Specialty Pharma Stocks Tumble in Fear of California's Drug Price Referendum

Big Pharma has more to worry about than just Hillary Clinton.
Photographer: Kiyoshi Ota/Bloomberg

For pharmaceutical companies, there's more at stake on November 8 than whether Donald Trump or Hillary Clinton emerges victorious in the presidential election.

Also to be decided in the voting booth is California's Proposition 61, a state ballot measure that would require state agencies to purchase drugs at prices close to those enjoyed by the Department of Veteran's Affairs. Recent polls performed by Field/IFS and USC/Los Angeles Times suggest the initiative, known as the California Drug Price Relief Act, is favored by voters. 

What looks on the surface to be good news for taxpayers, however, would crimp the revenues of pharmaceutical companies. Between the polls showing support for the proposition and a report from Politico that Health and Human Services Secretary Sylvia Mathews Burwell is calling upon Congress to give that department more power to negotiate drug prices, pharmaceutical stocks are coming under acute stress. 

Notably, specialty pharmaceutical firms, known for generating revenues on drug price increases, led the Standard and Poor's 500 Index down today. Four such companies — Mylan NV, Mallinckrodt PLC, Endo International PLC, and Perrigo Co PLC — are all down at least 4 percent as of 2:30 p.m. in New York.

MYL US Equity (Mylan NV) Line Ch 2016-09-29 14-32-37
Source: Bloomberg

In a note to clients, RBC Dominion Securities Analyst Michael Yee indicated the passage of this measure could adversely affect all the biotech companies in his coverage universe, including Amgen Inc., Gilead Sciences Inc., Celgene Corp., Biogen Inc., Regeneron Pharmaceuticals Inc., and Vertex Pharmaceuticals Inc.

However, Yee doesn't think this measure would have a materially deleterious effect on pharmaceutical companies' financial performance.

"We think a possible 2-3 percent earnings per share impact to large-caps if this initiative were passed across all 50 states, but this is more headline risk than anything," the analyst wrote.

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