How Much Longer Can Martin Shkreli Control a Pharma Firm From Prison?

A group of shareholders has set up a showdown with Martin Shkreli, who they say continues to exert influence over a pharmaceutical company from prison.

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For years, Kevin Mulleady was an ally of Martin Shkreli. He worked for one of the pharmaceutical executive’s hedge funds and later served as an executive at the company where Mr. Shkreli infamously raised a lifesaving drug’s price 5,000 percent.

Now, Mr. Mulleady is teaming up with activist investors to persuade his fellow shareholders to give them control of that drugmaker’s parent company, Phoenixus. (Phoenixus’s operating subsidiary, once known as Turing Pharmaceuticals, is now called Vyera.) There, he says, Mr. Shkreli still maintains control despite being in prison for securities fraud and not up for release until late 2023.

That fight will come to a head on Monday, when Phoenixus shareholders will be asked to re-elect its five directors or back the activists’ alternative slate of six candidates. Central to the activist investors’ pitch is to sever as many ties to Mr. Shkreli as possible. The current board remains too close to the imprisoned executive, they say.

The company, whose headquarters are in Switzerland, still owns the rights to Daraprim, a toxoplasmosis treatment, whose price Mr. Shrkeli unapologetically raised to stratospheric levels, earning him the moniker “Pharma Bro.”

“Martin Shkreli is a blight on this industry,” said Jason Aryeh, a hedge fund manager who has spearheaded the activist campaign.

Efforts to reach Mr. Shkreli through his lawyer Brianne Murphy were unsuccessful.

Phoenixus’s chairman and chief executive, Averill Powers, did not respond to requests for comment. In a letter to investors last month, the company asserted that its board was making decisions “independently from instructions from Martin Shkreli (except to the extent Martin Shkreli votes his shares).”

Although Mr. Shkreli is incarcerated at a federal prison in central Pennsylvania, he is legally allowed to vote his shares in Phoenixus, worth roughly 44 percent of the company. He has kept his stake despite being ordered as part of his sentencing in 2018 to forfeit nearly $7.4 million, including his one-of-a-kind Wu-Tang Clan album and a Picasso painting.

Phoenixus has also questioned efforts to portray Mr. Mulleady as a sort of white knight, noting in its letter to investors that he had been on the company’s board for more than three years and even once served as chief executive. He, Mr. Shkreli and the company are listed as co-defendants in an antitrust lawsuit by the Federal Trade Commission and New York State, which accuses them of illegally seeking to block generic competitors to Daraprim from the market.

The Wall Street Journal reported in 2019 that Mr. Shkreli had continued to conduct business behind bars — including regular contact with Mr. Mulleady — via a contraband cellphone, part of the complaint in the F.T.C.’s case.

Since moving to the low-security prison, in Allenwood, Mr. Shkreli communicates with the outside world in large part through collect calls. He “has maintained his influence over Phoenixus and Vyera through associates as well as his position as Phoenixus’s largest shareholder,” the F.T.C. and New York prosecutors said in their complaint.

Phoenixus took an enormous hit last year when generic competitors to Daraprim hit the market: It lost nearly $20 million, saw sales drop nearly by half and sharply reduced its staff. (The company blamed layoffs on the pandemic in a letter to investors.) It also reported a $5.5 million operating loss in the first quarter of this year, according to an investor presentation.

Among the activist investors’ plans for Phoenixus, should they win control, is unwinding the Daraprim price increase. Other possibilities include paying out more of the company’s cash holdings, which stood around $56 million at the end of March.

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Mr. Mulleady was ousted from the board in December, a move proposed by Mr. Shkreli. From that point on, Mr. Mulleady has worked with Mr. Aryeh on the challenge to existing directors.

The group had called for a special board election by Phoenixus shareholders, which had been set for June 7. It was called off at the last minute, with the group suspecting that Mr. Shkreli had drawn away enough shareholder support to make their challenge unsuccessful.

Initially, Mr. Mulleady was among the candidates the activists put up for election to the board, a group that also includes Mr. Aryeh and several health care executives and investors. He later withdrew from consideration, acknowledging that his history with the company, and Mr. Shkreli, was an easy point of criticism.

If the activist investors lose the vote, they plan to call for another special shareholder vote. Mr. Shkreli’s shares are in a sort of legal limbo, with a creditor of another Shkreli company fighting to have them taken away and sold. At a hearing last week in that case, the judge granted a request to appoint a receiver to take Mr. Shkreli’s shares, with the aim of selling them to pay off debts.

That could lead to Mr. Shkreli losing his influence in the company regardless of the shareholder vote, Mr. Mulleady said: “Martin’s kind of high and dry here.”

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