy changes are needed to respond to their actions. These two hedge fund pharmaceuticals were both founded by Martin Shkreli, Retrophin in 2011 and Turing in 2014. Our investigation has determined that these companies follow a business model with five key elements. I now submit for the record, committee exhibits containing more than a thousand pages of documents that reveal the structure of this business model, which operates like this. First, the companies identify an older brand name sole source drug. They choose a drug whose patents have long since expired, which already has the field to itself, and which faces no generic competitor. Second, they make sure that the drug is the gold standard for the condition it treats so that health care providers cannot prescribe a substitute treatment or will not feel comfortable in doing so. Third, they select a drug that serves a small patient population. Fewer patients means less scrutiny and less incentive for a competitor to enter the market. Fourth, they put the drug in a closed distribution system or specialty pharmacy, which gives the companies a monopoly. This move is key because it keeps generic companies from competing in the market because they cannot get the supply required to conduct bioequivalence tests needed for FDA approval. As Martin Shkreli told potential investors in 2014, ``We do not sell Retrophin products to generic companies.'' Fifth, they accomplish their ultimate goal. Soon after Mr. Shkreli made that statement in reference to the drug Thiola, which is used to treat a rare kidney disease, that drug began generating revenue at a level 5,000 percent higher than it had produced for its previous owner. In October 2014, Mr. Shkreli left Retrophin to start Turing, bringing with him former Retrophin consultant Ron Tilles, who is now Turing's CEO and Chairman of the Board. Edwin Urrutia, now Turing's CFO, Michael Smith, now Turing's Senior Director of Business Development, and most important, the business model I have described. Applying this business model, they acquired a drug called Daraprim, which is the gold standard medicine used to treat toxoplasmosis. Daraprim has been on the market since 1953, yet it has no generic competitor. When they acquired Daraprim, it was selling for about $13.50 per pill. Turing raised the price of this low-profile but very important medicine to $750 per pill, which amounted to $75,000 per bottle. Today, we will hear the sworn testimony of three company insiders, one who protested the business model and lost his job because of it, and two who stayed and helped to carry out the greedy scheme that caused hardship for patients and providers, prevented generic competition, and enriched the companies. These decisions made by these companies did not play out in a vacuum. We will hear from the mother of an infant diagnosed with congenital toxoplasmosis who, as a result of Turing's actions, faced a price tag of $28,000 a month for the medicine she needed to save her infant daughter from death or a lifetime of disability. An infectious disease expert will also provide her perspective on the impact of this price manipulation scheme on real people who are struggling to get access to drugs they cannot afford and desperately need. Whether or not these companies' actions are legal, their behavior harms patients, represents a market failure, and is a call to action. I now welcome the statement of our Ranking Member, Senator Claire McCaskill, who has done tremendous work on this important issue. It was, in fact, Senator McCaskill who first pointed out to me the enormous price spike for the drug Daraprim, so thank you very much, Senator McCaskill, for your leadership on this important issue. OPENING STATEMENT OF SENATOR CLAIRE McCASKILL, RANKING MEMBER Senator McCaskill. Thank you, Senator Collins, and as always, it is a pleasure to work in partnership with you to try to find public policy that can impact this practice without doing unintended harm to those companies that are out there doing the R&D to find the innovative cures that are so important to our country. I am glad to be here today for the second of our series of hearings about these rising drug prices. The first hearing the Aging Committee held on this topic examined the market forces that have allowed some companies to raise prices for their products by hundreds or thousands of percentage points. As we hear from witnesses back in December, the drugs that are being targeted for these astounding overnight price increases are, as the Chairman pointed out, usually drugs that are off-patent, that have a small enough patient population that most generic companies feel that it is not worth the cost or the time to develop a generic competitor. This gives the company that owns the right to this drug a de facto monopoly, and let me emphasize here that it is the government's business to go after monopolies, especially those that are harming the public. The patient populations for these drugs are so small, they are not only unattractive to potential generic manufacturers, but they are also usually not an important or even a desirable part of a traditional pharmaceutical company's portfolio, so traditional pharmaceutical companies are generally happy to sell these drugs to others when a good offer comes along. This makes these drugs and, therefore, the patients that need them, vulnerable to being poached by a relatively new breed of pharmaceutical companies whose primary goal is to reap extraordinary profits and who do not hesitate to pursue that goal despite risking patient access and people's lives. In our effort to understand why these cases were occurring with more frequency and how we could prevent these cases in the future, the Committee subpoenaed tens of thousands of documents last year from four companies that had engaged in this type of egregious price gouging: Valeant, Rodelis, Retrophin, and Turing, and in the documents, we found written detailed confirmation of how this new breed of pharmaceutical company operates. As Senator Collins has already described, the documents we subpoenaed showed that these companies are very good at targeting drugs whose prices can be manipulated without generic competition, and they have a whole master plan for how they go about doing so systematically. Something I also found to be interesting in my review of the documents was that not only are some of these companies being run by people who are not traditional pharmaceutical executives, such as Martin Shkreli and Michael Pearson, but that investors seem to be playing an outsized role in these companies. Some of these relationships are well known. For example, Valeant Pharmaceuticals maintains some of the most visible relationships with hedge funds who invest in the company, even going so far as placing people from those hedge funds on their board of directors. Valeant has worked closely with these hedge funds in the past few years to acquire companies, slash their R&D budgets--let me emphasize that, slash their R&D budgets-- and then raise the price of their drugs to fund additional acquisitions and boost its stock price. I look forward to examining Valeant in more depth at our next hearing in this investigation. The documents reviewed by the Committee make clear that the chief rationale for the extraordinary increase in price is just profit. The documents are explicit. In one e-mail, Martin Shkreli tells his investors that a certain drug will be, ``an annuity for some time.'' Or, and I quote, ``a $100 million present to investors.'' The documents also make clear that the investors are working hand-in-hand with the companies to drive up prices. In one e-mail to Mr. Shkreli, Dan Wichman, one of Mr. Shkreli's investors, who will testify on the second panel, said, and I quote, ``Funny that other small companies still have not realized that you can raise price aggressively and nobody gets too upset.'' Well, I am here to tell you today that I am upset, so make no mistake. Every single for-profit pharmaceutical company aims to increase earnings and create value for shareholders. There is nothing wrong with that, but traditionally, pharmaceutical companies have gone after profit by attempting to run a profitable pharmaceutical business, bolstered by research and development with the aim of creating new, innovative treatments. With the companies at issue in this investigation, however, that is not what we are seeing. What we are seeing in these cases is Wall Street having turned its eye to health care, because it has realized that here is a commodity, a product with a stubbornly inelastic demand. Yet, there is a price for everything at which people will no longer be able to pay for a product, but what some investors have realized, much to their delight, is that they can keep squeezing the very people who depend on these drugs in order to line their own pockets. The notion that these costs are passed on, the hearing that brought this to my attention, an executive from Valeant was there and I tried to pin him down on the outrageous increase in a drug that was being provided to hospitals and he said, well, the patients are not paying for that. That is being passed on. They want to somehow float this notion that these costs are going to insurance companies or hospitals. Make no mistake about it. Every greedy grab of profit in this space lands in the lap of hard-working Americans, every single dime. This is disturbing. If this new breed of pharmaceutical companies is where our pharmaceutical industry is headed, we are in big trouble. Let me speak very clearly to the folks who believe they can participate in this sick game of acquiring drugs, raising prices to ridiculous heights, and sticking it to patients. We will not stop this investigation until we find the right prescription of public policy to end this practice. We will shed light on this practice and we will work together to stop it for the sake of patients, the health care system, and American taxpayers, and I am very proud to be working with Senator Collins and all of my colleagues on this Committee to do so. I thank the witnesses for being here today and I look forward to their testimony. The Chairman. Thank you very much, Senator McCaskill. We now will turn to our first panel of witnesses. First, we will hear from Mr. Howard Dorfman, the former Senior Vice President and General Counsel of Turing. I would note for the record that Mr. Dorfman's testimony has been compelled by subpoena, but I also want to note for the record his cooperation and sense of civic duty in coming forward to tell his insider story. I am also very pleased to turn to our esteemed colleague, Senator Tillis, to introduce the next two witnesses, who both hail from his home State of North Carolina. Senator Tillis. Senator Tillis. Thank you, Chairman Collins and Ranking Member McCaskill. Thank you for holding this important hearing. It is one that literally touches home. I want to welcome three North Carolinians, and I regret that you are here under these circumstances, however. First is Dr. Adimora. Dr. Adimora is a leader in infectious disease and HIV. She served as Chair of the HIV Medicine Association from 2014 to 2015. Dr. Adimora treats patients who desperately need Daraprim and has firsthand experience with access problems. The patients that she treats are among the sickest of the sick, in end-stage AIDS and struggling with chronic and significant socio-economic burdens. Mr. and Mrs. Weston are the parents of a baby born with toxoplasmosis, both, I think, in May 2015, and physicians do not know why Mrs. Weston got the disease, but their baby got the disease in utero. Mrs. Weston found out that without treatment, the symptoms will develop permanent brain damage. She was told that it would cost $28,000 a month for treatment, and Mrs. Weston is unable to afford the cost, as are so many other people suffering, so again, I welcome you here. I regret it is under these circumstances, and I look forward to your testimony. The Chairman. Thank you very much, Senator Tillis. This is an investigation, we will be swearing in all of the witnesses today, so I would ask that you all stand and raise your right hand as I administer the oath. Pursuant to Committee Rule II-4, do you swear that the testimony that you will give to the Committee will be the truth, the whole truth, and nothing but the truth, so help you God? Mr. Dorfman. I do. Dr. Adimora. I do. Mrs. Weston. I do. Mr. Weston. I do. Thank you very much. Let the record reflect that all of the witnesses answered in the affirmative. Mr. Dorfman, we will start with your testimony. STATEMENT OF HOWARD DORFMAN, FORMER SENIOR VICE PRESIDENT AND GENERAL COUNSEL, TURING PHARMACEUTICALS Mr. Dorfman. Chairman Collins, Ranking Member McCaskill, and members of the Committee, before answering the Committee's questions, I would like to provide context by sharing my thoughts on the current discussions involving the cost of prescription pharmaceuticals and price increases by companies in the pharmaceutical industry. The opinions I provide for the Committee today are my own and do not represent those of any present or former clients I have counseled during my 30 years as an in-house and outside counsel in the pharmaceutical industry. In addition, due to issues of attorney-client privilege, I must respectfully confine myself to my role as an executive and advisor on business and commercial issues. From December 2014 until August 13, 2015, I served as Senior Vice President and General Counsel at Turing Pharmaceuticals, a privately held Swiss-based pharmaceutical company with offices in New York City. At a point during 2015, Turing acquired the manufacturing and commercialization rights to a drug, Daraprim, from Impax laboratories. Daraprim, the trade name for pyrimethamine, has been available since 1953 and is considered the gold standard and cornerstone in the treatment of toxoplasmosis, a parasitic disease that can be fatal in patient populations with compromised immune systems, as is the case with HIV and cancer. In the opinion of most experts, there is no adequate substitute drug for Daraprim. Thankfully, relatively few patients suffer from toxoplasmosis. Drugs with such limited target populations developed by pharmaceutical companies, so-called orphan drugs, may be priced higher than drugs with a wider potential market, largely attributable to research costs and limited revenue expectations. Congress has provided incentives to pharmaceutical manufacturers to bring such drugs to market. Following its acquisition of Daraprim in August 2015, Turing announced an increase in the price of the drug from approximately $13.50 per pill to $750 per pill. Turing implemented another change by entering into an exclusive distribution agreement with a specialty pharmacy company, limiting access to the drug through the specialty distributor. I and other members of the Turing management committee repeatedly raised business objections to these and other aspects of the commercialization plans under discussion in anticipation of the finalization of the acquisition of Daraprim based on our belief that the proposed actions would have a severely negative impact on Turing's business and reputation. The objections against an immediate and precipitous rise in the cost of Daraprim included concern as to the availability of the drug for a particularly vulnerable and vocal HIV and AIDS patient community, the lack of any formal study protocol in place to implement research to develop a next generation toxoplasmosis therapy, and the failure to develop any of the educational materials for health care professionals and patients, all of which were announced as components of the rationale for an immediate price increase. We made these objections during management committee meetings attended by senior executives of the company, including the Chief Commercial Officer, Nancy Retzlaff. In fact, Ms. Retzlaff shared these concerns in these meetings and in discussions with other members of the management committee in private discussions. Pharmaceutical companies typically justify drug price increases, especially large rises, by expenditures such as research and development of the drug itself or a substitute, clinical trial work, or educational programs. In this instance, the price increase as contemplated and subsequently announced was not justified by any such actual expenditures. Having referenced the retention of a specialty pharmacy for commercialization purposes upon the acquisition of Daraprim, it is important to understand how that closed distribution system plays a role in maximizing the returns on a drug such as Daraprim. Specialty pharmacies can play a crucial role in a program often mandated by the FDA to manage and minimize risks to patients. By creating a direct relationship between the specialty pharmacy and the patient and caregiver, the pharmaceutical manufacturer can have access to critical adverse event information in real time as well as the ability to monitor utilization and maximize expedited delivery, but such a system can reduce, if not eliminate, the opportunity for a second generic entrant to obtain sufficient quantities of the drug in order to complete the necessary bioequivalence studies required for FDA approval. In the case of Daraprim, the retention of a new specialty pharmacy distributor to carry on a closed distribution system was considered an integral part of the company's desire to block a generic entrant for at least 3 years. The issue of drug prices continues to generate considerable debate. One reason for drug pricing can be found in the costs inherent in the development of a prescription drug from lab through regulatory approval. In November 2014, the Tufts Center for the Study of Drug Development estimated that cost to be $2.6 billion, a 145 percent increase directed for inflation over the estimates made in 2003. Whether one accepts that figure at face value, it is recognized that drug development is a costly venture with significant risks of failure before final marketing approval is granted. What has fueled the recent debate to a large extent has not been price increases per se, but increases in prices for drugs developed decades earlier without either patent protection or the expenses of clinical trials. In closing, I hope I have been able to provide useful background and context into the activities under examination by this Committee. Thank you very much. The Chairman. Thank you for your testimony. Dr. Adimora, welcome. STATEMENT OF ADAORA ADIMORA, M.D., PROFESSOR OF MEDICINE AND EPIDEMIOLOGY, UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL, AND IMMEDIATE PAST CHAIR, HIV MEDICINE ASSOCIATION Dr. Adimora. Good morning and thank you for asking me to testify. My name is Ada Adimora and I am an infectious diseases physician, research, and Professor of Medicine at the University of North Carolina at Chapel Hill. I have been caring for patients with HIV infection for many years. Today, I am testifying as the Immediate Past Chair of the HIV Medicine Association, or HIVMA, to describe how doctors, patients, and the health care system are affected by the price increase for pyrimethamine, which is marketed as Daraprim. HIVMA is a national organization within the Infectious Diseases Society of America, or IDSA, that represents more than 5,000 physicians, researchers, and other medical providers devoted to HIV medicine. Last September, Dr. Stephen Calderwood, the population of IDSA at the time, and I, as the then-Chair of HIVMA, wrote to Turing Pharmaceuticals urging them to reconsider their pricing of Daraprim. The letter followed many reports from infectious diseases, or ID, providers that Daraprim's price had increased dramatically overnight and noted concerns about the effect the increase was having on toxoplasmosis treatment. An Ohio pharmacy had reported that Daraprim's price had increased from $13.50 per pill to $750 per pill, an increase of 5,000 percent. Turing's response to the letter indicated that they were committed to ensuring access for all patients who need it, but the access issues continued, and HIVMA, the IDSA, and the Pediatric Infectious Diseases Society wrote in late December to the new Turing CEO, Ron Tilles, about these continued patient access problems, urging him to return Daraprim's price to $13.50 per pill. To date, Turing has not responded to that request. Toxoplasmosis, or toxo, is a parasitic infection that mainly affects people with compromised immune systems, like people with AIDS, people on cancer therapy, or people after transplantation, and pregnant women and their newborns because their immune system cannot control the infection, and if not effectively treated, severe toxoplasmosis can cause brain and organ damage, blindness, or death. Now, my own experience with toxo is in treating patients with AIDS, who typically present with brain abscesses that can cause seizures, strokes, coma, or death. Patients are typically treated and stabilized in the hospital with Daraprim and other drugs and then discharged with a prescription to continue it at home. They usually require at least 8 months of treatment, many longer. The FDA first approved Daraprim in 1953 and it has long been a stable in toxo treatment. The Federal AIDS treatment guidelines recommend it as the standard, but in October 2015, these guidelines had to be updated to suggest alternative treatments because when Daraprim is unavailable. Turing's purchase of Daraprim in August 2015 disrupted toxo treatment in the U.S. Patients have suffered treatment interruptions or delays. They have been prescribed alternative therapies or gone without treatment entirely. Providers have devoted hours and hours or even days to getting the drug. Some institutions have been forced to extend their line of credit due to the $75,000 price tag for one bottle. Patients with health insurance are sometimes now subject to prior authorizations requiring many appeals, which can take 2 weeks or more to process. Patients without health insurance also face significant delays, sometimes for weeks or even months while they wait for assistance through Turing's Patient Assistance Program, if they are eligible for assistance through the program at all. Since HIVMA began monitoring access issues in October, we have gotten at least 50 case reports from providers about the trouble they have had accessing, or treating toxoplasmosis, rather. Just last month, a physician reported through the Daraprim access blog that a patient's hospital stay was extended for 7 days because of problems getting Daraprim on an outpatient basis through Turing's Patient Assistance Program. The patient finally got a 1-month's supply through the state's AIDS Drug Assistance Program, even though the drug had been removed from the program's formulary, but even at the 50 percent discounted rate that Turing now offers certain hospitals, the cost was $1,125 per day for the initial regimen. Before August 2015, the cost for this would have been around $41 per day. Many providers and institutions have turned to alternative treatment options, like compounding the drug in the hospital pharmacy, prescribing Bactrim, or contracting with a compounding pharmacy. We have turned to alternative solutions because we have to to treat a serious illness that really does require immediate attention, but we should not have to when there is a 60-year- old drug to treat toxo that is still available in other developed countries for as little as $2.50 per pill or less, so on behalf of infectious diseases and HIV providers, thank you for your continued attention to unjustified price increases for older off-patent prescription drugs. My comments focused on Daraprim, but other older drugs, as you know, have been priced out of reach. We urgently need policies to promote rational drug pricing that ensure patient access without complex assistance programs or making unreasonable demands on health care providers. Our patients' lives, our Nation's public health, and the sustainability of our health care system depend on preventing future market failures like this one. The Chairman. Thank you very much for your excellent and informative testimony. Mrs. Weston, we are so grateful for your being here today to share your personal story. STATEMENT OF SHANNON AND JOSHUA WESTON, PARENTS OF AN INFANT BORN WITH TOXOPLASMOSIS Mrs. Weston. Good morning and thank you, Chairman Collins, Ranking Member McCaskill, and distinguished members of the Committee, for inviting me to testify today. My name is Shannon Weston, and my husband, Joshua, and I met 14 years ago today. In the 3-years that followed, we bought a house, we got married, and we began dreaming about our future family. After I began graduate school, we began trying to begin that family that we had begun dreaming about earlier. Over the past 7 years, we have suffered many losses, and before I became pregnant with Isla. The pregnancy was ideal. There were no complications, and all of my ultrasounds revealed that nothing was abnormal. Isla was born on May 14, 2015, at 10:51 in the morning, and she was seven pounds, six ounces, and had a head full of hair. Her birth was eventful and resulted in delivery by emergency cesarian section, and as a result, she did not transition well to lung breathing on her own. After nearly a week in NICU, we were finally able to take our amazingly perfect, beautiful little daughter home. Those first weeks, we thoroughly enjoyed everything about her and stressed, as new parents did, and survived on no sleep whatsoever. When Isla was 2 months old, however, she developed a pocket of fluid between her skull and her scalp. A CT scan revealed pinpoint calcifications in her brain and her pediatrician said that it could have come from a number of things, and so we investigated further. A TORCH titer test, which is used to screen for certain infections, was ordered, and we were sent to a pediatric ophthalmologist and neurologist. The TORCH tests, the first one came back negative. The ophthalmologist found a macular scar in her left eye, but the cause of this was unknown at the time. The MRI revealed normal brain function and that the fluid pocket was the result of bruising from her being stuck in the birth canal, but we could not tell because of all that hair. After the results, a second TORCH titer test was ordered. The result this time was positive for the IGg antibody for toxoplasmosis. We were then referred to Dr. Belhorn, a pediatric infectious disease specialist at UNC Chapel Hill, who had previously treated diseases with congenital toxoplasmosis. To confirm the diagnosis, more tests had to be run. On August 6, 2015, we were admitted to the UNC Hospital, where they drew blood, performed a spinal tap on my 2-month-old daughter, and made arrangements to see an eye specialist there at the University. The lab asked for repeated blood draws from Isla and from me, and at the beginning of October, we finally received the conclusive results that Isla was diagnosed with congenital toxoplasmosis. Dr. Belhorn called me immediately when he received those results and we spent many hours going over what this meant, how we needed to proceed, and what the outcomes could be, but most of the time on that phone call, he spent consoling me, as my head was spinning a million miles a minute and every worst case scenario was playing out. Dr. Belhorn assured me that at the time Isla was asymptomatic except for the macular scar, and that as long as we began treating immediately, she would remain so. He then ordered the Daraprim and sulfadiazine that is the treatment for congenital toxoplasmosis and said it would be compounded in 2 days. The very morning we were to go for her treatment, we learned that our insurance company denied the medication that Isla needed. Dr. Belhorn resubmitted to the insurance company. They denied again, and then I filed a formal appeal. The insurance company wrote to Dr. Belhorn that the reason for the denial was that there was no medical necessity for the treatment, since she was HIV-negative. Dr. Belhorn continued to fight with the insurance company over the necessity of treatment with Daraprim and I looked into any way I could think of to come up with the almost $360,000 that I was going to need for a year of treatment. I knew that as long as she was treated before symptoms set in, that she would remain asymptomatic, and I was hopeless and depressed at the thought of what would happen to my perfect little girl if I was not able to help her. I truly felt that I had failed her in every possible way. I spent days researching Daraprim to see if there was another way to obtain it, and just as I was at a complete loss for what to do, Dr. Belhorn called to say that the UNC pharmacy had enough to cover Isla's treatment for at least that year and that they would compound it into the serum she needed and all for an affordable price. Since November 6, we have been purchasing the medication from the UNC pharmacy directly. I am so grateful that we found this option before it was too late for her, because I do not know what I would have done, and I thank you again and look forward to your questions. The Chairman. Thank you very much. Your story is absolutely heart wrenching and it helps us to put a human face on what has happened with this immoral price increase and the impact on your precious daughter, so thank you so much for being here. Mr. Dorfman, I would like to have Slide 17 put up. You have been in the pharmaceutical industry for some 30 years, and you have testified to the business model that was being used and the enormous price increase that Turing was going to apply. In this slide, Turing predicts that Daraprim will skyrocket from $4.9 million in annual revenue to possibly over $500 million. In your view, was there any justification for that kind of increase, based on your many years in the industry? Mr. Dorfman. Let me respond. It is an excellent question. As I said in my opening statement, and as I have believed throughout my career in the pharmaceutical industry, there are legitimate reasons for which prices are raised for pharmaceuticals, and usually the rationale for that increase has been fairly consistent over time among the various pharmaceutical companies, and that is the extraordinary costs of research, clinical trial programs, and those expenses for a company to determine whether a drug can be submitted to and then subsequently approved by the FDA remain a very important component of how a pharmaceutical company would go about undertaking to examine how best to price the drug, bearing in mind the returns that are required to reinvest in research and also to have the drug available for the required patient population. As I said before, during the discussions that were held among the management committee, there was a number of people, including myself and others, that voiced a very strong position that Daraprim did not fit that classic model, that the research had already been done on that drug and there were no clinical trial programs in place at that time to ostensibly develop what was purported to be a safer alternative to Daraprim, sort of a second generation drug for toxoplasmosis. The Chairman. What you are saying, in a nutshell, I believe, is no, because Turing did not bear the R&D costs of the clinical trials, the lab development for developing Daraprim, is that correct? Mr. Dorfman. That is correct. The Chairman. When you expressed your reservations and your concerns, did you believe that the price increase was unethical? Mr. Dorfman. I believe that the price increase was certainly unjustified. The Chairman. What was the reaction from Mr. Shkreli when you expressed that concern? Mr. Dorfman. Mr. Shkreli told me that he was the most knowledgeable person with regard to this business model, that I was seriously misinformed with regard to my concerns----- The Chairman. Despite your 30 years in the industry. Mr. Dorfman. Despite my 30 years in the industry, correct, and basically, said that no one cares about price increases. The Chairman. How soon after you expressed your opposition to this price increase were you fired? Mr. Dorfman. Certainly less than a month. I would say approximately two--two to 3 weeks. The Chairman. Were you fired for cause? Mr. Dorfman. No. I was told I was not fired for cause. The Chairman. Thank you. Dr. Adimora, prior to Turing's acquisition of Daraprim, did you or your colleagues at the HIV Medical Association ever have any serious issues with promptly obtaining Daraprim at an affordable price? Dr. Adimora. No. Actually, if you allow me to expand----- The Chairman. Yes. Dr. Adimora [continuing]. the process was quite seamless. I mean, people are admitted, typically with toxoplasmosis of the brain, if they have HIV infection, they are quite ill, admitted through the emergency room, desperately ill, as I said. Providers spend their time taking care of the patient. Once they recognize what infection the patient has, they used to simply just write the order, if they are inpatients, for pyrimethamine and sulfadiazine and leucovorin, start treating the patients, and then when they are ready to be discharged, write them a prescription, which was easily filled, for pyrimethamine, sulfadiazine, and leucovorin, or rather, Daraprim, I should say, and the other medicines. It was a seamless process. The Chairman. Everything changed once Turing bought Daraprim. Dr. Adimora. Absolutely. The Chairman. Thank you. Senator McCaskill. Senator McCaskill. Mr. Dorfman, at the meeting when you tried to explain to this genius, Martin Shkreli, or however you say his name, did you use the phrase that we use in Missouri, that pigs get fed and hogs get slaughtered? Did that phrase come up during that meeting? Mr. Dorfman. I am sorry, I forgot to use that phrase. Senator McCaskill. Yes. Well, that is what we are really talking about here. We are talking about unbridled, immoral greed, is what we are talking about. Dr. Adimora, when you sent letters to Turing, what were the dates that you sent letters to Turing? While Mr. Shkreli was trying to tell the world that they did not want to limit access to patients, what were the dates that you sent letters to Turing raising concerns about the inability of Mrs. Weston and Joshua and Isla in terms of getting this drug at a price that was anywhere in the realm of reasonable? Dr. Adimora. The first letter was sent sometime in September. I do not recall the exact date, but we can look it up and get back to you, and they responded, as I said, with the sort of general response, but did not actually do anything. We continued to have access problems and so a second letter was written sometime in December. Senator McCaskill. Did you hear back from the December letter? Dr. Adimora. They really did not respond in any meaningful way, no. Senator McCaskill. I kind of want to get this timeline, and Mrs. Weston, you all began really looking for this drug for Isla in October, is that correct? Mrs. Weston. Yes, ma'am. Senator McCaskill. Just to give context here, I think it is important to point out that Martin Shkreli bought the Wu-Tang recording in December for $2 million, just to give context to what is really going on here. Now, has anyone from Turing reached out to you at all, Dr. Adimora, about accessibility of this drug, ever? Has anyone called you at the HIV Medical Association to say, we are concerned that perhaps our price increase are killing people? Dr. Adimora. No. Senator McCaskill. Okay. Let me ask you this question about the closed system. I am interested in this. Can you give us your opinion, Dr. Adimora, about why a closed distribution, what the real reason is for Turing to have a closed distribution on this drug. What is gained by having a closed distribution? What competitive advantage is actually at play here? Dr. Adimora. Well, I have to say, you know, the exact mechanics of drug pricing and drug availability are somewhat beyond my field of expertise, but what it would appear to me is that the reason for having a closed distribution is to make sure that you can maintain a monopoly to enable you to get the price that you want without allowing others to make the drug available for a lower price. Senator McCaskill. Do you believe that, from a public policy standpoint, if the FDA changed--if there was a change in the law and public policy that would allow generics competing with orphan drugs to go to the front of the line at the FDA, do you believe that would have a positive impact on this type of immoral seeking of a monopoly in order to cause the Weston family the kind of grief that they have endured? Dr. Adimora. I believe that it would help in general, because, as I believe you noted in your opening remarks, there are several drugs for which this is a problem, so I do believe it would help. I would say, though, that in these situations such as this one, where there is a very small market, there is--there is also some concern that the likelihood that other companies would come in and offer lower prices that would be competitive enough to afford access to patients remains a concern because of the small market. I think the idea is, in general, a good one, but I think that, you know, we have to---- Senator McCaskill. We have two problems. Dr. Adimora. Yes. There are two problems. Senator McCaskill. One is how long it takes to get a competing generic to the market, and the other is that while the demand is inelastic, it is also not large because it is not a widely prescribed drug. Dr. Adimora. Yes, exactly. I am not certain that that alone, although helpful, I am not certain that that alone would solve this particular problem. Senator McCaskill. We need to figure out how to get at protecting families like the Weston family when there is a life saving drug, but not a lot of people need it, because they are the ones that are really getting it stuck to them. Dr. Adimora. Exactly. Senator McCaskill. Was there discussion, Mr. Dorfman, very briefly, during your time there, about the closed distribution model and the competitive advantages of using a closed distribution model? Mr. Dorfman. Yes, there were. The fact that we were talking about a drug for a relatively small but extremely needy and vulnerable patient population and having a closed distribution system would certainly assist in delaying or preventing a generic from entering the market because of the unavailability of the drug to do the necessary bioequivalence testing, so it was all part and parcel of the overall marketing plan, as it were, for this drug. Senator McCaskill. Thank you. Thank you, Madam Chair. The Chairman. Thank you. Senator Tillis. Senator Tillis. Thank you, Madam Chair. Mr. and Mrs. Weston, how is baby Isla doing? Mrs. Weston. She is doing amazingly well. Senator Tillis. Good. Mrs. Weston. She is beautiful. She is perfect, so far with the treatment, she has been developing normally, and knock on wood, it is going to continue that way. Senator Tillis. What is the cost of the medicine that is being compounded by the folks at UNC? Mrs. Weston. Forty-eight dollars a month. Senator Tillis. Forty-eight dollars a month, and the alternative was how much? Mrs. Weston. Twenty-eight-thousand dollars a month. Senator Tillis. Okay. I meant to mention that I am thankful that we have a very successful prosecutor on this panel, because I think that I am looking forward to the questions of the second panel. I am glad to have you back in any event, but particularly because of that. Dr. Adimora, can you give me some sense of the other costs and consequences of these drug increases in terms of hospital stays and other sorts of treatments that you may have to take if the access to the drug is not possible because of the cost. Dr. Adimora. In terms of accessing the drug, here are some of the--here is some of what happens. Instead of simply writing the prescription and attending to the patient, what has been happening in many cases is that there is treatment delay, which can be quite problematic, because a lot of these patients are desperately ill. Senator Tillis. Which would lead to even more costly complications? Dr. Adimora. Yes, or death of the patient, or disability, so there is--there are delays in treatment. In addition, there have also been incredible amounts--there has been incredible waste of time on the part of physicians, nurses, social workers, and other people, but a lot of times, this comes down to physician time, as Mrs. Weston described Dr. Belhorn's having spent hours and, in fact, days haggling with insurance companies to--in an attempt to get the medication, so it is an incredible waste of time that we simply do not have, is one thing. The other thing is that it is important to remember that in many of these cases, particularly the patients with AIDS, but in others, as well, they have a brain abscess. You know, they have a brain deficit, so talking to insurance companies and patient assistance programs is not something that they can necessarily do, but a lot of times that is required. If you are going to get a drug via a patient assistance program, you or your delegate has to interact with them and they cannot necessarily. In addition, many of the patients are poor. I mean, that is how they--some of them have gotten AIDS. They are not necessarily able to negotiate the situation, and finally, this has opened up, all of these complications have opened up new opportunities for things to fall through the cracks. For example, again, some of the patients are not--that we have seen cases where, and I actually saw--was aware of one of these situations where the patient, again, being not the most knowledgeable and having had perhaps some cognitive impairment, had been getting the medicine and then suddenly was not able to get it and did not say anything, came back not having had the drug for 3 weeks. Senator Tillis. The reason I asked that question is I think we are all angry about the practice that we have before the Committee today, but every single taxpayer and every single person who has insurance should be angry, too, because, just as you said, to provide the treatment, this company, Turing, and their leaders have decided they are going to pick the pockets of everybody. They are going to put you in a devastating situation in terms of caring for your baby, but they are also raising the cost of insurance, and to the extent that insurance does not cover it, they are raising the cost to the taxpayers for their own greed, and they need to be held accountable to that. I think they are predators. I think they are parasites. I think we have got to try and do something about it. The one thing that I did want to--and, Mr. Dorfman, my time is short. I had a question for you, but I want to thank you for your testimony and being here. I think it is important to understand the distinction between pharmaceutical companies that are taking risks and incurring the costs to do what they need to do. UNC Chapel Hill has a great collaboration with pharmaceutical companies. They are creating life saving treatments. There is a cost associated with that that they have to recover so that, ultimately, those can become lower-cost drugs, more pervasive drugs over time. We need to make it very clear, this is not an attack on the pharmaceutical industry, the good actors. This is a focus on the bad actors, that if there is any possible way legally we can put them out of business, I think we should. Thank you, Madam Chair. The Chairman. Thank you very much, Senator Tillis. Senator Casey. Senator Casey. Madam Chairman, thank you very much, and we welcome back Senator McCaskill and we are grateful she is with us. I said to Senator McCaskill yesterday--she said she was going to be out for 3 weeks, and I said, Claire, it has only been two, but apparently it was three. She moves pretty fast, so we are grateful she is here, and I want to see that second panel, as well. It will be interesting today to hear her questions and to have heard the ones she presented. I wanted to nail down, or reiterate is probably a better word, something that, Mr. Dorfman, you said for the record in your statement, and you gave a summary in answer to one of the questions. On page two, you outlined the objections you and others had, but then on page three, you said the following, and I am quoting at the top of the page. ``Pharmaceutical companies typically justify drug price increases, especially large rises, by expenditures such as research and development of the drug itself or a substitute, clinical trial work, or educational programs.'' Then you say, ``In this instance, the price increase as contemplated and subsequently announced was not justified by any such actual expenditure.'' I think it is important for the record to note that that statement is there. It was not justified. That is not some random opinion by some observer in the marketplace. That is the testimony of someone who saw it up close. Not justified. Probably an understatement, an understatement for what I would argue is a pattern of conduct which is pure evil, the incarnation of evil. In our system, once in a while, that is a subject of accountability and even prosecution and punishment. I hope to God that happens in this case, because no family, no family should ever have to go through what the Weston family went through. You did everything right, and a group of people in this company did everything wrong, so we will watch and support efforts to hold them accountable. I do not want to lose sight of what you have ahead of you. The good news is you have a perfect daughter and that is good news, but I want to get a sense of what you are up against next in terms of what is ahead of you. Just one specific question about--I want to make sure I pronounce this right--with regard to the treatment with pyrimethamine, how long will she need that part of the treatment? Mrs. Weston. The treatment for congenital toxoplasmosis is 1 year with pyrimethamine, sulfadiazine, and leucovorin, and then there is monitoring monthly after that to ensure reactivation has not occurred. They would monitor the macular scar, and that is how they would look for reactivation, but it is a minimum of 1 year. Senator Casey. One year. Thank you, and then, in addition to that, in terms of an additional source of the drug, do you have something lined up, or what is your sense of what comes next on that part of the challenge you have? Mrs. Weston. Well, UNC has told us that we have the year at the price they are able to provide it, which is so much better than the $28,000 a month. After that, we are not sure. Senator Casey. Mm-hmm. Mrs. Weston. Either something changes, my insurance company decides to cover it, or I do not know, unfortunately, and that is the scary part. Senator Casey. Well, you should not have that uncertainty, especially in light of what you have already been through. I hope the folks out there are listening. I hope someone out there thinks about working to take away that uncertainty, but we are really grateful you are here today, because as Senator Collins said, especially when matters are complicated, it is very--it is one thing to listen to expertise, and we had some of that here, thankfully, for people that have lived with these issues for a long period of time. Nothing replaces or nothing can substitute for your own personal witness, and we appreciate you doing this. I know it is not easy. You could have just dealt with the challenge that you had privately, and you did not. Your testimony is going to help other people and we appreciate you being here. Thank you. Mrs. Weston. I hope it does. Thank you. The Chairman. Thank you, Senator Casey. Senator Donnelly. Senator Donnelly. Thank you, Madam Chair. I am so angry I can hardly see straight when I think of this and I think of what you went through with your child and the decisions made by people to cause this pain to other human beings, to little kids who have done nothing, but hope for a good life. You know, I am not someone who wears my religion on my sleeve, but there is a saying in the Bible that what you do for others, you do for Me, and I just do not know how you can do these things. It takes my breath away to think about this kid suffering so you can buy a $2 million album. Something is so wrong with that, to buy a bigger house in the Hamptons, to buy a fancier car, to have more trinkets and baubles, and at the same time that is going on, there are kids who are suffering. There are people who are struggling. You know, I think of my dear friend Claire. Can you imagine if, when she got sick, they said the problem is, your medicine is unaffordable because people need to have more cash to throw out windows. We are sorry. You know, I think of my Dad, who had a small business and worked hard every single day, and he always told me what you have are your name and you take care of your customers and you treat them right, and if you treat them right, then we will have a--we will be able to keep this business going. That is how Americans do it. To have such staggering greed, it just takes my breath away. You were talking about brain abscesses that are caused when you do not have this. Tell us a little bit more about that. Dr. Adimora. This is--first, I actually would like to revise, if you do not mind, a response that I made about communications between HIVMA and Turing, and again, I do not know the exact timeline, but there were some additional communications. For example, there was a meeting which I believe occurred in November between some Turing officials and other HIVMA-related--HIVMA members and some related organizations. We also sent additional letters, so there was a meeting in November. There were--and they did--I believe they may have laid out some plans for patient assistance, but my point is actually that nothing meaningfully changed in any way. I mean, we continue to get these reports of incredible problems accessing the drugs. I just wanted to make that clear. In the interest of accuracy, there were additional communications, but nothing meaningfully really changed. In response to your question, Senator Donnelly, so, typically, when I see patients with toxoplasmosis, this is typically people in the advanced stages of AIDS with very compromised immune systems. They often come in complaining of fever and headache and they have pretty big neurologic deficits a lot of the times. They may have strokes, and they may actually come in with coma or go on to have coma. I mean, people can die from this. They truly are desperately ill. They come in, are admitted to the emergency room, or admitted from the emergency room to the inpatient side of the hospital and they require urgent emergent care, and they need their medicines quickly. They need them right away. The expectation is that the order is written for the medicines and they get it within, you know, an hour. There is not that the care providers spend time talking to insurance--arguing with insurance companies and patient assistance programs, and the patients themselves typically are not capable of doing that because they are sick. Some of them are comatose, and they may not have a delegate to help them. This can be--actually, it is interesting, because despite the fact that people can be so desperately ill with this infection, it also can be quite gratifying to treat if you treat it quickly and properly. I personally have seen many people turn completely around in a matter of weeks or less after proper treatment. Senator Donnelly. I am just about out of time. I just want to ask Mr. Dorfman, why did Turing executives not heed your warning? Mr. Dorfman. I guess you would have to ask them---- Senator Donnelly. Oh, we plan to. Mr. Dorfman. I do not know, you know, my--I gave my best business and judgment, knowing how some of these activities would certainly impact the availability of drugs for patient populations that were in desperate need. These plans were not in place, and I can only--I really cannot surmise as to why. I think you have said it before, but I really had no knowledge about why. Senator Donnelly. Well, to the Westons, we are so glad your child is doing well, and the fact of the matter is, for anybody who is listening, it could be our kid. It could be any kid. I just--I just--it breaks your heart to think that this kind of thing has been going on. Thank you. The Chairman. Thank you. Senator Gillibrand. Senator Gillibrand. Thank you, Madam Chairwoman. I want to continue the line of questioning that Senator Donnelly started. Mr. Dorfman, in your written testimony, you said that when Turing Pharmaceuticals was establishing its pricing plan for the drug Daraprim, you raised concerns internally about the proposed price increase. Turing decided to increase the price anyway, from approximately $13.50 per pill to $750 per pill, more than a 5,000 percent price increase. What were the specific concerns that you raised? What did you actually say? Do you believe that Turing was justified in implementing the price increase? Why or why not? Mr. Dorfman. Well, the crux of my objections were based on the fact that, number one, we were dealing with a very, very vulnerable patient population. As the Doctor has testified, the AIDS community, HIV community, is extremely vulnerable where a drug of this type is--basically can be a life or death decision. The question of whether the drug would be available, both in terms of timing through distribution and also whether it would be available because of pricing, those were all objections that I and other senior members of the management committee expressed over--over and over again to the company. I am sorry, there was another part of your question. Senator Gillibrand. Do you believe they had any justification for disregarding your legal advice? Mr. Dorfman. Well, I really cannot answer legal advice because of patient--excuse me, of client confidentiality. I can give you it based on a business decision, and that is, again, the pharmaceutical industry has historically worked toward measuring price increases with the expenditures that were needed to establish clinical trial programs and to be able to fund a drug from, basically from the lab through FDA approval. These were not expenses or costs that Turing had incurred because of the nature of the drug. It had been approved in 1953, and the rationale for that kind of price increases, or any major price increase, was lacking. Senator Gillibrand. Thank you. Thank you. The Chairman. Senator Whitehouse. Senator Whitehouse. Thank you, Chairman Collins. Let me first thank you and our Ranking Member, Senator McCaskill, for holding a bipartisan hearing on this very, very important question. Let me welcome Senator McCaskill back. This is the first time we have encountered one another in a hearing since her return. My observation is that there are very clear market failures that allow for the extortionate type of pricing strategies that the Westons have so well described the consequences of, and you mentioned some of the conditions, Mr. Dorfman, in your testimony that provide this opportunity for mischievous, monopolistic, or extortionate pricing strategies. I guess my question is two-fold. One, are there signals that would allow this Committee to make a principled distinction between market-based competitive behavior and the kind of, again, mischievous, monopolistic, or extortionate pricing that we now see in many quadrants of the pharmaceutical industry? If so, what are they? The reason I ask that question is that I think there is very broad concern, and I would suggest bipartisan concern, that we not interfere into any kind of pricing strategies that would interfere with the fair and free operation of the market. If the market is absolutely failed, then I think there actually is a role for Congress to step in and put some kind of price limits on so that the type of catastrophes that are befalling families like the Westons do not take place. What is your advice to us? Is there, in fact, a way to separate out the bad conduct from regular market conduct, and what would those red flags of warning be that we should look for? Mr. Dorfman. Well, I definitely think we have to recognize, as you said, and as has been stated earlier, and particularly by even Dr. Adimora extraordinarily well, what we do not want to do is disrupt a process that has allowed the United States to really be the major developer, researcher, for life-saving therapies around the world and the United States. We are also dealing, of course, in this instance and others with patient-- with relatively small patient populations. That seems to be one of the ways in which these kind of activities are identified, because of the relatively small patient population. I think the work of this Committee in terms of investigating has probably gone a long way. I do not agree necessarily that we are dealing with a rogue industry. What we are dealing with---- Senator Whitehouse. No, rogues within an industry. Mr. Dorfman. We are dealing with---- Senator Whitehouse. It is not the industry. It is not rogue at all. Mr. Dorfman [continuing]. right, and we--what we need to do is we need to clearly identify conduct that we deem to be inappropriate. I have been in the industry for over 30 years. I am extraordinarily proud and feel privileged to have been working in an industry that has dedicated itself to alleviating pain, alleviating disease, and treating patients such as the beautiful daughter that we have seen here today. As far as signals are concerned, I think one of the things that we need to do is look at, number one, how the generic approval system has been working. Are there undue delays? Is it a funding issue? Things of that nature. Basically, making sure that we pay particularly close attention to orphan diseases and provide the kind of in-depth support that allows these drugs to be developed, yet would seek to limit inappropriate conduct by certain individuals. Senator Whitehouse. Mr. Dorfman, I have 5 seconds remaining. I would simply ask you, if you might, take my question as a question for the record, and if you wish to supplement your answer in any way, I think it would be helpful to the Committee to get a thoughtful written element from you about the elements that would be good signals that there is a market failure and there is rogue pricing going on. Thank you. Mr. Dorfman. Well, I certainly think that signals, at least early warning signs, can certainly be---- Senator Whitehouse. For the record means you write it down and send it later, and I do not---- Mr. Dorfman. Oh, I am sorry. Senator Whitehouse. Sorry. The Chairman. Thank you. Mr. Dorfman. I will do so. Thank you. The Chairman. Thank you very much. I want to thank this panel for appearing today. To the Westons, I want you to know that we will continue to do everything we can to make sure that your daughter gets what she needs, but also to make sure that other families do not go through the absolutely horrific experience that you endured. During this hearing, I had my staff do a little calculation on what the cost of Daraprim for your daughter would have been prior to Turing getting the--buying the drug and what it was going to be for you if UNC had not come to your rescue. The answer is, it would have been $6,500 for the treatment of your daughter for the year. After Daraprim was bought by Turing, it would have been $360,000. I know, and from our previous staff discussions with you, that prior to your working out the agreement with UNC, that you were looking at remortgaging your house, emptying out your retirement plan, doing everything you could to save your precious daughter, and this is just outrageous, and I want to thank you so much for coming forward. Dr. Adimora, I want to thank you, as well. You were able to describe and to show conclusively that this problem has real consequences for the patients that you treat and that prior to the change in ownership, as you put it, the system was seamless. Mr. Dorfman, I want to thank you for your courage in telling us exactly what happened and for standing up in the first place and raising questions about this completely unwarranted price increase. I know that it most likely cost you your job, but there is going to be a special place in heaven for you, I can tell you that. Mr. Dorfman. Thank you very much. The Chairman. I very much appreciate your coming forward. Senator Kaine, we were just about to go to the next panel, but if you would like to ask a quick question---- Senator Kaine. No. Thank you, Madam Chair. I want to hear the next panel and ask them questions. The Chairman. Great. Thank you very much. This panel is excused and we appreciate your help. For the interest and knowledge of my colleagues, for this next panel, we will do 10-minute rounds of questions, and while they are setting up, I am going to introduce the witnesses. First, we will hear the testimony from Ronald Tilles, who was Chairman of the Board during the acquisition of and price increase of Daraprim by Turing. He has served as CEO of the company since Martin Shkreli resigned after being indicted for fraud. Next, we will hear from Michael Smith, the Senior Director of Business Development and co-founder of Turing, who helped find Daraprim as a potential acquisition, and finally, we will hear from Dan Wichman of Broadfin Capital, an investor in Retrophin. Pursuant to the Committee rules, I would ask that you all stand so that you could be sworn in. Please raise your right hand as I administer the oath. Do you swear that the testimony you are about to give will be the truth, the whole truth, and nothing but the truth, so help you God? Mr. Tilles. I do. Mr. Smith. I do. Mr. Wichman. I do. The Chairman. Let the record reflect that all the witnesses answered in the affirmative. Mr. Tilles, we will begin with your testimony. STATEMENT OF RONALD TILLES, INTERIM CHIEF EXECUTIVE OFFICER, AND CHAIRMAN OF THE BOARD, TURING PHARMACEUTICALS Mr. Tilles. Thank you. Thank you, Chairman Collins, Ranking Member McCaskill, and distinguished members of the Committee. I am pleased to appear here today at your request. I am currently the Interim CEO of Turing Pharmaceuticals and Chairman of its Board. In my role as Interim CEO, my primary responsibilities include interacting with investors, addressing issues related to the expenses of the company, and identifying new strategic opportunities. Our focus remains to invest in treatments for neglected diseases and to dedicate our revenues to research and development. I oversee the day-to-day affairs of Turing with the assistance of Turing's senior management, including Nancy Retzlaff, who is Turing's Chief Commercial Officer, and Dr. Eliseo Salinas, who is Turing's President of R&D. I graduated from Middlebury College and received an M.B.A. from Columbia University in 1985. I have held various positions at investment firms over the years, but in the last years, I have focused primarily on startups. One of those startups was Retrophin, in which I was an early investor. I became a consultant to the company with a focus on business development. I then joined Turing, another startup, with a similar focus on acquisition strategy and raising capital. I was the point of contact with Impax during the negotiation for the purchase of Daraprim. I did not, however, develop the valuation models for the deal or analyze the issues relating to the pricing of the drug. As the Committee is aware, Martin Shkreli resigned as the CEO of Turing last year. He has also since resigned from Turing's board. He continues to be a shareholder in the company, but is not involved in any of the day-to-day operations of the business. When I took over as Interim CEO, I assumed leadership of a company facing critical challenges. I am working diligently to address those challenges in concert with our executive team. Please note that we are still a young startup trying to address the issues that face all new companies. My responsibilities as the Interim CEO do not include primary oversight of drug pricing, marketing, sales, or distribution. I do not manage patient access matters or our Patient Assistance Programs, which Turing funds in order to ensure that all patients who need Daraprim can get the drug regardless of their ability to pay. For those matters, I rely on our talented and experienced commercial team under the able leadership of Nancy Retzlaff, who also happens to be in the room today. She has more than 20 years of experience in the pharmaceutical industry, including positions as a senior marketing officer for several large established drug companies. It is important to note that we have put in place discounts and support programs that mean ability to pay should never be a barrier to access. For example, two-thirds of Daraprim sales are to Federal and State health programs that pay Turing one penny per pill. In addition, we fund a Patient Assistance Program that offers Daraprim free of charge to qualified uninsured patients. For insured patients, we provide copay support and fund a bridge program to provide a supply of Daraprim at no charge if there are delays in coverage. I also think it is important for the Committee to understand that the large majority of Daraprim sales by volume are not through the specialty distribution channel. For that larger volume, Turing cannot control access by generic competitors. I am not a scientist or medical researcher. Although I do not personally manage Turing's R&D programs, I want to ensure that Turing is fulfilling its commitment to invest in research into new and improved drug treatments, including for toxoplasmosis. For this effort, I rely on Dr. Eliseo Salinas, who is a highly respected and an experienced life science executive and medical researcher. I have complete confidence in the experience and expertise of my team. All of us at Turing are working hard to uphold Turing's commitments to research and development and to patient access, even while we face critical challenges from the negative publicity surrounding our former CEO. The revenues generated by Daraprim are primarily used to fund R&D. I am very proud of our R&D efforts and my team's commitment to innovation. We are pleased to cooperate with the Committee's inquiry and I look forward to answering your questions. Thank you, Madam Chairman. The Chairman. Mr. Smith. STATEMENT OF MICHAEL SMITH, CO-FOUNDER AND SENIOR DIRECTOR OF BUSINESS DEVELOPMENT, TURING PHARMACEUTICALS Mr. Smith. Thank you, Chairman Collins, Ranking Member McCaskill, and distinguished members of the Committee. I am pleased to appear here today at the request of the Committee. I am a part of the business development team at Turing Pharmaceuticals, where my responsibilities include looking at opportunities to acquire undervalued products. I am not a part of the company's executive leadership team. I received my undergraduate degree in finance from Fordham University. I started my career as an investment analyst. Later, I joined the business development group at Retrophin. I left Retrophin in 2014 to join Turing. I reported to Martin Shkreli before he resigned as CEO of turing in December 2015. Turing acquired the rights to market Daraprim in the U.S. from Impax in August 2015. We view Daraprim as an undervalued treatment for a serious but neglected disease, toxoplasmosis. This acquisition gave us an important foothold in the treatment of toxoplasmosis and a revenue stream to fund research into new drug treatments. I care deeply about the patients who take our drug and Turing is committed to innovation in life-saving medicines. This conviction comes from personal experience. Both my Mom and my sister are cancer survivors. My father suffered from heart disease and received a quadruple bypass 4 months before he was killed in the September 11 attacks, so as much as anyone, I appreciate the need for pharmaceutical innovation. At Turing, we are focused at developing improved treatment for toxoplasmosis. Someday, we hope to market a worldwide next generation toxoplasmosis drug that could have the potential for greater return on our investment. I did not participate directly in the negotiations with Impax regarding the purchase of Daraprim. My responsibilities focus on certain aspects of due diligence for the transaction, including with respect to potential generic entry and collecting information from physicians about the use of Daraprim. My responsibilities for business development do not include aspects of Turing business that I understand are most relevant to the issues under review. I do not have responsibility for drug pricing, marketing, sales, market access, or distribution. I am not familiar with the procedures for drug payment and invoicing or with the prices paid for our drug Daraprim by various entities and different distribution channels, including government entities, hospitals, commercial insurance companies, or pharmacy benefit managers. I do not deal with any patient access issues, and I have no involvement in administering the extensive Patient Assistance Programs that Turing funds in order to ensure that all patients who need Daraprim get the drug regardless of their ability to pay. All of these matters are handled by our experienced commercial team, headed up by Nancy Retzlaff, Turing's Chief Commercial Officer. I am also not a scientist and I am not responsible for Turing's R&D programs. The person most familiar with those programs is Dr. Eliseo Salinas, Turing's President of Research and Development. I know the Committee is focused on certain portions of business development documents and presentations prepared for investors. Some of these documents reflect a suggestion that restricted distribution of branded drugs can make it difficult for generic companies to obtain product samples for bioequivalence testing. Others emphasize that drugs tend to be more valuable if they are the preferred treatment for a serious disease with small patient populations and there is no good substitute. These are assumptions that investors sometimes make when evaluating a potential investment, but they do not always reflect the realities of the commercial marketplace. Every drug is different. For example, I understand from our commercial team that Turing supplies Daraprim in large volumes to some institutional purchasers. We do not have the ability to control access to this product once it goes through those channels, and Turing inherited the distribution system put in place by our prior owner of Daraprim. Since then, we have improved distribution to expand access to the drug. I also understand that there are real benefits to patients and physicians from the specialty pharmacy services offered for Daraprim users. The people at Turing most familiar with these commercial realities are Nancy Retzlaff and her team. For my part, while I am not responsible for the commercial side of the business, I do believe that these factors are critical to the Committee's understanding of the actual market dynamics involved in drug pricing and patient access. Thank you, Madam Chairman. The Chairman. Mr. Wichman. STATEMENT OF DAN WICHMAN, PARTNER AND ANALYST, BROADFIN CAPITAL Mr. Wichman. Chairman Collins, Ranking Member McCaskill, and members of the Senate Special Committee on Aging, thank you for inviting me to speak before you this morning. My name is Dan Wichman and I am a partner and analyst at Broadfin Capital, an investor and provider of capital to health care companies. Broadfin was founded in 2005 and invests in a wide variety of mostly small and mid-sized companies in the pharmaceutical, biotech, and medical technology sectors, including companies developing new cancer drugs, companies that are focused on treatments for rare diseases, companies that manufacture generic drugs, and many others. We invest in both companies that are turning a profit and those whose only currency is a good idea. We trade infrequently and often invest in companies over multiple years. I personally have been working in health care finance for 17 years and I have seen dozens and dozens of companies in which we have invested develop innovative, often life-saving products that change lives. My own philosophy, consistent with Broadfin's, is that the best and most profitable investments are companies developing products and services that will add significant value to the health care sector for many years. We believe that the most successful pharmaceutical companies are those that maximize opportunities by focusing on patients, for example, investing in improved doctor and patient access and education, investing in better drug formulations, and investing in measures to improve patient compliance with treatment. Although we seek to foster good relationships with many of the companies we invest in, we are passive investors and have never had an activist role with any company in the pharmaceutical space. We believe our job is to ask fundamental due diligence questions, fact check management's representations, and observe and analyze results. While companies sometimes bounce ideas off of us and ask for our opinions, they make the final decision. Retrophin is one of more than 100 life science investments in Broadfin's current portfolio. We are one of many investors, which include a number of large mutual funds. We first decided to invest in Retrophin in August 2013, when the company only had two pipeline assets and was not generating any revenue. The first pipeline asset is a drug called RE-024, which treats a rare disease called pantothenate kinase-associated neurodegeneration, or PKAN. PKAN is a progressive degenerative nerve disorder that primarily affects children and is caused by a mutant gene that allows iron to buildup in the brain. Once diagnosed, the life expectancy for children affected with this disorder is sometimes only a handful of years. The second drug is called Sparsentan, which treats a rare kidney disease called focal segmental glomerulosclerosis, or FSGS. FSGS affects both children and adults, and more than half of people who suffer from FSGS develop chronic kidney failure within 10 years. We believed then and believe now that both these drugs have the potential to improve patients' lives dramatically if they are brought to market. In the last 2 years, we understand that Retrophin has spent approximately $50 million per year in research and development, largely around these two compounds. I am aware that the Committee is interested in price increases for off-patent branded drugs in general and for Retrophin's drug Thiola in particular. Thiola, acquired by Retrophin in 2014, treats a rare and debilitating chronic kidney disorder called cystinuria. We had never heard of Thiola before Martin Shkreli, Retrophin's then-CEO, told us about it. When Retrophin explained the acquisition, it sounded promising, but the decision was the company's. We understood that there would be a price increase, but that the increase would be accompanied by investments into patient services and support, improved manufacturing, and research and development into better formulations. Our own diligence has suggested that physicians and patients are satisfied with how Retrophin has handled ownership of Thiola, and we believe the patient community is better off due to Retrophin's acquisition of the drug. According to Retrophin, the patient population receiving the drug has approximately doubled since Retrophin acquired Thiola less than 2 years ago. We also believe the company has made great strides in working with patients to adhere to what can be a difficult treatment regimen. In fact, Retrophin recently announced that since the acquisition, patient compliance rates have improved from approximately 50 percent to 85 percent. Finally, I am also aware that the Committee is interested in the experience of Turing Pharmaceuticals. While we were repeatedly approached by Mr. Shkreli to become an investor in Turing, we chose not to and have never invested. Let me reiterate, we have never been an investor in Turing. Broadfin is proud to partner with innovative companies, like Retrophin, that invest in improving the lives of the patients who use their products. We are committed to investing responsibly on behalf of our investors while at the same time making a difference in the lives of children and adults who suffer from debilitating conditions and ailments. Thank you, and I welcome your questions. The Chairman. Thank you. Well, I must say, it is very difficult to know where to even begin, but Mr. Smith, you made the most outrageous statement of anyone when you stated, quote, that you ``care deeply about the patients who take Daraprim.'' I would like to draw your attention to Exhibit 8 and Exhibit 9. Now, clearly, you know that Daraprim went from being modestly priced to being prohibitively expensive, and when you started to hear of access problems, according to a Skype exchange that we have, which is shown in Exhibit 8, you say, ``I think some of them are fake.'' You participated in a Skype chat with two of your colleagues in which you express shock that two patients had paid cash for Daraprim. Let me read from that chat, although it is difficult to do so because of the number of expletives in it in which you are making fun of patients that are paying the full amount. ``Two patients have paid cash for Daraprim. Rich... [expletive deleted]. Oh, my God. Wow.'' You went on to discuss concerns that you had with the 340B Medicare program. This is a program that provides needed medicine for our Nation's desperately poor, and you express concern that it was cutting into Turing's profits, so as we can see from the slides, your colleague, Mr. Crutcher, wrote, ``Time to dip out of the 340B claims... [expletive deleted]. F-these guys.'' Your reply, ``Laugh out loud. Yes. I told her to start disputing the 340B claims.'' Mr. Smith, that exchange alone--and there are many more that I could have pointed to--make it very difficult for me to believe your statement when you express your deep concern for the patients. Would you care to respond? Mr. Smith. Yes. I would like to provide a little bit of context about this exchange. The 340B program makes up approximately 66 percent of Turing's--the volume of Daraprim that Turing sells, and there is some--within the industry, there is some concern that the 340B program is occasionally abused for fraudulent use, where a hospital may purchase a product at a much lower price to then sell it at a higher price, so that--those comments that I was making in this informal discussion between coworkers that have been working together for many years, and there are many stupid comments in here and regretful language. That was the genesis of those comments. The Chairman. Well, ``LOL, yes'' does not sound like you are really talking about fraudulent claims. The whole tenor of this exchange is, can you believe there are suckers out there who are paying the full price? Can you believe that--we are concerned. We have got to start fighting back on the 340B program. There is nothing in there that expresses an iota of concern for the patients who are getting help through the 340B program, nothing at all. Mr. Tilles, Daraprim has been on the market since 1953. Is the Daraprim pill that Turing sells today essentially the same pill that has been on the market, the same medicine that has been on the market since the FDA approved the drug in 1953? Mr. Tilles. Yes. The Chairman. Turing did not do any R&D to develop Daraprim, correct? Mr. Tilles. Correct. The Chairman. Since, obviously, Turing did not exist until 2014 and this drug has been on the market since 1953, so the R&D was done before--decades before Turing even came into existence, correct? Mr. Tilles. Yes. The Chairman. What improvements did Turing make to Daraprim to justify raising the price of the drug from $13.50 a pill to $750 a pill? Mr. Tilles. I think it is important to distinguish the initial purchase and what we are doing now. We are now focused--sorry. We are now focused on R&D for the next generation of toxoplasmosis. We have Dr. Eliseo Salinas, who is adequately qualified to develop new programs, and we are very much focused on R&D going forward. Initially, no, now, yes. There are--as you mentioned, the drug has been around since 1953 and we are not aware of any other pharmaceutical company which ever paid it any attention to try to develop it in any way going forward. The Chairman. We---- Mr. Tilles. Some people--oh, sorry. Go ahead. The Chairman. We have heard testimony today that Daraprim works just fine, that it is the gold standard. In fact, if you look through Turing's documents, it is repeatedly described as the gold standard, so no matter what the story may be now about your R&D plans, the truth is that Daraprim is exactly the same today as it was 60 years ago. The only difference is that the price has been increased by some 5,000 percent. Mr. Tilles. Correct, and I have--since I began at Turing, I have spoken to--we have had, actually, many experts in the field come in, and you are correct. It has been around since 1953, but it does not mean, because of that, it is the best version. My understanding is that there are many patients who do not tolerate Daraprim very well and there actually is room-- there are some toxic effects--there is room for improvement, so I respectfully would have to disagree that there is nothing that can be done to improve the lives of Daraprim patients. It is actually a cyst that is very hard to destroy. It is actually not originally an AIDS drug. It is a cyst. It is a parasite that infects you, and there is actually apparently three billion people globally who have this parasite. Someone in this room could have it, so it is actually there is room for improvement. The Chairman. What percentage of your revenues are you spending on R&D today? Mr. Tilles. Last year, we spent roughly, I think as we described earlier, about 60 percent in R&D last year. The Chairman. Sixty percent of R&D---- Mr. Tilles. Last year. Last year. The Chairman. [continuing]. does not add up to the figures. Are you talking about 60 percent of the increase in the price of Daraprim? Mr. Tilles. No, I am talking about in terms of any kind of revenue that we make. The Chairman. There is a conflict between your testimony and the testimony of your executive who testified on the House side in that regard---- Mr. Tilles. I--uh---- The Chairman. [continuing]. since he said it was of the increase in the price. Mr. Tilles. That may be--she might be correct, actually, so---- The Chairman. Let me turn to another issue, and that is Exhibit 5. This is a personal letter--personal letter--directly to you from the leaders of the HIV Medical Association, the Infectious Diseases Society of America, and the Pediatric Infectious Diseases Society. This letter contains a personal plea to you. It notes that you are the newly appointed interim CEO of Turing and it pleads with you to lead the country in--lead the company in a new direction that places patients' interests and lives ahead of short-term profits by taking the step of reversing Turing's price increase on Daraprim from $13.50 a pill to the $750 a pill, and it goes on to note that despite Turing's repeated assurances to the contrary, the $750 per tablet price has wreaked serious havoc on patient access to the treatment of toxoplasmosis, resulting in treatment delays and interruptions. Now, you said in your deposition that you were out of the office at the time that this letter arrived. What, when you became aware of the letter, what did you personally do to respond specifically to this December 22, 2015, letter from these three prestigious medical groups? Mr. Tilles. Yes. As I mentioned before, this was not actually my area of expertise, but it is of great concern, so I discussed it with Nancy Retzlaff, who, again, is here in the room, our Chief Commercial Officer, and my understanding is that she made every attempt to reach out to all these organizations. The Chairman. What have you personally done in response to this urgent plea to reverse the price increase of Daraprim? Mr. Tilles. Well, again, with all due respect, we have actually reduced the price of Daraprim across the board, first to hospitals by 50 percent, and as I earlier described two- thirds of patients basically pay one penny a pill, so that $750 number is a little bit inaccurate if you look at the entire patient population. The Chairman. Well, the hospital price of--let us say you cut it in half. It is still going from $13.50 to more than $300 a pill. Mr. Tilles. Again, the majority pay a penny a pill. The Chairman. Well, I would suggest to you that we talked to these three medical societies and they tell us that you have done nothing to respond to their letter and that you have made virtually no changes in your distribution pattern or your pricing. Senator McCaskill. Senator McCaskill. Mr. Wichman, I know from your testimony that your company, Broadfin Capital, regularly invests in the health care sector and pharmaceutical companies. In your due diligence, do you think it is important that the CEO of a pharmaceutical company have a background in pharmaceuticals? Mr. Wichman. You know, I--people at the company would have to have some kind of background---- Senator McCaskill. No, the CEO. Do you think the CEO of a pharmaceutical company should have any background in pharmaceuticals, as part of your due diligence for you investors? Mr. Wichman. My opinion, it would be helpful. It is not-- not mandatory. I do not think---- Senator McCaskill. Did Martin Shkreli have that kind of background in pharmaceuticals? Mr. Wichman. As the CEO of a pharmaceutical company? No. Senator McCaskill. Did he have any--how about Michael Pearson at Valeant? Did he have that kind of background? Mr. Wichman. I do not believe so. Senator McCaskill. Okay. Mr. Tilles, you are the CEO of the company? Mr. Tilles. Yes, I am Interim CEO. Senator McCaskill. Okay, but you do not know much about pharmaceuticals, do you? Mr. Tilles. That is correct. Senator McCaskill. So---- Mr. Tilles. That is not my background. Senator McCaskill [continuing]. like, even last month, or 2 months ago when we took your deposition, you did not even know what ANDA was, did you? Mr. Tilles. I know what it is now---- Senator McCaskill. You did not know 2 months ago. Mr. Tilles. When I started--when I started, no, I did not. Senator McCaskill. Yes. You became CEO--you were Chairman of the Board beginning at the beginning of this adventure to acquire Daraprim and jack the price up because there was nothing anybody could do about it. You have been there as Chairman of the Board. Now you are a CEO since December, and in your deposition, you did not know what ANDA was, which was 2 months ago, after you had been CEO for several months, correct? Mr. Tilles. I believe, again, if I look at my--if I recall my deposition, when I first started--not 2 months--when I first started, I did not know. Senator McCaskill. It is on the screen, sir. You can look at it. You said, ``I have heard of the term.'' Mr. Tilles. Okay. Senator McCaskill. You did not know what it was? Mr. Tilles. Correct. Senator McCaskill. All right. What about when you were asked about if you were familiar with the concept of bioequivalence testing. Were you---- Mr. Tilles. I was not that familiar with the exact procedure, no. Senator McCaskill. Well, did you not say, ``I have heard the term, but if you quizzed me, I would fail''? Mr. Tilles. That is correct. Senator McCaskill. All right, and what about you are not really familiar with a concept known as substitutability of a drug. Did you understand that term as CEO of this pharmaceutical company? Mr. Tilles. Again, I do now, but I did not then. Senator McCaskill. That was after you had been CEO for several months. Mr. Tilles. I have been CEO since December 18. Senator McCaskill. Okay, so let me now turn to your sales. What were your sales in August 2015, prior to the price increase? What was the IMS tracking number for your company in August 2015, before you increased the price? Mr. Tilles. For Turing? For---- Senator McCaskill. For Daraprim, which is that, and you have Vecamyl, but, essentially, your company is Daraprim, so tell me what your unit was in August 2015. Mr. Tilles. Well, we--I think it was close to zero, because we acquired it in August 2015, so we did not own it---- Senator McCaskill. What was being prescribed in the country in August 2015 of Daraprim? Surely, you knew that as Chairman of the Board, what you were buying, how many were going out the door. Mr. Tilles. I believe it was five million. Senator McCaskill. Well, per month. In August 2015, it was 25,500, based on IMS data, which is the industry standard, correct, Mr. Wichman? Mr. Wichman. IMS is the industry standard. Senator McCaskill. Okay. I am using the industry standard here and you are the CEO, so in August 2015, before you increased the price, 25,500 in that month. Now, what about in December 2015, when you took over as CEO? How many went out the door, according to the IMS data, that month? Mr. Tilles. Again, I do not recall the specific number. Senator McCaskill. How about 600? How are you doing reaching patients with this astronomical price increase? This notion that you are sitting there and saying a penny a pill is so offensive to me. I mean, we are not stupid. Six hundred, so you went from putting 25,000 out the door at the lower price to 600 out the door in less than 6 months according to the industry data. Now, how does that--how does that board feel about that? How is this price increase working out for you? Mr. Tilles. Well, I do think there were some transitional issues when we--after we acquired in August into September, so there is a several month transition period, and I am not sure in terms of why the sales numbers were different. I do not believe that it was just because of the price. Senator McCaskill. You think it went from 25,000 a month to 600 a month for some other reason, because all of a sudden we have controlled the disease? Mr. Tilles. I---- Senator McCaskill. I thought you just said that this was a growing epidemic worldwide, globally, and that this need for this drug was so serious compared to what had been prescribed. How do you reconcile going from 25,000 a month to 600 a month? Mr. Tilles. Well, in the U.S., it affects about 2,000 to 3,000 patients per year, but I was not--I am not aware of what impacts or measure were doing before we bought it, so it is really hard for me to comment on their sales before we acquired the drug. Actually, I have no idea what they were doing previously. All I can comment is what has happened since we have acquired it. Senator McCaskill. Well, I will tell you. Since you have acquired it, in September 2015, it was 3,000. In October 2015, it was 900. In November 2015, it was 500, and in December 2015, it was 600. Mr. Tilles. Mm-hmm. Senator McCaskill. Now, as CEO, I would think you would have those numbers at the tips of your fingers. I know if Mr. Wichman had invested in your company, he would expect you to know that, and the street would expect you to know that, so I am a little confused that you do not even have a handle on your sales. How do we trust anything you tell us about your revenue or your R&D expenditure if you do not understand basic terms of pharmaceutical industry at your deposition and you do not even understand what your sales are? That is very hard for me to reconcile. Now, let me ask you about this. You were very involved in the acquisition of Daraprim, correct? Mr. Tilles. Yes. Senator McCaskill. You, in fact--it is your role---you stated that you were the point of contact with the former owner, is that correct? Mr. Tilles. I was point of contact in terms of negotiations for the company, yes. Senator McCaskill. You sent several letters to them making offers to buy Daraprim, correct? Mr. Tilles. Yes. Senator McCaskill. When you were asked about, the investigators of this Committee, about your role in the offer letter during your deposition last week, you quoted yourself as contributing to it in terms of grammar, and I want to read for the record the questioning in the deposition, because I think it is very important because it is astounding. You note in the--this is a question. ``You note in the second full paragraph, quote, 'We believe our offer is generous for an asset with declining volumes, lower than typical gross margins, and for which an ANDA might have been filed.' Question: What did you mean by that?'' Answer: ``I did not mean anything. I just sent the letter, but again, I can speculate. I was just the conduit.'' Question: ``Did you write the letter?'' Answer: ``No, I sent it.'' Mr. Tilles. Okay. Senator McCaskill. Question: ``To be clear--" Answer: ``Actually, I was not writing the letters.'' Question: ``Did you edit the letter in any way?'' ``Did I? Well, for English, yes, but not for numbers.'' Question: ``So, you edited the letter only for English, not for content?'' Answer: ``Yes, that is correct. I typically didn't write the letters.'' ``Understood. Referring specifically to this letter, the offer letter, did you not write this letter?'' ``Correct. I contributed to it only in terms of grammar.'' ``And then you sent it under your signature.'' ``That is correct.'' ``So, you, as Chairman of the Board of Turing, sent a letter to a potential counterparty in a deal stating we believe our offer is generous for an asset with declining volumes, lower than typical gross margins for which an ANDA may have been filed, but you do not understand what was meant by that.'' ``Sitting here today, now I do, but no, not then. They were just kind of, like, send this, and I was, like, Okay.'' You were Chairman of the Board and you were just signing letters that were put in front of you? Do you not have a fiduciary responsibility to the people that give money, to people like Mr. Wichman, to have some sense of what you are sending and what it means? Mr. Tilles. Well, I certainly read the letters. What I meant is we are a very small company. We have three or four people. Again, as I said before, I do not have a pharmaceutical background, so did I send the letter as Chairman? Yes. Did I read it? Yes, but did I compose it? No. We have a very small team that writes the letters. Senator McCaskill. Well, I get confused. On one hand, you say that you are going to do groundbreaking R&D with 60 percent of your revenues, and you turn around and say, well, we are a very small company. We only have three or four people. We cannot do things like have the CEO understand what he is talking about when he actually is dealing in a pharmaceutical industry. It is hard for me to reconcile your testimony in that regard. Mr. Wichman, I am not going to have time to get into everything I want to get into with you on this round, but I will come back to Retrophin and to the kidney drug and talk to you about that investment and some of the issues surrounding that problem. Let me just say on the record here, as my time expires, and as I say I hope to do some more work in the second round, if anybody wants to know--it is always interesting to me when I talk to people who work on Wall Street, or when I talk to people in corporate America and they are beside themselves in trying to understand why America is so mad at them. They do not get it. Well, I do not understand, you know. We are just, you know, we are creating value for shareholders. This is why they are mad. This nonsense is why people are furious, and they are mad at us because we are letting you do it. Just so everybody is clear, nobody understands where the pitchforks came from. They came from deals like this. This is where the pitchforks came from. The Chairman. Senator Casey. Senator Casey. Thank you, Madam Chair. I wanted to start with referring to an earlier statement I made in the first panel. There are lots of ways to describe what happened here with regard to the conduct or even the pattern of conduct that has been alleged against Turing. My only way, the best way I can describe it is the incarnation of evil. That is what I believe it to be, and I just hope our system can hold those responsible fully accountable, but we will see what happens. I wanted to start, though, with part of the testimony of Mr. Tilles and Mr. Smith. One thing that jumped out at me, and I just place almost no credence in what, at least this part of your statement, I hope subsequent events and testimony and evidence proves me wrong, but it is just not credible in your testimony--in your written testimony--where you make references to discounts and support programs that mean ability to pay should never be a barrier to access. That is part of Mr. Tilles's statement or testimony, and then, Mr. Smith, when you say on page two, referring to assistance programs regardless of ability to pay. We just had a family here in the first panel that was told what they had to pay in order to help their daughter, so I hope that those were not just gratuitous statements. I hope that when you put that in your testimony, you meant it. I cannot prove you wrong. I just do not believe that part of your testimony, so I hope the rest of your testimony is truthful. Let me ask both of you this question. Mr. Dorfman in his testimony in the first panel said, and I am quoting at the top of page three, ``Pharmaceutical companies typically justify drug price increases, especially large rises, by expenditures such as research and development of the drug itself or a substitute, clinical trial work, or educational programs.'' That is the justification for large price increases. Mr. Tilles, let me ask you, do you agree with that statement? Mr. Tilles. Well, I think it is important to understand two things. One---- Senator Casey. Let me just say, just answer that question first. Then you can talk---- Mr. Tilles. Sorry. Then could you repeat the specific question? I am sorry. Senator Casey. Do you agree with the following statement. ``Pharmaceutical companies typically justify drug price increases, especially large rises, by expenditures such as research and development of the drug itself or a substitute, clinical trial work, or educational programs,'' Do you agree with that statement? Mr. Tilles. Yes, I agree. Senator Casey. Mr. Smith, do you agree with that? Mr. Smith. I agree, but I would also include pre-clinical and early stage development. Senator Casey. He then goes--the next sentence is as follows. ``In this instance,'' meaning Turing--``in this instance, the price increase as contemplated and subsequently announced was not justified by any such actual expenditure,'' Do you agree with that statement, Mr. Tilles? Mr. Tilles. I respectfully do not. Senator Casey. Mr. Smith, do you agree with that statement? Mr. Smith. I respectfully disagree. Senator Casey. Okay. Good to have that clarified. Mr. Smith, I want to ask you a couple of questions about your testimony and some of the statements that you have made. You indicated that you worked on a valuation model related to Daraprim with other members of the business development team, is that true? Mr. Smith. That is correct. Senator Casey. You also said that you viewed Daraprim as an undervalued treatment for a serious but neglected disease. Is that true? Mr. Smith. That is true. Senator Casey. The question I have is, what factors went into the conclusion that Daraprim was undervalued? How did you come to that conclusion? Mr. Smith. Many drugs are valued based on the value they provide to patients, and Daraprim being a standard of care for a rare, you know, neglected disease, it seemed that the current value of the product was much lower than comparable medicines for similar disease morbidity indications. Senator Casey. What did you do to--what kind of analysis or what kind of work did you do to make that conclusion? What undergirds the conclusion you made? Mr. Smith. I am not sure that I have done a specific analysis, but my general experience with the industry is that you see drugs with small patient populations generally have prices well in excess of Daraprim. Senator Casey. You also stated the Daraprim acquisition gave you an important foothold in the treatment of toxoplasmosis. I assume that the word ``foothold'' means a firm positioning in the marketplace. Is that generally accurate? Mr. Smith. Yes. What I was referring to in that statement was prior to the completion of the acquisition, we had made a decision that regardless of the success of that acquisition, we would be developing new drugs for toxoplasmosis because of the severity of the disease and because there has been no improvements for over 50 years and there is still a lot of--a lot of physicians share the opinion that there is room for improvement. Senator Casey. Could the company not have gained a, quote, ``foothold,'' without raising the price almost, by one estimate, 5,000 percent? Mr. Smith. I think that the price raise was necessary in order to establish that foothold. Senator Casey. By that amount, the price raise was necessary? Mr. Smith. I am not--I do not make any pricing decisions, so I am not sure what---- Senator Casey. You just said--you just said that you thought it was necessary. Mr. Smith. I--I thought that a price raise was necessary, yes, but the scale of which, I have never had to make such a decision, so---- Senator Casey. All right. I want to make sure I understand what you are saying. You are saying a price raise was necessary. Mr. Smith. Yes. Senator Casey. Not necessarily the price raise that transpired. Mr. Smith. I do not have the experience. There are a lot of factors that go into price decisions and I do not have the experience to determine whether that was an appropriate price or whether that was too low, too high. Senator Casey. You did come to the conclusion about valuation, as your testimony indicates. Mr. Smith. I built the model, correct. Senator Casey. Let me just conclude with this sentence. Where in your modeling do you estimate what financial resources would be necessary to improve treatment for toxoplasmosis? Mr. Smith. Could you be specific with which model, or---we prepare many iterations of models. Models, it is a tool. It is not necessarily a snapshot. Senator Casey. Well, let me ask you this. What models, if any, did you prepare that related to toxoplasmosis? Mr. Smith. I prepared the main one the business development team used, but again, as we moved through the due diligence process and our understanding, you know, of the product grew, there were many changes to the model, so there are many, many iterations. Senator Casey. You just said you did prepare a model. Mr. Smith. Yes, that was updated constantly. Senator Casey. What went into the development of that model? Mr. Smith. There was an extensive literature search to understand, you know, the patient population. I spoke to a few doctors that had said that they had treated toxoplasmosis. You know, we received confidential information from Impax as the process went on about the product. Those sorts of things. Senator Casey. I think you were here when we had earlier testimony. I want to go to the Westons' testimony, in particular, where they were told the cost--what the cost would be for the treatment for their daughter. Did you hear that part of their testimony? Mr. Smith. I heard that part, yes. Senator Casey. What do you say to a family that is faced with that kind of predicament? Mr. Smith. I was deeply saddened to learn about their situation. I only found out yesterday, and I was more upset that there was not adequate communication. Turing has made substantial efforts, and our commercial team and Nancy Retzlaff have made substantial efforts to reach out to hospitals, pharmacies, and members of the community to make sure that everyone knows where to get Daraprim and that if there is any issue with the ability to pay, we have several different programs that can limit copays, that can provide drug free of cost, so I was disappointed that that was not made available immediately to those folks. Senator Casey. That is all I have. The Chairman. Senator Donnelly. Senator Donnelly. Thank you, Madam Chair. To the Westons, I heard your testimony. If it were my child, just like you, I would be turning over the tables, because you will do anything to make sure your child is Okay, and you know, I may have been born at night, but I was not born last night. This is a scam. You guys are running a scam, and you tried to figure how fast you could milk it and how hard you can milk it, and somewhere, there has been a complete loss of any sense of shame, of any sense of responsibility. I am going to give you a chance here. The pills were $17.50 before you guys got your hands on it. They are $750 now. I will make you a deal. Why do you not make a pledge here today that you will not charge more than $25 for any of these pills for at least the next 2 years. You have got over--almost a 50 percent increase in the price then. Why do you not make a deal and tell the American people you are going to step up and end this and you will not charge more than $25 for any pill. Mr. Tilles, will you make that deal? Mr. Tilles. With all due respect, in my role as CEO, as an individual, I would love to do that, but as a CEO, I cannot, because---- Senator Donnelly. As a CEO, is a 50 percent increase in a product you just bought not enough? Mr. Tilles. Well, what I was going to say is the company still has to survive, and at this point---- Senator Donnelly. They cannot survive on a 50 percent increase in the price of the product you bought? Mr. Tilles. We are not a profitable company right now. Senator Donnelly. Why is that? Mr. Tilles. Again, many reasons---- Senator Donnelly. Is it the $2 million records that your CEO is buying? I mean, why are you not profitable right now? Mr. Tilles. Just to comment on that, Mr. Shkreli never took a salary while at Turing, and as far as I know, as Chairman and CEO, I do not think he has extracted one dollar out of Turing to date. Senator Donnelly. Well, then, why did you buy a company that you are not now making money on that was apparently profitable at $17.50 a pill. You are charging $750 a pill. That does not make any economic sense at all. Mr. Tilles. Well, again, our goal as a company--you know, I find it interesting. We have talked about how to get a drug through the pipeline can cost over a billion dollars, and one of our initial visions---- Senator Donnelly. Well, this did not go through a pipeline. Madam Chair, am I wrong, this is the same thing since the 1950's? The Chairman. You are absolutely correct, and the witness has so testified. Senator Donnelly. Forget about the pipeline. You jacked it up 50 percent if you get 25. How is that not enough? Mr. Tilles. Well, what I was going to add was that, again, the distinction between developing a drug from scratch and using the profits from the drug that we do have to develop new drugs from scratch, I do not see that---- Senator Donnelly. In the process, their child cannot get the medicine. I have a town--let me tell you about a little town in Indiana. The name of the town is Austin. We have had a terrible opioid problem there. We wound up with 189 people with HIV cases. Maybe at some point with AIDS they would have to use your product. How can I sit here and let you continue with a 750 price point when I have people who may be in desperate need of your product? Mr. Tilles. Well, as I said earlier, the majority of patients do not pay 750 a pill. They pay---- Senator Donnelly. Why do any of them pay 750, other than the fact that maybe you thought you could get it? Mr. Tilles. Well, again, our head of marketing is in the room. My understanding is that---- Senator Donnelly. Well, maybe the head of marketing can tell me. Mr. Tilles. She can if she likes. Senator Donnelly. Do you want to tell me how you came up with the 750 price? I would be really interested how you sat at a table, and who made the decision to go from $17.50 to $750. The Chairman. Senator---- Senator Donnelly. Okay. I am sorry. The Chairman. [continuing]. since that witness would not be under oath---- Senator Donnelly. We will pass, then. The Chairman. [continuing]. and testified extensively at the House side---- Senator Donnelly. I am sorry. We will pass this. The Chairman. We have her testimony already. Senator Donnelly. Mr. Smith, let me ask you a question, and maybe this is a little bit offbeat. What do your parents think about this model you came up with that wound up with $750 pill prices for kids? Mr. Smith. Well, I cannot comment for my father. As I said earlier, he was killed in the September 11 attacks, but for my mother, she--I mean, she does not have a strong understanding of what I do, so she is generally supportive of me. Senator Donnelly. You think that is morally correct to do 750? Mr. Smith. Again, as I said earlier, I am not involved in any of the pricing decisions. I have never had to make one. There are many factors that go into it. Senator Donnelly. Let me ask you this, Mr. Tilles. Do you still believe no patients have been impacted by this price? Mr. Tilles. I believe Turing has done everything in their power to make sure every patient has access to the pill. As I mentioned before, we have numerous programs in place and our desire is that no patient not have access to this drug, and I actually think that we are doing everything in our power to create awareness of this disease and to make sure that everyone is--that gets the drug that needs it. I am also pleased--again, Dr. Salinas is not here--- actually, our head of research is the highest paid person in our company. I do not know if you are aware of that. I am pleased to see that we are actually doing a lot of things in toxoplasmosis. I sat on a panel--again, I am not a pharma expert, but some of the things he is doing are just fascinating to me in terms of the next generation of drug. Senator Donnelly. Mr. Wichman, could you walk us through the process of identifying a pharmaceutical asset you reasonably assess as promising in terms of potential returns for your hedge fund investors. Mr. Wichman. Senator, we generally do not identify pharmaceutical products. We identify companies that we think are worthy of investment and that is what our job is. Senator Donnelly. As you look at this, as you move forward, as you check out potential returns in the pharmaceutical assets, the question was asked before, how deep do you look in terms of the management's expertise in pharmaceuticals, their work in pharmaceuticals, their CEO's role in pharmaceuticals? What do you look at with that? Mr. Wichman. We look at management teams and we look at a number of other factors when we do our diligence. When we look at a drug, we speak to physicians. We build financial models. We do detailed work on a number of factors, so it is one of many factors that goes into investing in a product, or in a company. Senator Donnelly. Do you encourage the companies that you buy to take a step like this? Mr. Wichman. Absolutely not. Senator Donnelly. Absolutely not. Okay. Well, you know, we are going to continue to work to turn this back. I think you can make a huge difference in your public opinion, in the way you are viewed, if you would step up and say, we are not going to charge more than $25, which is over a 50 percent increase in what you were--the price that was being charged when you bought it. I think it would be an enormous help to all of you. I think it would help to clean up the mess that you have on your hands, and I think it would be a sign to the families who count on you, who may lose their children, who may lose their loved one who has AIDS, that you can start to put this back on the right track, and I would encourage you to do so. Thank you, Madam Chair. The Chairman. Thank you. Senator Kaine. Senator Kaine. Thank you, Madam Chair. Mr. Tilles, I just want to followup. You indicated you graduated from Middlebury College, I believe? Mr. Tilles. That is correct. Senator Kaine. What was your undergraduate degree? Mr. Tilles. Oh, you mean what did I study? Senator Kaine. Yes. Mr. Tilles. English. Senator Kaine. Then a Columbia M.B.A. Did you have a concentration at Columbia in finance or human resources? Mr. Tilles. Marketing and finance. Senator Kaine. Uh-huh, and then you indicated you did not have a pharmacy or medical background. You have not had separate training in pharmacy science or any allied health field? Mr. Tilles. That is correct. Senator Kaine. Mr. Smith, tell me about you. Where did you go to college? Mr. Smith. I went to Fordham University. Senator Kaine. What was your undergraduate major? Mr. Smith. Finance. Senator Kaine. Do you have a graduate degree? Mr. Smith. No. Senator Kaine. Have you had any separate training in any pharmacy or allied health field? Mr. Smith. None other than professional experience. Senator Kaine. Okay, and then, my understanding is the same is probably true about Mr. Shkreli, that he did not have a background in pharmacy or medical studies academically. Mr. Tilles. I am not sure of Martin's educational background, but I do know that early on, one of the things that enormously impressed me was that he had developed on his own a treatment for PKAN. I found that fascinating. I think he has a patent on the disease, so to me, he seems to have been self- taught. Senator Kaine. You first started working with him when he was at a hedge fund, is that correct? Mr. Tilles. I met him when he was there, yes. Senator Kaine. Okay. Mr. Smith, you answered a question to Senator Casey that I want to followup on. You asked kind of how you came upon Daraprim and determined that it was undervalued, and he asked you, how do you determine a drug is undervalued, and I think your testimony was that--I was trying to write it down quickly--you look at drugs and you assess the value of the drugs based upon the value that they have to patients, and if you notice that, I think the extension was, if the value to patients is high but the cost is not very high, then there is some kind of a mismatch, and that is what undervalued means. Is that a fair characterization of your testimony? Mr. Smith. I think to expand on my testimony, I was referring to the fact that some drugs, there is also an opportunity to increase units. As some physicians have mentioned, the typical patient that takes Daraprim is generally pretty noncompliant with their medicine, so putting a product like Daraprim into a specialty pharmacy, where there is refill reminders and the drug is delivered right to their door, a number of steps that we take to ensure that patients take drug, which increases units, and also it leads to better patient outcomes. Senator Kaine. How does that relate to your answer to the question of whether Daraprim was undervalued? Mr. Smith. Those items add to the value. Those things were not currently being addressed as aggressively as we currently are. Senator Kaine. You concluded that Daraprim was undervalued in part because you thought that there was a mismatch between the pricing of that drug and the significant and intense need that particular patients had for that drug because it was the gold standard treatment for the medical condition. Mr. Smith. I believe the drug was underutilized, yes. Senator Kaine. Right, so this notion of kind of what undervalue is, that it is--if patients really need it, that they have an intense need for it because it is the gold standard, but the price is low, I mean, it is basically a profit opportunity. It is the patient as a hostage, the patient as a profit center. If the patient really needs it, because it is the gold standard, and the price is low, then there is the finance opportunity that suggests, wow, this is an undervalued drug. What a great business opportunity for us. I mean, it sounds like I kind of got the business model. Mr. Smith. Can I provide some clarification? Senator Kaine. Yes. I mean, your testimony is already on the record, what you said to Senator Casey, but, please, yes, clarify. Mr. Smith. When I said utilization, I meant that the patients--because it is such an important medicine---- Senator Kaine. Actually, your answer did not--when you answered Senator Casey, you said nothing about utilization. What you said is you viewed this as an undervalued drug because the value to patients was very high and that was very different than how the drug was being priced, so my read of that quick testimony was you saw a gap between patients who had a tremendous need to have this drug, because it is the gold standard in treating a difficult condition, and a pricing mechanism that, frankly, was not extracting enough for them given the value that it had to the patients who needed it. Mr. Smith. As I responded to your initial request for clarification on undervalued, I used the word ``utilization,'' and by utilization, I meant the use of the drug within the patient population. You know, it is my understanding that there---- Senator Kaine. The notion would be, if it was underutilized, one of the ways you could more utilize it is expand access to it, have more people have access to it, right? Mr. Smith. By utilization, I mean patients taking--sick patients taking the drug. Senator Kaine. The idea would be you would want to expand utilization, and the way to expand utilization would be to expand access, right? Mr. Smith. By investing in patient access---- Senator Kaine. I know that you have indicated that you have no responsibility with respect to pricing decisions, but how could it conceivably be an expansion of utilization, or facilitate expanded access, to increase the price of a pill from $17 to $750? Mr. Smith. Well, access is just a component. The additional research and development and the next generation drug that we could market worldwide is also a significant---- Senator Kaine. You would agree with me, so you went to Fordham and had a degree in finance, and I have a degree in economics I can barely remember, but as a general matter, if we see this drug, we do not think it is utilized enough and we want it to be utilized more, that jacking the price from $17 to $750 and entering into a sole source distribution agreement, those two things actually cut against the expansion of utilization, I mean, would you not agree with that? Mr. Smith. No. Senator Kaine. You do not think increasing the price from $17 to $750 would reduce the expanded utilization of this product? Mr. Smith. No. Raising the price allows you to make all these significant investments in the different areas I spoke about, the commercial patient outreach and research and development. Senator Kaine. Has the subsequent experience, in terms of dramatically expanding the quantity of this that patients have been taking, borne that out? Mr. Smith. I do not have familiarity with the exact figures, but Nancy Retzlaff, our Chief Commercial Officer, would be able to tell you. Senator Kaine. What was the--tell me about the genesis of the sole distribution agreement with Walgreens. Mr. Smith. That is an agreement that we inherited from Impax. Senator Kaine. Was the fact that that agreement was in place a business factor in your decision that Daraprim was an undervalued drug and a promising opportunity for investment by Turing? Mr. Smith. We had planned to make--set up a similar system, so it--in some ways, they already set it up. Senator Kaine. Right, so you would have done that if--so, it was. That was a positive factor as you were looking at whether this was an undervalued drug that you might want to purchase, that they had a sole distribution agreement with Walgreens. Mr. Smith. Their agreement is--I believe there have been a number of amendments to the agreement, but---- Senator Kaine. Yes, but you get what I am asking. If you were going to do it anyway, the fact that they had already done it was a positive as you looked at this investment opportunity. Mr. Smith. Yes. Senator Kaine. Okay, and there were concerns raised with Turing about the sole source agreement with Walgreens and the effect that it would have on access and utilization. I will just refer to the record, Exhibit 23, e-mails from the Health Resources and Services Administration that show that HRSA reached out directly to Turing with concerns that this limited distribution network would have a significant impact on patient access, and I will just State that for the record. I do not think we need to go into it further. It is in the record. Madam Chair, I do not have any other questions, but I just think that the two fundamental kind of core aspects of this undervaluation determination, we see this as undervalued because patients really need it and the cost and maybe the access to it suggest that we need to expand utilization, and then we take steps to dramatically jack up the cost and we take steps to put this drug, or we at least find positive to put this drug in a limited distribution channel that raises questions about access. It just seems to me that this is a business model that is about patients as hostages. It is about patients as profit centers, and it is decisions that are made by executives who have no training in pharmacy, no training in medicine, no training in allied health fields at all, and you know, that this seems OK. Fordham is a Jesuit school. Mr. Smith. Correct. The Chairman. Thank you, Senator Kaine. You are exactly right. It is a case where there is a captive audience and this is the gold standard, which is part of the business model that we have been able to identify. Ms. Retzlaff, I notice you have remained at the table. Unless you are giving legal counsel in an official capacity to the witnesses, I would ask that you return to your seat. Mr. Tilles. May I say something? The Chairman. Mr. Tilles. Mr. Tilles. Yes. I just want to say that although her testimony is not a part of this Senate record--although Nancy Retzlaff's testimony is not part of the Senate record, my understanding that Turing is--we are happy to offer her as a sworn witness because it seems like she is the most qualified person on these matters. The Chairman. Ms. Retzlaff testified extensively on the House side, so we have her testimony, and unless she is here officially representing one of the witnesses as an attorney, she is directed to return to her seat. Senator Blumenthal. Senator Blumenthal. Thank you, Madam Chair. You are here under subpoena, correct? Mr. Tilles. Yes. Mr. Smith. That is correct. Senator Blumenthal, You have taken an oath. Mr. Tilles. Yes. Mr. Smith. Yes. Senator Blumenthal. Let me ask you, because you are here under compulsory process, whether you would have done things differently if you knew then what you know now. Mr. Tilles. Are you talking to me, sir? Senator Blumenthal. I am asking both of you. Mr. Tilles. Okay. Well, it is hard--it is hard to, again, look back. I mean, what is done is done. I would just say that, going forward, we will make every effort to basically invest in R&D and improve patient access as much as we can. Mr. Shkreli is no longer part of the company. We feel we are moving in a good direction at this point, and again, despite all the scrutiny, we remain a--we remain a very small company. As I said before, it is pretty much kind of a startup, so you know, we do have big plans, but it has obviously been very difficult in the last few months, but we do hope to move forward and correct the issues. Mr. Smith. As I said earlier, I have never been a part of a senior executive team, so I am not sure about all the factors that weigh into all these specific departments, so I am not sure that I---- Senator Blumenthal. Well, you are intimately involved in the affairs of the company. Would you have done things differently than, in fact, happened, if you were in a position of responsibility? Mr. Smith. Again, I think that someone--the folks on our senior management team have a lot more experience and years, many, many years more knowledge of these matters, so I would not--I would not know how to assess the situation. Senator Blumenthal. I think what the members of this Committee find offensive, with all due respect, is the apparent lack of remorse, given the powerful impact that we have seen of the price gouging that occurred, the powerful impact on families like the Weston family--thank you to them for being here today--the lack of remorse and, frankly, any sense of regret, because the human impact is incalculable. The explanation that there was going to be an investment in R&D or in greater access, which defies common sense as to why a 5,000 percent increase in price was necessary, and the logic, or defiance of logic in saying that utilization would be expanded by increasing the price--I am not an economics major. I have no background in finance, but that is a little bit like saying that the laws of gravity no longer work, or we are going to put a man on the moon by drilling to the center of the earth. I know that your explanation is you were going to invest in expanding the reach, but you are dealing here with a product that is not being mass marketed, correct? Mr. Smith. Correct. It reminds me a lot of Thiola, as Dan Wichman said, when we did a very similar strategy and grew units. Senator Blumenthal. It is a captive audience, a discrete patient population that has to be reached by very specific means, not by going on TV or other kinds of mass media, and so, to have a drug that is the gold standard that is available through discrete, specific channels, and then to say that a 5,000 percent price increase is necessary to invest in the means to reach that captive patient population just seems to defy common sense. Mr. Smith. My understanding from speaking with physicians is that there is still a large amount of unmet need. For example, with congenital toxoplasmosis, I believe Daraprim is contraindicated for a certain trimester of dosing and it can be very unsafe---- Senator Blumenthal. You are not going to make that drug more available by putting it financially out of reach. That is the contradiction here. Mr. Smith. In speaking with some of our R&D staff recently, I was made aware of our--a series of compounds that we have developed that display degrees of selectivity for the toxo over the human gene, DHFR, of hundreds-fold, so we are already making those steps in the next generation of toxoplasmosis treatments that could mean, you know, no need to co-dose with other drugs for which there is known allergies, or lower pill burden for these patients that are notoriously noncompliant, so there are significant advantages to investing in this. Senator Blumenthal. When you raised the price, was there a business plan that calculated the specific revenue that was necessary to accomplish specific R&D steps or outreach measures? Mr. Smith. There was a financial model, but again, as I said, it is a tool. It is not really a snapshot. Senator Blumenthal. I am sorry---- Mr. Smith. It is a tool to evaluate different scenarios, so it is not necessarily something that shows exactly--I mean, there may be other documents that I am not aware of. I am just speaking from my personal knowledge. Senator Blumenthal. Do you want to supplement that? Mr. Tilles. Yes, if I might add that it is hard, because, again, we are a relatively new company, it is hard month to month to figure out the exact budget to go into R&D. I can assure you that pretty much every spare dime we have goes into these types of programs. Senator Blumenthal. Well, I have been looking at the testimony that was submitted to the House by Ms. Retzlaff and, you know, I am at a loss to know why that 5,000 percent increase was the number set, why it went so substantially to that number. Maybe you have an explanation. Mr. Tilles. Again, I was at the company, but at the time, I was a Board member. I was not CEO. I did not get involved in the drug pricing. I did get involved in the negotiation of the deal. I do not know how they arrived---- Senator Blumenthal. You cannot really come to this--I apologize for interrupting. You cannot come to this Committee and say, you know, I am Sergeant Schultz. I see nothing. I know nothing. You know what happened, correct? Mr. Tilles. I would like to add that I believe one of the things they were looking at, if you step aside and--I know we cannot, but if you could, for a second, ignore the price increase, that if it was a new drug that we had developed, and it was an old drug, but in that sense, it was---- Senator Blumenthal. Well, that really---- Mr. Tilles [continuing]. it is a life-saving--oh, sorry. Go ahead. Senator Blumenthal. Go ahead. Sorry. Mr. Tilles. It is a life-saving treatment and it is overall, in comparison, I believe, looking in comparison to other drugs of comparable treatments, it is relatively priced. I do agree that there was a price increase. I acknowledge that. Again, the actual amount paid by every patient, as I guess Nancy said before, is a totally different number and many patients get it at a penny per pill, and our program, our desire, again, as I have said before, even though we are not developing a drug from scratch, we are using the profits to develop new drugs from scratch, so it is, in a way, similar. Senator Blumenthal. Do you have anything to add? Mr. Smith. No. Senator Blumenthal. The Nancy you referred to was Nancy Retzlaff? Mr. Tilles. Yes. Correct. Senator Blumenthal. Well, I would ask that you submit to this Committee any additional documents that you may have to justify the decision to raise this price to the specific number of $750 from the much lower price, and any other documents that would reflect on that decision. Thank you, Madam Chair. The Chairman. Senator Warren. Senator Warren. Thank you, Madam Chair. I want to start out by thanking Chair Collins and Ranking Member McCaskill for this deep investigation on drug pricing. Your work shines a light in many dark areas, and this is the first step for changes in the industry. I admire your leadership in this very much. The market for prescription drugs is different from the market for other goods and services, and there are lots of reasons why. Patients need prescription drugs to live and be healthy. They are not like TVs, where you can put off until next month your next purchase. Unlike most consumer products, the drug industry has little price transparency. Unlike most consumer products, there are very long legal monopolies. In many cases, like we saw with Daraprim, there is only one manufacturer selling a drug. If that manufacturer raises the price, consumers cannot just shop elsewhere. These structural differences give drug manufacturers great pricing power, and, you know, I think Spiderman had it right. With great power comes great responsibility, but that responsibility is missing across the drug industry. Mr. Dorfman from the first panel is the former General Counsel of Turing and he was let go after he raised concerns about the company's strategy of jacking up the Daraprim prices. We have his sworn deposition, and in his deposition--I just want to quote it here--he said, ``A price increase along the lines that were taken here is, in my mind, is not justifiable. I do think a price increase that is taken with a drug, if it is necessary to maintain, frankly, the life of a particularly vulnerable patient population that could negatively impact their ability to obtain it, is unethical from a business ethics perspective.'' Mr. Tilles, do you agree with that statement? Do you think it is unethical for a company to raise the prices of drugs needed to save patients' lives so high that patients cannot afford them? Mr. Tilles. Again, with all due respect, to put it in the context of what we were trying to do, the price--I admit there was a price increase. Actually, you know, again---- Senator Warren. We know there was a price increase. That part is clear. Mr. Tilles. Yes, and we were--when Mr. Dorfman left, we were still an early stage company, and as far as I am aware, we had not even really begun our R&D program then because we had no profits to invest in R&D, so he left prior to that being the case. Senator Warren. Well, hold on just a minute. Mr. Dorfman is not some abstract ethicist or some do-gooder. He is a 40-year industry veteran and a former General Counsel of your company, and he is just looking at the question of pricing a drug that is necessary for people to survive at a price where they cannot afford it, and he says these price increases are unethical, and I am just asking, do you agree with his statement? Mr. Tilles. Again, I--at Turing, you know, we are a small company. I see what we are doing, so at first blush, you could say, oh, my God, that is incredibly unethical, but if I see---- Senator Warren. Yes, I think you could say that. Mr. Tilles. If I see the dedication and desire of all our employees--again, I admit, and I have said it, I am not--do not have a pharma background, but we have about over 65 people in our New York office and every one of them is very dedicated to what they are doing, and I find it hard to believe that they would all be there, you know, if they did not see the vision that we have, and I think we are quite misunderstood as to what we are doing. If you spent a day at our company, you would see the dedication. We have scientists and I am very impressed with our R&D---- Senator Warren. Well, let me just stop you there, though, Mr. Tilles. I assume--I mean, you are the CEO of this company. You are the one ultimately responsible for the pricing, and that was the question I asked. Mr. Tilles [sic] said--he was your former General Counsel--he said he thought pricing exactly the way you have priced is unethical, and I am asking the question, do you agree with him, and if--do you agree with him? Mr. Tilles. Again, so the pricing policy that we had in place, again, no--as I have said before, as far as I know, almost no patient pays that price, so it is---- Senator Warren. Well, wait just a minute. There are obviously patients who cannot afford this product, and we know this. There are patients who have testified that they cannot afford this product, so saying ``almost'' is not very good if it is your child who is in trouble, if it is your child whose life is on the line. Let me just underline this. Every time you say this--you know, it sort of makes me jump back a little bit when you say many patients cannot afford it. Let us keep in mind, it does not mean no one is paying that price. We are all paying the higher price through higher insurance premiums, through what we pay in Medicare. You cannot just shove this off. We have people who cannot afford it and we are still asking the question about you have picked a price that your own former General Counsel says was unethically arrived at. Mr. Tilles. Again, the pricing was determined by our Marketing Department and---- Senator Warren. In other words, because you could. Mr. Tilles. No, I would not say that. I would say that there are many things that went into the pricing. The assistance programs we have in place, as I said before, we are trying to develop them as much as we can. If you went on our website, you would see all the programs that are available. You can call us, obviously, as a company. Senator Warren. I have actually just looked face to face with people for whom that is not working. Mr. Tilles. Again, yes, so there were--I am aware--again, I became CEO in December--I am aware that there were, yes, transitional issues when we took it over from Impax. There were not all the programs that might have been in place, and from what I understand, we are doing everything in our power to change that. My goal as CEO is to make sure that there is no patient who cannot get access to the drug, and as far as the pricing issue, I cannot at this point, you know, again, as CEO, I cannot just roll up--we have reduced the price, as I said, to hospitals, and we are doing everything in our power to make sure that access is there, and we are also---- Senator Warren. Well, wait a minute. If you are doing everything in your power, I have a suggestion for you. Lower the price. That will actually make it easier for patients to access the drug and it will make it easier for hospitals to access the drug, for Medicare, for insurance companies to be able to pay it. You do have something entirely within your power. Mr. Tilles. Again, two-thirds of the patients, is my understanding--I am not the head of marketing--but two-thirds of the patients pay a penny a pill. Senator Warren. Well, the question we are asking here is whether or not it is ethical to price the way you have priced, and you have tried to defend this by saying lots of people can afford to pay, and for the people who cannot, it is just too bad? Mr. Tilles. No. I think we have programs in place that if you cannot afford it, you get it for free. Senator Warren. Well, programs that are not working. Mr. Tilles. Well, we are trying to change that. Senator Warren. You are telling me that you are going to lower the price---- Mr. Tilles. No, I did not---- Senator Warren [continuing]. for everyone who cannot pay for it? Mr. Tilles. I did not say it like that. I said we have lowered the price and we have---- Senator Warren. Well, and that is not working. You say you want something that works, so I am asking the question. Are you going to lower the price for everyone who says it is a hardship for me to pay for this? Mr. Tilles. Again, as I have said before, we have many programs in place to make sure they can access the drug. Senator Warren. Well---- Mr. Tilles. Many people are not--are getting it, as I said, for a penny, and apparently---- Senator Warren. Many are not. Mr. Tilles. No, and many for free. Senator Warren. Many are not, and that is the point. and if you wanted access for everyone, you could lower the price. Do not tell me it is not within your control. You know, I should just wrap this up by saying that I agree with Mr. Dorfman. I think that charging patients so much for a drug that they cannot afford it is unethical. It was unethical when Turing did it, and it is just as unethical when the rest of the pharmaceutical industry jacks up drug prices, and they routinely do it. The Washington Post reported last week that Novartis has hiked the price of the breakthrough drug Glivec for leukemia from $26,400 for a year's supply to more than $120,000 today. The Wall Street Journal reported that Biogen has hiked the price of Avonex to treat MS an average of 16 percent per year over the last decade. Amgen raised the arthritis drug Enbrel's price 88 percent over the last 5 years. The Journal also reports that at the beginning of this year, Pfizer raised list prices an average of 11 percent for more than 60 branded products. This happens again and again. The pharmaceutical market may be producing giant profits for drug companies, but it is not working for the American people. Congress needs to take action on this to make sure that this market functions for patients, and I hope to be a full partner in those efforts. Thank you, Madam Chair. The Chairman. Thank you. Mr. Tilles, you have said at least three times today, maybe more, that many patients are getting Daraprim for a penny a pill. You have said that over and over again. You are referring to 340B program, a special program that discounts the cost of medications that go through hospitals that desperately poor patients use. Are you aware that at least three of your colleagues were involved in a discussion--Mr. Patrick Crutcher, Mr. Urrutia, and Mr. Smith--in which they talk about trying to, quote, ``dip out of the 340B claims and say F-these guys. I told her to start disputing the 340B claims. Laugh out loud. Yes.'' There is a discussion of one patient who is from Canada and the suggestion is that he return to his own country. That does not sound to me like a business that is supportive of or concerned about the 340B program making a drug that you have made extraordinarily expensive affordable. Are you concerned about that? You are a small firm. You have three senior people, including the CFO, trying to figure out a way to bypass this program and denigrating this program. Mr. Tilles. Again, I was not actually aware of those discussions before these hearings, but I might add that none of them are a part of the Marketing Department. Again, we have, as I have said before, Nancy has many people on her staff who are dealing with these issues every day. None of those three individuals, as far as I know, were involved in any way in those areas. Nancy heads up patient access. She heads up pricing, all of those issues that we have discussed before. I think those isolated statements are not at all characteristic of us as a company. The Chairman. Well, those are pretty senior people making those statements. Mr. Smith, you have gone out of your way today to describe yourself as being a low-level person in the firm. When you worked for Martin Shkreli at Retrophin, did you report to him? Mr. Smith. Yes. The Chairman. Did you report to him directly? Mr. Smith. Uh, me, along with four or five other business development---- The Chairman. Right. You reported---- Mr. Smith [continuing]. middle-level folks---- The Chairman. [continuing]. to him directly. Mr. Smith. I reported to him directly, yes. The Chairman. That is what your deposition says. Mr. Smith. Yes. He acted as head of business development. The Chairman. Did you report to Martin Shkreli at Turing, also? Mr. Smith. That is correct, again, reprising the role of head of BD. The Chairman. At one point, did you earn in excess of $300,000 a year? Mr. Smith. I believe we have provided all of our company financials. We are a private company. None of this is public information, but if we have not, we are happy to. The Chairman. My point is that you are a highly paid executive that reported directly to Mr. Shkreli. Were you the individual who located Daraprim and suggested that the firm buy it or invest in it? Mr. Smith. No. The Chairman. Do you know who that person was? Mr. Smith. I believe it was Patrick. The Chairman. Mr. Crutcher? Mr. Smith. Correct. The Chairman. In your deposition, you stated that the first time you heard someone suggest that there were any access problems for Daraprim was when your colleague appeared before the House Committee on February 4, but that statement is not accurate, is it? Mr. Smith. I was referring to the ongoing issues. Any--it was my impression from the commercial team that any issues that I came across, whenever I spoke to them, they would say it has already been addressed or they have been working on it. The Chairman. Well, in your deposition, you were asked the question, were you aware that there were access issues for Daraprim. You responded, ``During the Senate,'' and you later corrected to mean the House, ``hearing committee where Nancy spoke. I recall one of the Senators,'' you meant Congressmen, ``mentioning something, but outside of that, that was the first time.'' Mr. Smith. Right. It was my understanding that they had all been taken care of. The Chairman. Well, I am trying to reconcile your testimony during the deposition with the discussion you had on the website, on the Skype chat, back in October 2015, October 20, with two of your colleagues, when you specifically addressed the subject of access concerns presented on the website HIVclinician.org, a forum that is dedicated to medical professionals reporting access problems with Daraprim, and your response was, ``I think some of these are fake.'' Mr. Smith. My experience with that website is that they have censored a lot of posts that we have tried to provide to inform patients where they can access Daraprim, and just--we monitor it frequently and we try to get in contact with them, and I understand that it has created an additional barrier, where there is someone who knows someone who has--who needs to access Daraprim and they are actively preventing us from, is my understanding---- The Chairman. You heard testimony today from Mrs. Weston and an infectious disease specialist who talked about access problems that they know firsthand of. Do you still think that this is a fake problem? Mr. Smith. For the Westons, absolutely not. No. The Chairman. Are you discounting the testimony of Dr. Adimora? Mr. Smith. With regard to that website specifically, because of the difficulties we have had with working with them in order to get the drug to patients, I felt that they were not doing everything in their power to--and they did not have our interests at heart in terms of providing---- The Chairman. Well, I am not surprised they do not have your interests at heart, given that you imposed a 5,000 percent increase on a medication that their patients desperately need and that you yourself have described as the gold standard. Mr. Smith. Right, but I would expect them to be more focused on getting drug to their patients rather than---- The Chairman. They wrote a letter to Mr. Tilles, which he still has not answered, back in December from three respected medical societies saying they were having access problems because of the price. Do you discount that? Mr. Smith. Again, these matters are chiefly dealt with by Nancy Retzlaff, so I do not have the---- The Chairman. Mr. Tilles, do you discount that letter? Do you think these are fake reports of access problems? Do you agree with Mr. Smith on this issue? Mr. Tilles. I do not discount the letter at all, and as I said before, again referring to Ms. Retzlaff, we, as I understand, did reach out to those organizations many times. The Chairman. Well, according to the information that we have received, there still has been no answer to that letter. Mr. Smith, in your testimony, you indicated that investors sometimes make the assumption that restricted distributions make it difficult for generic companies to obtain product samples for bioequivalence testing. You further say that investors also sometimes assume that drugs tend to be more valuable if they are the preferred treatment for serious diseases and there is no good substitute. Well, we have looked at Turing's--it is Exhibit 4--we looked at Turing's investment presentations on Daraprim and it indicates the following. Daraprim is the preferred treatment, the gold standard. It also indicates that Turing management has experience with restricted distributions. The presentation calls it, quote, ``a high-touch closed distribution system'' and emphasizes that it would be difficult for a generic to enter the market until at least mid-2016, possibly much longer. Mr. Smith, can you understand why an investor would make these assumptions when Turing presents this case as the precise reasons why people should invest in Turing? Mr. Smith. This distribution system that we describe here is, as I said, at Retrophin something that we put in place and had success with in---- The Chairman. Success is defined as keeping generic companies from buying up enough of the medicine in order to do the bioequivalence studies, correct? Mr. Smith. I think you misunderstand the channels, so the specialty channel that we sell through, we have control of that channel. We do not have control through--for, I believe, 60 to 70 percent of our product by unit that we ship out. We have no--I am not aware of any reason why, you know, a generic could not get access to that. The Chairman. Well, there is absolutely no reason, according to the medical experts that we have talked to, to put this drug into a specialty pharmacy or a restricted distribution system other than to prevent generics from buying up enough of the drug to produce a lower-price generic version. The only exceptions are drugs that have special safety risks, and that is not the case here, according to what the experts tell us. Senator McCaskill. Senator McCaskill. Let me first turn to Mr. Tilles about R&D. Mr. Dorfman indicated in his testimony, and I think Senator Warren covered it, that he believed the price increase was not justifiable, and you said in response to Senator Warren that he left before you had really begun any R&D. That is what you said. Mr. Tilles. Being able to pay for any R&D. We did have a plan. We just did not have the money. Senator McCaskill. Well, your management report says you had already spent $8.5 million on R&D before September, so what was that money? Mr. Tilles. No, that is---- Senator McCaskill. It clearly was not R&D, because you said you did not have any R&D before he left. You put down on your management report you spent $8.5 million on R&D and had not done any. Mr. Tilles. Yes. We had some initial investment in the company, but we could not ramp up R&D to the degree that we wanted. There was some initial investment in some early programs in our pipeline. It is all in the presentations. We had several at the time. Recently, we have had to cut back on a little bit because we just do not have the money. As we have said many times, it is very expensive to carry these drugs through fruition, but I am there and we do remain an R&D focused company, despite the---- Senator McCaskill. I am--you know, seriously, I mean, I cannot trust these books. You say in your testimony you did no R&D before Dorfman left and your books say you spent $8.5 million on R&D before Dorfman left. Let me go through the numbers with you. In September, you had $21 million in gross revenue. Your book says that you spent $3 million on R&D and had 36 employees in R&D. I assume most of the costs that you are charging to R&D is, in fact, your personnel. Mr. Tilles. No, I would not say that. Senator McCaskill. Okay. what percentage of your R&D budget is personnel? Mr. Tilles. Again, I would have to look. I do not want to-- -- Senator McCaskill. Well, this is your specialty now. You know about the numbers. This is what you do. You do not know pharma, but you know the numbers, so tell me what percentage of your R&D is on personnel. Mr. Tilles. Right today? Senator McCaskill. Mm-hmm. Mr. Tilles. I would say a very small percent. In terms of personnel, you are talking about their salaries? Is that what you are---- Senator McCaskill. Yes. I am talking about the overhead to the company for paying the people that are doing the R&D. Mr. Tilles. Right. No, I would say it is significant. Again, Dr. Eliseo is our highest paid employee---- Senator McCaskill. Okay. Mr. Tilles [continuing]. who is the head of R&D. Senator McCaskill. Okay, and how many---- Mr. Tilles. So--but---- Senator McCaskill [continuing]. people work for this doctor? Mr. Tilles. We have about probably 20 people there. Senator McCaskill. Okay, and so what is the total of that payroll? Mr. Tilles. Umm, I would say it is about--well, again, I would say--I would say it is about 20 percent, at least, 30 percent. Of total payroll. Senator McCaskill. Tell me the number. Mr. Tilles. Umm, again, I would have to look. I am sorry. I do not have it at hand. Senator McCaskill. Okay. Well, we---- Mr. Tilles. I apologize. Senator McCaskill. You know, it does not make any sense, because what you have got on your management reports makes no sense. You have got, you know, $20 million in gross revenue and you spent $3 million on R&D, which, by the way, is not near 60 percent. You have got 36 employees, you say, that are doing R&D. Then in October, you say you spent--you have $26 million in gross revenue. You spent $3 million again on R&D, and you have no number for employees. Then in November, you say $16 million in gross revenue. Now, you are up to 46 employees in November on R&D, and spent $3.7 million, and then in December, you have $27 million in revenue and you spend $7 million, you say, on R&D and once again, 36 employees. Now, here is the question. In January, you have $8 million in revenue, R&D is $1.3, but you still say you have 36 R&D employees, so where is all that R&D money going, because it says here you are paying $1.3 million for 36 people. That is quite a bargain for 36 scientists. Mr. Tilles. Well, again, we have several programs, which we could go into detail about---- Senator McCaskill. You understand these numbers make no sense. Mr. Tilles. I--again, I do not have them in front of me. Senator McCaskill. It appears to me that the books are being presented in a way to give the impression that this is about R&D, and let us be clear about where this R&D money is coming from. You are not calling Mr. Wichman and asking for investment for R&D. You are not going out and finding capital for R&D, like many pharmaceutical companies do. You are going to families like the Westons and saying, we want you to pay for our R&D. The notion that you, Mr. Smith, with your finance degree from Fordham, are trying to tell this Committee that this was about increasing utilization of a drug, jacking the price? No. It was about an orphan drug price. It was about a business model that meant money, money, money raining from the sky. It was about a drug that was making $5 million a year for the previous company that you made $69 million on last year, even while the numbers were going way down in terms of how much of the drug was going out the door. Mr. Smith. Can I provide some context? Senator McCaskill. Sure. Mr. Smith. For the gross revenue numbers that you are quoting, those--gross revenue is not revenue that a company actually receives. There is a discount that goes in, so for example, the drug we sell to 340B programs, that would be incorporated in that discount, so the actual revenue number is much lower, and then, in terms of the IMS data that you are referencing, IMS gets their data from wholesalers and pharmacies which do not have complete visibility into all the channels. Senator McCaskill. Yes. Mr. Smith. In addition to that---- Senator McCaskill. It is the industry standard, Mr. Smith. You can give me all the context you want. You know what would really be refreshing? If you guys would just own this. It is so obvious to anybody. I mean, I spent a lot of time on this. You know, I have tried to really understand. It is very obvious what this is. Mr. Wichman knows what it is. He knows exactly what it is, and let us turn to Mr. Wichman. You said in your opening statement, you are passive investors, have never had an activist role in any company in the pharmaceutical space. I am going to direct your attention to a series of e-mails between you and Mr. Shkreli concerning a different company. This is a company with the drug--this is Retrophin and this is the drug that has to do with kidney disease, and I think it is, by this e-mail discussion, it is hard to see you as a passive investor. I will not go through all of it, but in several back-and- forths, Shkreli says to you, ``I have to be careful with giving you minute-by-minute updates on the company,'' smiley face, and then in this exchange, you are discussing with Mr. Shkreli how to market the news of the acquisition to the rest of Wall Street. The same morning, Mr. Shkreli informs you that Retrophin is looking into acquiring Thiola. He states in his e-mail, and I quote, ``The drug does $1.2 million in sales. It is woefully underpriced and would not stop selling at orphan prices. With new pricing, we estimate sales of $20 to $40 million, almost 95 percent EBITDA margins at these prices. Would be an annuity for some time.'' Then he adds, and I quote, in an e-mail to you, ``A hundred-million dollar present to you this morning, correct?'' Now, I take it that what he means when he says the drug would not stop selling at orphan prices, he means that the price of Thiola could be drastically increased. It would not affect demand. Do you understand that is what orphan prices are? Do you want to see the depositions? What are the pages, guys? What are the pages for the e- mails. Here we go. Mr. Wichman. Senator McCaskill---- Senator McCaskill. It is Exhibit 10, Exhibit 10 in your book. This is a back-and-forth e-mail from you and Mr. Shkreli on May 3, beginning at 8:41 a.m. This is where your e-mail begins, on page two of the exhibit. ``It sounds like no lose, to put it mildly. Don't have to run a model on this one this weekend to give you my opinion,''and listen to your opinion. ``Funny that these small companies still haven't realized you can raise price aggressively and nobody gets too upset. Obviously, it depends on the product, but I figure this dynamic may not last forever. You need to maximize opportunities while you can. In the real boring spec pharma space, I kind of look at HZNP Horizon versus Depo,'' which is the Wall Street--I do not know which company that is. Who is depo? Mr. Wichman. Depomed. Senator McCaskill. Depomed. ``Own and like both companies. Have nothing but good things to say about Depo, but Depo is very cautious and conservative while Horizon says this price dynamic might not last forever, at least on these reformulated pain products, so let us maximize our cash-flows now and diversify it over time. It is not like people are giving companies gold stars for charging slightly lower prices. Thanks, guys, for charging 500 a prescription, not 800. In that land, the generics are not your competition and do not even try. Anyway, it is different in orphan land and probably more sustainable. It seems like at this point these little guys would get the idea they could push things a bit. How can they ever make money with that model? Bottom line is I will not get too excited, but it sounds very intriguing.'' You guys are discussing the business model that I want everybody to own up to here, finding an orphan drug that has inelastic demand and jacking the price up for a period of time before another generic can get in the space, or maybe the demand is so low that another generic never gets in the space and people like the Weston family just suffer. Mr. Wichman. Thank you, Senator McCaskill. I, first, would like to provide a little context and clarify that at the time-- the e-mail you are talking about, the background, it was actually a number of weeks prior, we had been approached by Barclays, along with a number of other investors, about a completely different acquisition. This was the--$190 million-- this was another acquisition. It was a--we had been working for a number of weeks on this, modeling this acquisition, doing our diligence, and that was the focus heading into the e-mail you are referring to. Senator McCaskill. Yes, and then we go into, ``The deal we are working on''--this is from Martin Shkreli to you, about 3 minutes later--``the deal we are working on is very simple and Manchester-like. We would pay $1 million to acquire a drug called Thiola, which is the only treatment for a rare disease called cystinuria. The drug does $1.2 million in sales. It is woefully underpriced and would not stop selling at orphan prices.'' Now, orphan prices means jacking the price way up, right? Mr. Wichman. Higher prices. Senator McCaskill. Yes, and orphan prices is a term in this area where you know you can really jack up the price because there is not competition. You have got a monopoly. That is why it is called an orphan, right? It is all by itself. Mr. Wichman. Right. Senator McCaskill. It would be annuity for some time, and that is where he says, a million dollar present--``a $100 million present for you this morning.'' I would say I will be happy with that--this is what you say. ``I would say, I will be happy with the one I know about, but I am always open to more as long as you guys have the personnel and time and expertise to handle it all.'' Then he goes, ``Steve is the best.'' It goes back and forth, and then you say, later on, May 3, Saturday, May 3, ``Yes, fair enough. Once this deal closes, I'll go back to being less a pain in the ass. Sounds good on Steve. A ying and yang perhaps, and hope the other stuff works out. Assuming this looks like a done deal this weekend, I'd love to discuss a little of how you will convey it to the street. I--" Mr. Wichman. Senator McCaskill, I apologize. I was referring to a completely different deal there. I was not referring to this deal that you are discussing. That was a completely different deal that we were doing the work on. Senator McCaskill. Okay. Mr. Wichman. That never happened. Senator McCaskill. Okay. Well, I think that the essence of these e-mails, if you look at all of these e-mails, is that you are really engaged with Mr. Shkreli back and forth, I mean, minute by minute. How are you going to present the deals, you know, pricing, and I know you did not follow him to Turing. I know you said, enough, and I will give you an opportunity to say why. I mean, this would be the chance you would have to say you thought the guy was flaky or something. Mr. Wichman. Maybe, first, a comment on those e-mails, because again, a lot of those e-mails referred to a deal we were working on with Barclays and other investors confidentially and a deal that never happened. In the context of multiple weeks of discussion, Mr. Shkreli mentioned a product I had never heard of before, product Thiola. He mentioned it. It was a Saturday morning. I was home with my kids. I provided some snap observations about the industry and the dynamics as they were at the time, and I think it is very important to point out that when--as a fund, when we are looking at maximizing opportunities, we are not talking about maximizing price alone. I do not believe you can be a successful company by simply maximizing price, and just again, to give context, after this conversation, we went back to talking about this other deal that never happened. I did not hear about Thiola. I did not think about Thiola until the end of the month, but when we talk about maximizing opportunities, we are talking about we make long-term investments where we-- where companies maximize access for patients, and I think it has played out where Thiola is now used in approximately twice as many patients as it was at the time of the acquisition. You maximize improvements in manufacturing. Our understanding is Thiola had not actually been supplied to the market for a lot of 2012. There were supply shortages. There was bare bones manufacturing. The supply was improved when Retrophin acquired the product. There was improvements potentially in the actual formulation of the drug. Our--again, we did the work multiple weeks later, once we actually heard that this is a real deal, and this is a drug that patients take, our understanding is, eight to ten pills a day, potentially as many as 16 to 18 pills. Retrophin has said publicly that they are working on the next generation version of this drug that could be far more convenient for patients, and as mentioned before in my opening statement, Retrophin is a company that spends significant amounts of money on R&D in particular---- Senator McCaskill. I listened. I understand all of that, and I--you have plenty of opportunity to put anything in the record you want to put in the record, and we will have more questions. I think it is really clear when you read these e-mails in context, when you read them all, it is very clear what is going on, and I am not saying that there is anything inherently evil about wanting to make money. I am saying that the business model that finds an orphan drug with an inelastic demand and no competition and the ability to jack up prices--and I am going to quote you, and it may not have been about this deal, but these are your words, Mr. Wichman. ``I hear you on the pharma mentality. It is ironic how it took two companies, Jazz and Horizon, the brink of insolvency to decide they should aggressively play the price card, and Questcor is obviously a poster child. For the heat and bad PR they took, didn't work out so badly in the end, did it. Not every deal and not every product will work out.'' I mean, I guess what I am trying to tell you is, the overarching message of this hearing is that we have places in the pharmaceutical industry that are gouging families like the Westons for quick profits, big profits, and I am assuming you guys get stock options and bonuses? Mr. Smith. I think we have made all of our financials----- Senator McCaskill. I am asking you. Mr. Smith. I think we have submitted it to the Committee-- -- Senator McCaskill. You will not tell me? I do not have it in front of me. I would like to hear it. Mr. Tilles. No bonuses. Senator McCaskill. Stock options? Mr. Tilles. There is an employee option plan. Senator McCaskill. Yes, and I am sure Mr. Shkreli got stock options. You said he did not take a dime. He got no stock? Mr. Tilles. Oh, no, stock? Yes, options---- Senator McCaskill. Yes, and he can trade that stock, and I think that stock has been pretty valuable from what---- Mr. Tilles. Oh, I am sorry. You meant Retrophin. Sorry. Sorry. Thought you were talking about Turing. Senator McCaskill. Yes. I mean, he--I do not think anybody is saying---- Mr. Tilles. I did not---- Senator McCaskill. I do not think anybody buys a $2 million album of Wu-Tang if they do not have any cash on hand. It looked he had more cash on hand in December than your company did, so I think he turned out--I think he came out just fine in the deal. Mr. Wichman, I guess if you can provide more information to this Committee about how we do a public policy that stops this, but does not stop meaningful R&D in this space, because I think that there are hucksters out here trying to make a quick buck because they see these orphan drugs and they know that the people who need them are going to need them no matter what, and you can say all you want to about a penny a pill, but this family and millions of other families like that, for lots of different drugs, are facing exorbitant price increases that the market does not really bear out because there is not competition. Mr. Wichman. Thank you, Senator McCaskill. I would just add, on--and, again, Broadfin did not invest in Turing. With Thiola, in particular, we have talked to physicians. We have-- we attended the Society of Nephrology meeting late in 2014 to understand how they were looking at Retrophin and how this was working out, and our understanding, and it is not comprehensive, but the physicians we have talked to have been very happy with how this has played out. Our understanding, again, based on public information, is approximately--there are now twice as many patients on Thiola as there were at the time that this product was acquired, so you know, I cannot speak to other products, other acquisitions that we did not make, but---- Senator McCaskill. Well, we will take a look at the IMS data on that drug, and what was the price increase there, what percentage? Mr. Wichman. It went from, I believe, $1.50 to $30 a pill. Senator McCaskill. Yes, $1.50 to $30 a pill. I do not know how that helps get more people the drug. It is counterintuitive. I feel every once in a while in this hearing, every time you guys say, oh, we are going to jack up the price and we are going to have more utilization, and meanwhile, the University of North Carolina is helping them get through a crisis because the insurance companies have now figured out that--in fact, one of the people involved in this said--I think in one of his e-mails--the insurance companies just absorb it. I think it was from you, Mr. Wichman. I think you said that the insurance companies just absorb it, or maybe Mr. Shkreli, but in one of the e-mails I read in preparation for this hearing. I am way over my time and my Chairman has been very patient with me. Thank you all for being here today. We are not done. We are not done, so better grab while the grabbing is good because something is going to happen. The Chairman. Today's hearing is the second in the Committee's investigation. As the Ranking Member has just indicated, our investigation is ongoing and will feature additional scrutiny on others of the four companies in particular which have been our focus. Today, we have examined a business model used by Turing and Retrophin to target certain drugs for acquisition in order to generate huge profits. As we have seen, the business model at both Retrophin and Turing involves identifying a sole source drug that is the gold standard for treating a particular condition, preferably one that serves a small patient population, then putting that drug into a closed distribution system, if it is not already there, and then hiking the price as high as it will go. We have seen, thanks to the Westons and thanks to the infectious disease specialist who testified, that real people are being hurt by the access issues created by the closed distribution system, which prohibits generic competitors, and, of course, by the egregious and unacceptable price increases. Committee members will have until Monday, March 28, to submit additional questions for the record. I want to thank our witnesses today, and I also want to thank our Ranking Member, in particular, as well as all the Committee members who participated in today's hearing. This hearing is now adjourned.[Whereupon, at 1:00 p.m., the Committee was adjourned.] ======================================================================= APPENDIX ======================================================================= ======================================================================= Prepared Witness Statements ======================================================================= [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] ======================================================================= Statements for the Record ======================================================================= [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] [all]