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Martin Shkreli, the former hedge fund manager under fire for buying a pharmaceutical company and ratcheting up the price of a life-saving drug, is escorted by law enforcement agents in New York Thursday, Dec. 17, 2015, after being taken into custody following a securities probe.Craig Ruttle/The Associated Press

Martin Shkreli, dubbed the world's most-hated CEO, has been arrested on securities fraud.

It is tempting to savour the Schadenfreude of the pharma Scrooge getting screwed, or the karma of the hedge-fund Grinch being hoisted on his own petard – especially at Christmas.

If only the storyline was so simply linear and justice so sweetly vengeful.

Alas, the charges have nothing to do with the Turing Pharmaceuticals CEO's much-reviled and publicized move to jack up the price of a lifesaving anti-parasitic medication to $750 a pill from $13.50.

It is alleged that the wunderkind, in an elaborate shell game, illegally took stock from Retrophin Inc. – a biotech company Mr. Shkreli founded in 2011 and from which he was ousted in 2014 – and used it to pay off disgruntled investors from another failed venture, MSMB Capital Management.

Regardless of where he ends up – in jail, or back on Wall Street – Mr. Shkreli is not the sole problem. Rather, he is a symptom of a much larger problem: The way drugs are approved and priced can lend itself to perverse disincentives and make essential drugs unavailable.

Mr. Shkreli, beyond all his bombast, is simply exploiting an obscure U.S. government initiative that was supposed to spur development of drugs for neglected diseases and has, paradoxically, made them unaffordable.

Back in 2007, U.S. Congress adopted rules that would grant companies that develop drugs for rare tropical diseases and rare pediatric conditions a voucher that entitles them to expedited approval from the Food and Drug Administration. The voucher shaves about four months off the drug approval process. It also gives a company de facto exclusivity that can deter competitors and allow free rein to set prices, which can be worth billions.

What Mr. Shkreli has done is to seek out companies that have developed drugs for neglected diseases – drugs that have the potential to get voucher approval – and purchase them. The loophole is that there are many drugs used to treat tropical diseases in developing countries that are not approved in the United States; by getting a voucher, companies like Turing can essentially corner the market, jack up prices, and reap windfall profits.

All this is seemingly legal – though there is some question about whether it constitutes price-fixing.

In the much-publicized case, Turing bought the rights to daraprim – a 60-year-old drug used to treat toxoplasmosis, a parasitic condition that affects mostly people with AIDS – from CorePharma. As the sole supplier, Turing could set any price it wanted, and it did.

In September, the cost of treatment jumped to $63,000 from $1,100 (U.S.) and Mr. Shkreli became known as the exploitative $750-a-pill man.

In November, Turing moved again, purchasing KaloBios Pharmaceuticals, which produces the drug benznidazole, used to treat Chagas disease, another parasitic infection.

Treatment for Chagas currently costs $50 to $100 in Latin America, and, in the U.S., the drug is actually provided free of charge, but requires a lot of paperwork.

When Turing wins FDA approval – which is a mere technicality – and commercializes the drug, treatment costs will jump to between $60,000 and $100,000.

This is not a new game. In fact, the real scandal here is that wild price hikes for old drugs are common practice. What is puzzling is why Mr. Shkreli chose to draw so much attention to his sleazy practices.

His previous company, Retrophin, raised the price of Thiola, used to treat a rare condition in which kidney stones recur repeatedly, to $30 a pill from $1.50. It also sold a voucher for the pediatric drug Cholbam  to Sanofi for $245 million.  Another example of this practice is Knight Pharmaceuticals, which sold its voucher for the drug miltefosine for treatment of leishmaniasis (a parasitic illness caused by sandfly bites) to pharma giant Gilead for $125-million, though in that case the price of the drug did not increase substantially.

Mr. Shkreli is, and always has been, a hedge-fund investor. He takes risks on tiny, usually troubled biotech companies, and sucks them dry for profit.

What he does has nothing to do with the pharmaceutical and biotech industries – which have been unfairly tarred by his antics. With Turing, there is no research, no real investment and no original products – just exploitation.

George Scangos, CEO of the biotech company Biogen Inc., said it best in an interview with Bloomberg: "Turing is to a research-based company like a loan shark is to a legitimate bank." Mr. Shkreli is a parasite. Sadly, his victims – those infected with parasitic diseases – tend to be poor and desperate.

But it is ultimately the U.S. government that must close the legal loopholes that allow and encourage his parasitic behaviour.

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