Cures-for-Dollars Model Comes Undone as Biotech Stocks Sink

Some investors are distinguishing between the practice of raising prices on older drugs and the idea of maximizing profits from innovative new treatments.

Some investors are distinguishing between the practice of raising prices on older drugs and the idea of maximizing profits from innovative new treatments.

Photograph: Getty Images
  • Nasdaq Biotechnology Index down 11 of last 15 trading days
  • Criticism of industry pricing practices drives stocks lower

For the last five years, biotechnology and pharmaceutical stocks have surged on an assumption about the companies that invent and sell drugs for American patients: Invent amazing treatments that save lives and cure the sick, and you can charge pretty much what you want.

That thesis is under more pressure than any time in recent history, in part because of increasing scrutiny of how some drugmakers price their medicine. In the last month, media reports about price increases for therapies that have been on the market for years have caused Democratic presidential candidates to call for regulating the sector’s business practices, including what companies spend on research and how much they can charge.

Much of the criticism has focused on a few companies -- like Valeant Pharmaceuticals International Inc. and Turing Pharmaceuticals AG -- that have bought old drugs and raised prices to increase profits. But the pressure on stocks has spread far wider. The Nasdaq Biotechnology Index -- a 143-company barometer of the industry -- fell 3.8 percent Tuesday, and has been down 11 of the last 15 trading days, wiping out $150 billion in value.

“I definitely think the concern over pricing is the main cause here,” said Jeff Jonas, a portfolio manager at Gabelli Funds who helps manage about $300 million. “I don’t think any of this is going to be able to pass politically, but I don’t think the market’s focused on the next six or 18 months. I think they’re focused on the next day or what the next negative article is going to be.”

Clinton’s Tweet

The index’s drop began in earnest on Sept. 21, when Democratic presidential candidate Hillary Clinton criticized Turing and its Chief Executive Officer Martin Shkreli for “price gouging,” after the closely held drug company bought a decades-old treatment and raised the price from $13.50 a pill to $750. Clinton’s rival, Senator Bernie Sanders, has also been vocal on the issue, and health-care costs are likely to be a topic at their first presidential primary debate next week.

Much larger drugmakers use smaller price increases each year to generate more revenue from older medications. Pfizer Inc., the biggest U.S. pharmaceutical company, has raised prices on 133 of its brand-name products in the U.S. this year, according to research from UBS, more than three-quarters of which added up to hikes of 10 percent or more. Rival Merck & Co. raised the price of 38 drugs, about a quarter of which resulted in increases of 10 percent or more. Pfizer sells more than 600 drugs globally while Merck has more than 200 worldwide, including almost 100 in the U.S. Pfizer shares are up 12 percent in the last year, and Merck is down 16 percent.

While the stock-market rout has affected the entire drug industry -- even European stocks such as Shire Plc and Genmab A/S have been caught in the sell-off -- some investors are distinguishing between the practice of raising prices on older drugs and the idea of maximizing profits from innovative new treatments.

“Nobody’s arguing Eliquis shouldn’t be $10 to $12 a day. Or nobody’s arguing that Opdivo is too much” at $150,000 a year, said Marshall Gordon, an investor with Clearbridge Investments, citing drugs from Pfizer Inc. and Bristol-Myers Squibb Co. that have helped patients avoid a stroke, or live longer with cancer. “They are taking issue with abuses of the system, companies that dramatically increase prices of old drugs,” not companies whose focus is investing in innovation.

Dealmaking Drop?

The threat of government action may also blunt dealmaking by companies like Valeant, Horizon Pharma Plc and Mallinckrodt Plc, said Michael Levesque, an analyst with Moody’s Investors service. “We expect that specialty drug companies will pull back on acquiring other companies’ products for pricing upside until the scrutiny subsides," he said.

Yet even companies far removed from the buy-and-raise business model have been hurt. Bluebird Bio Inc. is developing treatments that reprogram the immune system to attack cancers, one of the industry’s most exciting areas. After a 2013 initial public offering, it rose 10-fold to a market valuation of more than $6 billion, despite having no products on the market. Since May, it has lost half its value. A competitor, Juno Therapeutics Inc., is down 31 percent over a similar period.

“Whenever you get a group to see a correction like this, it’s hard to not go after the names that have very high valuations on ‘years-in-the-future’ kind of metrics,” said David Heupel, senior health-care analyst at Thrivent Financial, which manages $97 billion. “Most of the companies aren’t expected to make money for quite some time.”

Separately, shares of Exact Sciences Corp. sank 46 percent on Tuesday after a U.S. panel of medical experts questioned the benefits of its colon cancer test, which is sold as Cologuard. U.S. laws generally lets insurers limit coverage for screenings that the panel doesn’t back.

Gordon sees the sector’s drop as an opportunity. “There were a lot of momentum investors in health care, and particularly ones who may not have had a lot of experience investing in it. The weaker hands are being shaken out, and that’s healthy,” he said.

“I don’t know where this is going to end, but I’m seeing better value than I’ve seen in a long time.”

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