Once a Notorious Short Seller, Martin Shkreli Now Sees a Future in Biotech
Martin Shkreli doesn’t sit still. Slouching in a modern black chair at the Manhattan offices of Retrophin, the biotechnology company he started three years ago, he fiddles with a keyboard connected to a wall-mounted monitor, multitasking even as he gives an interview. As he talks, he flips through a copy of the Journal of the American Medical Association. He tugs at the blue hoodie he’s wearing over a crimson golf shirt and jeans. He’s 31 years old but could easily pass for an undergraduate.
The child of working-class immigrants from Albania and Croatia, Shkreli skipped grades and landed his first job as a 17-year-old college intern for Jim Cramer, the hedge fund manager and host of CNBC’s Mad Money. Restless in his clerical role, Shkreli recommended shorting a biotech stock—betting the company’s share price would drop. Sure enough, it did. Cramer’s hedge fund profited, and the Securities and Exchange Commission called to ask if there’d been any funny business behind the prescient wager. At 19, Shkreli found himself under SEC scrutiny. The agency found nothing amiss.
In his twenties, after he’d set up his own hedge fund, Shkreli developed a reputation for using a stock-gossip website to savage biotech companies whose shares he was shorting. This was not a path to popularity in biotech. In 2012 the nonprofit Citizens for Responsibility and Ethics in Washington (CREW) publicly accused him of trying to manipulate the U.S. Food and Drug Administration for financial gain. Once again, Shkreli emerged without facing government charges. “I hit this field like a tornado,” he boasts.
By the time regulators finished clearing him of misusing the FDA, Shkreli had started Retrophin. The name refers to “recombinant dystrophin,” Shkreli’s initial product idea for an engineered form of a protein that’s lacking in patients with a type of muscular dystrophy. Self-trained in biology, he says he wrote the genetic sequence himself for recombinant dystrophin after reading copious academic literature on the topic. One day he plans to manufacture the drug. Meanwhile, Retrophin has been acquiring the rights to obsolete remedies Shkreli says can be put to new and lucrative purposes. He describes the transition from hedge funder to corporate leader as a function of maturing and realizing his life’s mission. “I want to cure many diseases and save children’s lives,” he says.
This January, Retrophin jumped from an over-the-counter stock to a Nasdaq listing. To celebrate, the company held a supplementary stock sale that easily raised $40 million. One investor was hedge fund mogul Steven Cohen (whose SAC Capital Advisors pleaded guilty in November to securities fraud). In February, Shkreli announced a $63 million acquisition that brought Retrophin its first revenue-producing FDA-approved drugs. Between New Year’s and early April the company’s stock rocketed 230 percent, to more than $23, before falling to $12 in a biotech downdraft. Without having recorded revenue, let alone profit, Retrophin has a market cap of $300 million, even as its SEC filings contain a disclaimer from its auditor, common for early-stage startups, about “uncertainty as to the company’s ability to continue as a going concern.” When it was shooting up, Cramer called Retrophin “a frothy stock” on his cable show.
Perhaps, but Shkreli, having helped drive the early-spring surge by buying Retrophin shares on the open market, has become, on paper, a rich young man. Subordinates refer to him as “the boy genius”; from an investor’s perspective, he’s “a high-risk, high-reward play,” says Alan Geller, a retired oil trader and investor in Retrophin.
Rarely does someone who’s made a name for himself as a short seller turn around and take the ultimate long position: starting his own company in the very industry he’s spent years strafing. Geller, who invested with Shkreli back in his hedge fund days, says this is what makes Retrophin so compelling. But has Shkreli undergone a conversion, as he claims, to creating value and saving lives? Or is he using what he learned about biotech—a field notorious for empty promises—to game the field? “He’s definitely a genius,” Geller says. He’s also “a little flaky. I’m betting he’s going to make a billion dollars rather than blow up.”
Shkreli’s formal education culminated with a bachelor’s degree in business from Baruch College. His corner office is stocked with an arsenal of Nerf assault weapons, and he periodically reminds his 3,500-plus followers on Twitter of his affection for the cartoonish pop singer Katy Perry. At the same time, established scientists whose drug trials Retrophin is sponsoring express deep respect for his scientific and medical insights. “Martin’s brash,” says Dr. Susan Hayflick, chair of Molecular & Medical Genetics at Oregon Health & Science University in Portland, “but his ideas are original, and they could save lives.”
Shkreli grew up in the Sheepshead Bay section of Brooklyn, a bright kid whose immigrant parents had janitorial jobs. He played electric guitar and chess and idolized Bill Gates: “I always wanted to start a public company and make a lot of money,” he says. In 2000, lacking resources and gravitas, he got his foot in the door at Cramer, Berkowitz & Co., a small, high-profile hedge fund with investors such as New York real estate scion Eliot Spitzer, then the state’s attorney general and later its governor until he resigned in a prostitution scandal. (Cramer left his namesake fund less than a year after Shkreli arrived and didn’t know Shkreli well. Rarely at a loss for words, Cramer declined to comment for this article.) “I was supposed to keep the copier filled with paper,” Shkreli recalls. Soon, though, he was recommending trades to more senior colleagues.
He researched Regeneron Pharmaceuticals, which was testing a weight-loss drug. “It looked like bulls--- to me,” Shkreli says, and in early 2003, Cramer Berkowitz backed his hunch. That spring, Regeneron admitted the drug was a disappointment; the company’s shares lost half their value in a single day. Not long after, several SEC attorneys called Cramer Berkowitz to ask whether the firm had traded on insider information. No, Shkreli said, he’d done his homework and followed all the rules. The SEC dropped its inquiry, he says. “I had a ball with it.”
After four years at Cramer Berkowitz, he moved on to jobs at UBS and Intrepid Capital Management before starting his own hedge fund in 2006. Elea Capital Management, by his own description, wasn’t terribly successful. In 2007, Lehman Brothers sued Elea in New York state court for failing to cover a “put option transaction” in which Shkreli bet the wrong way on a broad market decline. When stocks rose, Shkreli didn’t have the funds to make the bank whole. In October 2007, Lehman won a $2.3 million default judgment against Shkreli and Elea. The following year, however, Lehman imploded. No one ever demanded the $2.3 million, Shkreli says, adding, “I would make them whole now if they wanted.”
Despite setbacks at Elea, Shkreli retained the faith of enough wealthy individuals to start a new hedge fund called MSMB Capital Management in 2008. At MSMB (his initials combined with those of a childhood friend and business partner, Marek Biestek), Shkreli found his trading legs as a short seller. Rather than pick targets and sit back to wait for them to falter, he combined short sales with loud public pressure. On Christmas Day 2010, he wrote a letter to FDA officials urging them to reject an inhaled insulin remedy produced by MannKind of Valencia, Calif. Making no secret of his financial interest in seeing MannKind’s stock decline, Shkreli criticized the company’s clinical trials as deficient. Weeks later, at an investment conference in San Francisco, he confronted MannKind Chief Executive Officer Alfred Mann, a stalwart in the medical device field. “There was a lot of shouting,” Shkreli recalls.
Over the course of 2011, MannKind’s shares lost two-thirds of their value, falling to $2.50, and Shkreli’s short sale paid off. On Jan. 20, 2012, the FDA formally requested that the company run additional trials on its inhaler. Asked for comment, Mann “respectfully declined,” spokesman Jeff Hoyak said. On April 1, 2014, the company’s Afrezza inhaled insulin product won the backing of a panel of FDA advisers. MannKind’s stock has bounced to about $6.
Shkreli often advertised his short positions on an investing website called Seeking Alpha, where he encouraged others to follow his lead. In March 2012 he took on San Diego-based Cytori Therapeutics, criticizing “regenerative” treatments it was developing to use stem cells to rebuild damaged tissue. “Regenerative medicine is a meaningless and embarrassing buzzword that means nothing,” Shkreli declared. By early April the company’s stock had plummeted 30 percent, to about $2.
“In our field, sentiment affects stock price, and even one negative comment that seems informed, whether or not it really is informed, can have an impact,” says Mark Saad, Cytori’s chief financial officer. He points out that one of the company’s devices for treating heart patients has received regulatory approvals in Europe and is in clinical trials in the U.S. “If the data we’ve seen in Europe are repeated in the U.S., we anticipate very successful products,” Saad says. The company’s stock has gone up and down, with a high of $3.35 last November and an April 15 close of $2.25.
Another observer troubled by Shkreli’s methods was Citizens for Responsibility and Ethics in Washington. The nonprofit watchdog group did extensive research on MSMB’s activities and then asked the SEC and the U.S. Department of Justice to investigate Shkreli’s alleged “behind the scenes efforts to manipulate the biotech industry market for financial gain.” In a July 9, 2012, letter to Preet Bharara, the U.S. attorney in Manhattan, CREW listed obscure companies with names such as Avanir Pharmaceuticals, Zalicus, and Mesoblast that Shkreli had shorted and publicly debased. In the case of yet another company, now known as Navidea Biopharmaceuticals, he’d submitted what’s known as a citizen’s petition to the FDA, asking the agency in June 2011 not to approve a lymph-node mapping agent he claimed hadn’t been tested properly. Navidea’s stock dropped 33 percent in a month, to $3.29 on July 1, 2011. “This evidence suggests a pattern of suspicious behavior in the trading of biotech stocks that warrants a thorough investigation,” CREW told Bharara.
The Justice Department and the SEC apparently disagreed. There’s no evidence that either launched a formal probe, and spokesmen for both agencies declined comment. A spokeswoman for Navidea also declined to comment. Its stock is trading at less than $2, although in March 2013 it announced that the FDA approved its Lymphoseek product. “It’s obvious CREW just didn’t know what they were talking about,” Shkreli says. “I fully disclosed my financial interests in every case, and there’s nothing wrong with taking short positions. I even gave CREW tons of documents to help explain how this works. The whole thing was kind of fun.”
On the general topic of short selling, Shkreli has the better of the debate with his antagonists. Although his analysis of a given product might or might not be scientifically correct, he operates in the open and hasn’t been accused of wrongdoing by government authorities. Even though they’re considered distasteful by some in corporate management, short sellers, similar to plaintiffs’ attorneys, have a financial incentive to ferret out corporate foibles and shed light on information that may have broad societal value. Nevertheless, Shkreli says he yearned to do more with his life than “swashbuckling speculation.”
Darren Blanton, a Dallas-based biotech investor who made money on Shkreli’s short bets at MSMB, takes credit for urging the younger man to switch from profitably maligning other people’s products to developing his own. “I told him about a friend’s son who died of myotubular myopathy, and Martin seemed genuinely moved,” Blanton recalls. Shkreli, he adds, “is someone who showed real skill in digging through thousands of pages of drug trial results and really understanding what he’d read.”
In 2011, Shkreli used $3 million raised from MSMB investors to start Retrophin. In addition to Blanton, Retrophin’s initial financial backers included the family of Fred Hassan, former CEO of pharmaceutical giant Schering-Plough, to whom Shkreli introduced himself at a pharmaceutical conference in 2004.
To realize his aspirations with Retrophin, Shkreli had to grow up in more ways than one. As a hedge fund manager, he admits, “I did sleep on the floor of my office sometimes. I didn’t brush my teeth as often as I should have.” Today, he continues, “I think my hygiene has improved quite a bit.” On the other hand, he still prides himself on obsessiveness, pointing to the stacks of well-thumbed medical journals that make sitting on his office couch impossible. “I had an investor,” he recounts, “who said to me he’d keep his money with me as long as I didn’t have a girlfriend and I didn’t start combing my hair.” Geller, the former oil trader who invested in MSMB and Retrophin, says that during one visit to the company’s new headquarters on Third Avenue, he encountered Shkreli “wandering around in fluffy slippers with a stethoscope around his neck.” Noting that the newly minted CEO lacks an M.D., Geller asked Shkreli about the get-up. “I’m working, and I’m comfortable this way,” he responded. “Geniuses do stuff like that,” Geller says, unperturbed.
Shkreli took the company public in late 2012 by means of a “reverse merger” with an existing shell company called Desert Gateway. Some investors frown on reverse mergers, as they suggest a corporation can’t raise funds through a straightforward initial public offering. Shkreli, however, was in a hurry. Retrophin’s $63 million purchase in February of Manchester Pharmaceuticals illustrates Shkreli’s strategy of buying the rights to obsolete drugs and repurposing them as treatments for rare illnesses. Manchester’s main asset is Chenodal, an FDA-approved drug to treat gallstones that hadn’t caught on commercially. Chenodal, or chenodeoxycholic acid, can also be used to treat a rare disease called CTX, or cerebrotendinous xanthomatosis, which, if unaddressed, can cause brain damage and early death. The FDA has granted Chenodal orphan drug status for CTX patients, meaning that for a period of years, its owner receives valuable financial incentives to proceed.
A year’s course of Chenodal costs $110,000. Retrophin plans to raise the price even further “to normalize Chenodal’s pricing to be more in line with other ‘ultra orphan’ drugs,” Shkreli said during a Feb. 13 investor conference call. “There are at least 500 to 1,000 CTX patients in the U.S.,” he added, with fewer than 10 percent taking Chenodal. In other words, there’s an underexploited market with sky-high possible margins. “This might seem cynical,” noted Evaluate, a London-based biotech-industry research firm, in a report after the conference call. And it might work, Evaluate indicated. “The Chenodal plan broadly reflects the rest of Retrophin’s pipeline.”
Synctocinon, a drug Retrophin licensed from Novartis, was approved in the 1960s for assisting new mothers with lactation. It was withdrawn in the late 1990s because of poor sales. Retrophin plans to develop it as a treatment for schizophrenia and autism. It has also licensed Sparsentan from Ligand Pharmaceuticals, intending to develop the hypertension drug for the treatment of focal segmental glomerulosclerosis, a rare children’s kidney disease.
Shkreli takes every opportunity to emphasize his humanitarian motives. Only a day after his Feb. 13 conference call forecasting price hikes for Chenodal, he read a Bloomberg News dispatch about pharmaceutical shortages in Venezuela. The report described an 11-month-old boy awaiting a liver transplant. His father was struggling to find the medication his son needed to stay alive until the operation. Shkreli asked me to put him in touch with the Bloomberg correspondent in Caracas. On Feb. 15, Shkreli took to Twitter to announce, “Five executives at RTRX [Retrophin’s stock symbol] spent most of Friday night and this morning trying to get a non-RTRX drug to a dying kid in Venezuela.” At no charge to the infant’s family, the company arranged for a year’s supply of ursodeoxycholic acid, which it doesn’t produce, to be shipped to Venezuela. “This has been a blessing to us,” the father, Joel Correa, 26, told Bloomberg. In an e-mail, Shkreli wrote, “It is our obligation to take responsibility for the community of people that we have joined by being drug developers.”
Shkreli’s aggressive style can surprise some in his field. Hayflick of Oregon Health & Science University was taken aback when he first called her out of the blue in 2012 to ask about her quarter-century of research on pantothenate kinase-associated neurodegeneration, or PKAN. Stemming from a protein malfunction, PKAN can cause severe childhood nerve and muscle symptoms—including jerking, twisting, and rigidity—and typically kills its victims by the age of 10. It’s thought to afflict 5,000 to 10,000 children worldwide. In her lab, Hayflick had identified the relevant gene behind PKAN, but accepted theory held that a remedy couldn’t be formulated. To Hayflick’s surprise, the cocky young man on the phone proposed a molecular modification he thought would do the trick. He needed a Ph.D. researcher to see if he was right and asked Hayflick what she thought. “Damned if it doesn’t do what he thought it could do,” Hayflick says. “It’s impressive. It’s humbling.”
Financed by Retrophin, Hayflick is doing further testing on toxicity and efficacy. “We’re laying the groundwork for human studies,” she says. Shkreli “showed genuine appreciation for the 25 years of work we’d done.” He visited her lab and observed her research. “He’s nerdy, like myself,” she says.
Retrophin’s PKAN compound, known as RE-024, appears to be the most promising remedy for addressing the disease. Shkreli speculates the market has been underestimated. “There have to be more PKAN patients than anyone currently thinks,” he wrote on Twitter last November. “I hope we can stamp out this most horrific illness.” He hasn’t yet put a possible price tag on RE-024.
Even skeptics such as Stephen Brozak, president of WBB Securities in Clark, N.J., concede that Shkreli has spun a story that appeals to risk-tolerant investors. “Wall Street likes him,” he says, but “what products do they have?” Given biotech’s legacy of broken dreams and Shkreli’s background as a short seller, Brozak says, “for now, I’m taking a pass on Retrophin.” Someone bolder, who bought the company’s stock in January and sold it in early April, could already have made a small fortune.