Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

With biotech and specialty pharma in free-fall, it's easy to forget that usually stable big pharma companies have had it rough, as well.

The sector is usually a defensive favorite in shaky economic times. But criticism over high drug prices and a valuation reset after five years of market outperformance are weighing on big pharma, if not quite as much as on little pharma. As a result, the sector not only suffered during the broad stock-market downturn earlier this year, but has failed to enjoy the market's recent recovery. Big pharma isn't behaving like a safe haven. Typically such stocks command more of a premium in troubled markets. But at a 14.7 median P/E ratio, large pharma stocks trade at the lowest multiples of any major industrial sector, according to a Bloomberg Intelligence analysis. Even energy stocks have substantially outperformed big pharma year-to-date.

It's a case where rhetoric seems to have trumped reality. Drug pricing in the U.S. is a real problem. But stump speeches and finger-pointing congressional hearings do not make policy. A move to the general election from primary season will likely moderate criticism of the sector. Valeant -- a lightning rod for pricing critics -- will likely recede a bit from headlines, as Turing's Martin Shkreli already has. Any major shift in drug pricing in the U.S. will be a long time coming. Pharma investors are shivering in a closet and hiding from a monster that is mostly imaginary for now.

Falling Flat
Big pharma has lagged the broader market and even energy stocks during a volatile start to 2016. Performance indexed to 100.
Source: Bloomberg

Only GlaxoSmithKline and Johnson & Johnson -- the safest of the safe, with large, non-pharma revenue streams -- saw any kind of real share-price increase in the roller-coaster first quarter of 2016. There are some valuation out-performers; Bristol-Myers, for example, trades at about 27 times forecast 2016 earnings, thanks partly to expectations of strong sales growth for its blockbuster cancer drug Opdivo.

Drug Doldrums
Outside of a few standouts such as Bristol-Myers, investors are down on pharma stocks.
Source: Bloomberg Intelligence

But many of the rest of the big names are very much in the valuation doldrums. There's a degree of near-universal pessimism that doesn't quite seem warranted.

Phlagging Pharma
Big pharma lags other industrial sectors in median P/E ratio. Analysis restricted to companies with market values above $40 billion.
Source: Bloomberg Intelligence
Data as of March 31

The drug pricing model in the U.S. is strange, and perhaps unsustainable in the long run. Prices are high, opaque, and rarely tied to value. It would be dangerous for firms to behave as if pricing can go nowhere but up without consequence. But the current regime isn't about to collapse, and most price-dampening effects of current rhetoric will likely be minor and short-lived. 

The more outlandish ideas, such as a recent suggestion that the government strip patent rights from a prostate cancer drug, just aren't going to happen. The platforms of the two presidential candidates who have been most critical of high drug pricing, Hillary Clinton and Bernie Sanders, include some efforts that sound great on the stump but may not drastically change pricing. 

Both include as a centerpiece the long-touted idea of having Medicare negotiate drug prices. Even assuming such a law could get through a Congress that has been reluctant to endorse the idea, it likely wouldn't be that effective. Donald Trump has suggested it could save the country $300 billion a year, a monumental (and mathematically impossible) exaggeration even by Trumpian standards. The actual effects, without other major policy shifts, would be minimal

Yes, Medicare covers millions of older Americans, and size brings negotiating power. But Medicare is legally required to cover medications in some of the most expensive treatment areas, such as cancer. It's almost impossible to have real leverage with drugmakers if it can't say "no." Americans tend to hate the idea of denying treatment. When private insurers tried to deny extremely expensive medications in some cases in the 1990s, there was an enormous public backlash. Medicare would be unlikely to have better luck -- even though governments in Europe have been aggressive about rejecting or discouraging the use of overly costly treatments, and pay lower drug prices as a result. 

But there's a trade-off between access to medicine and cost. Reining in prices effectively will likely require either outright price controls or some type of rationing. Both would be tough to sell on a national level.  

Actions speak louder than words, and politicians have short attention spans. Pricing reform is inevitable, arguably necessary, but not imminent.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net