On Sunday, it was the New York Times that published a story headlined: “Valeant’s Drug Price Strategy Enriches It, but Infuriates Patients and Lawmakers.”
Yesterday, it was the Wall Street Journal with a story titled “For Prescription Drug Makers, Price Increases Drive Revenue.”
And of course, late last month, the industry got its bogeyman in the form of Martin Shkreli. His company, Turing Pharmaceuticals, bought a drug called Daraprim that treats an infection called toxoplasmosis. Then the company proceeded to hike the price by more than 5,000% before backtracking somewhat.
What the heck is going on?
Well, you have a wide variety of biotechnology and pharmaceutical companies that take different approaches to the business.
|Turmoil in the pharma sector.|
Some of the biggest players funnel billions of dollars in profit from patent-protected drugs into research and development, in order to come up with new and better treatments for life-threatening diseases. Politicians and regulators grudgingly accept the rising cost of their drugs because at least they’re re-investing in their businesses.
But companies like Valeant Pharmaceuticals (VRX) are increasingly coming under fire. They’re buying old drugs or entire companies, hiking prices willy-nilly, and distributing huge chunks of profit to shareholders and management rather than investing in R&D.
The Times story notes that Valeant quadrupled the price of a drug called Cuprimine. That drove up the cost of one man’s treatment to $35,000 a month – a cost largely eaten by Medicare. His own out-of-pocket co-pays surged to $1,800 a month from $366.
The Journal tells a separate story about Biogen (BIIB) and its Avonex treatment for multiple sclerosis. Biogen raised its price 21 times, at an average annual increase of 16%, despite falling prescription volume and the fact it’s an older medication. The story goes on to note that U.S sales growth of 30 top drugs surged 61% on average, even as prescriptions rose one-third as much.
There are so many sides to this story that it’s hard to track them all. Surging drug prices raise widespread ethical, political and social concerns.
But this column is focused on the investment implications of world developments. And the negative publicity is clearly putting downside pressure on biotech stocks in particular and drug stocks in general. Reason: Investors are worried Washington could slap price controls or other punitive measures on pharma companies that have been making billions for their shareholders off the backs of vulnerable, sick Americans.
Valeant has tanked by $100 a share just since August, while Biogen has dropped $200 in only seven months. The benchmark iShares Nasdaq Biotechnology ETF (IBB) has lost more than 15% in only the past three months, and is desperately trying to hold above its August panic low.
|“Is it a scourge on society or a fair-game approach?”|
I would keep a very close eye on those August lows if I owned any biotech stocks or ETFs. If that area of technical support can’t hold, it will probably lead to even more follow-on selling as investors throw in the towel. That, in turn, could put more downward pressure on investments like the PowerShares QQQ Trust (QQQ). After all, biotech and other health-care companies make up around 14% of its holdings.
So what do you think about surging drug prices and the corporate strategy of firms like Valeant? Is it a scourge on society or a fair-game approach? Will the government step in at some point? What form could increased regulation or penalties take?
Lastly, do you own any biotech or pharma stocks, and if so, how are you reacting to this news? Here’s the link to the Money and Markets website where you can sound off.
I asked a simple question yesterday: Is everything awesome again? I got a lot of great responses, so let’s get right to them.
Reader Myron R. said: “This market has been so hard to trade. Got stopped out of a short position yesterday. The market wants to go up, but the data and fundamentals don’t warrant it. But I guess we are back to bad news is good news. What happens next will tell a lot as we are at a strong resistance level which the market hasn’t closed above in a long time.”
Reader Jim W. said: “What happened Friday and yesterday in the markets was just the realization that our dismal job numbers mean that the Fed won’t be raising interest rates for quite a while. As soon as we start getting some companies reporting some bad earnings, the market will react to that and start down again.”
And Reader Carla added: “It’s early October and I am cynical that a little exuberant bounce is anything but that. Perhaps it’s just inflation, but to my perception, despite the correction, prices still look high.
“From my perspective, some equities are just beginning to come into buying range and I’m patiently waiting for more downdraft drama. I do remember 2008 very well and had a marvelous time shopping: Diamonds are a girl’s best friend, especially when they are high grade and priced deliciously.”
Meanwhile, on the topic of the Fed, Reader Michael C. said: “It troubles me to think, no less suggest this, but I don’t believe that the Fed can, or will, increase the interest rates by more than 0.25%. As our national debt rolls over, it (most of it) must be recast, and if interest rates begin increasing, our medium-, and long-term debt repayments will swell beyond our ability to repay it in a sensible fashion.
“The fix to this problem would be to increase all forms of taxes (federal), but there is little stomach for that solution, especially in a political season. There are solutions, but they, as they always have been, are very painful.”
And Reader Alan W. weighed in on the topic of employment, saying: “Jobs — good jobs, with insurance and retirement plans — are missing in action. We gave them all away to Mexico and China. Without them, the golden goose is missing some eggs.
“We are in a transformation between manufacturing jobs to the information age, with much less need for humans that get paid decent for doing the mundane. It’s hard to drive an economy this size on less and less workers with less and less payroll to tax. Debt loads are way out of control. We can’t afford all the goodies our governments are giving away.”
Great thoughts all around, and I appreciate you sharing them. It’s obvious to me that this economic recovery is sorely lacking compared with what we’ve seen in other post-recessionary periods. The list of headwinds is long, and the list of potential solutions that might actually see the light of day is short.
Now, it looks like even the anemic recovery is succumbing to a multitude of domestic and overseas threats. I believe that’s a tough environment in which to buy stocks, despite the rally of the past couple days.
Agree? Disagree? Something in between? Then let me hear about it over at the Money and Markets website.
Nelson Peltz and his Trian Fund Management firm are notorious for buying stakes in companies, taking board seats, and agitating for management changes, strategic shifts, and the like. But the activist investor’s latest $2.5 billion bet on General Electric (GE) appears different.
GE is a huge industrial conglomerate and Peltz’s suggestions for what it should do are fairly run-of-the-mill. That’s leading to questions about whether his involvement will actually do anything longer term for shareholders.
Volkswagen AG is shutting down non-essential investments and planning to cut spending to the bone as it struggles with the potentially huge financial impact of its emissions scandal. The carmaker may need to pay more than $7 billion to fix affected vehicles, plus several billion dollars more in fines in the U.S., Europe, and elsewhere.
The energy industry has been battered and bruised by the collapse in oil prices. But it appears to be getting closer to a significant legislative win: The repeal of the U.S.’s 40-year-old ban on exporting crude oil. The ban was enacted during the era of Arab oil embargos, but looks increasingly unnecessary thanks to the surge in U.S. oil and gas production.
Should we export oil? Will Volkswagen be able to survive this self-inflicted crisis? Do you think the gains in GE shares will stick? Hit up the website and let me hear about these or other topics of the day.
Until next time,