Traders Flee Pharma Junk Bonds as Price Scandal Engulfs Industry

  • Scrutiny spreads past $750-a-pill move by Shkreli's Turing
  • Lawmakers pump `fear into sector'; new deals await fate

Pharmaceutical companies are emerging as the latest pocket of sorrow in the beleaguered junk-bond market as a renewed public debate on drug-pricing tactics unnerves investors.

Bonds sold by companies from Valeant Pharmaceuticals International Inc. to Endo International Plc and Concordia Healthcare Corp. have underperformed the broader junk-debt gauge, Bloomberg bond index data show. That comes at an inopportune time for companies like Concordia and Sucampo Pharmaceuticals Inc., which are marketing more than $2 billion of loans to finance acquisitions.

Drugmakers are under increased scrutiny over drug-price increases deemed excessive. It started with a decision by Martin Shkreli’s Turing Pharmaceuticals to boost the price of its newly acquired drug Daraprim 50-fold to $750 a pill. Now the focus has expanded, with congressional pressure, input from Democratic presidential candidates and the contagion of negative reports focusing on the pricing practices contributing to out-sized volatility, according to Eric Axon, an analyst at debt-research firm CreditSights Inc.

"One of the primary reasons it’s been whacked so hard is because there’s a lot of political headlines," Axon said. "That has pumped some fear into the sector."

Democratic presidential front-runner Hillary Clinton has called for reforms in the pharma industry and is proposing a plan to control prescription-drug costs. Vermont Senator Bernie Sanders, another Democratic candidate for president, plans to introduce bills targeting high drug prices. Democrats in Congress are pushing for a review of price increases for two of Valeant’s heart drugs.

‘Event Risk’

"After the Turing headlines, Valeant gets roped in and put on the same table as this guy, and that became a spark and it’s cascaded from there," Axon said. "There’s not been much fundamental change in the sector, but a lot of it is overshadowed by event risk."

Valeant’s bonds have lost 5.5 percent in the past month, almost three times the decline for the high-yield bond index in the same period. The Laval, Canada-based company’s $3.25 billion of 6.125 percent notes maturing in April 2025 dropped to a low of 92 cents on the dollar from as much as 103.875 cents in the past month, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds last traded at 95 cents, Trace data show.

Toronto-based Concordia has seen its bonds slump 14 percent in a month. The company is seeking to raise a $1.1 billion seven-year term loan and a similar maturity 500 million British pounds ($766 million) loan that would be used to fund its $3.5 billion acquisition of Amdipharm Mercury Ltd. The loan market has been rocked by scrapped deals and pricing boosts on new loans being marketed as investors became wary of taking on risk amid the market turmoil. Commitments for the Concordia loan are due next week.

Bethedsa, Maryland-based Sucampo is looking to raise $250 million of loans, offering to pay investors as much as 8 percent to investors with a discount of 98 cents on the dollars.

Dublin-based Endo’s bonds have lost 3.7 percent in the past month, Bloomberg bond index data show.

Representatives for Valeant, Concordia, Sucampo and Endo didn’t immediately respond to requests for comment.

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