Should Biotech Investors Worry About Donald Trump?
The biotech sector got a major wake-up call yesterday -- President-elect Donald Trump does not like price increases.
Biotech stocks, which enjoy huge profit margins under current law, had jumped 9% the day after Trump’s election, reflecting relief that the price controls that Hillary Clinton was planning to implement would not happen.
However, the relief rally turned out to be short-lived with Trump saying that his intentions may have been misread by some stock analysts. In an interview to TIME magazine, which has named him “2016 Person of the Year”, Trump said that his goal has not wavered -- he does not like what happened to drug prices and he will bring down drug prices. Although Trump did not provide any specifics about how he intends to drive down prices, during the election campaign he had talked about drug re-importation and allowing Medicare to negotiate prices.
Needless to say, Trump’s statement sent biotech stocks in a tizzy with the NYSE ARCA Biotech Index shedding 3% and the iShares Nasdaq Biotechnology ETF declining 2.9%.
Medical - Biomedical and Genetics Industry Price Index
Medical - Biomedical and Genetics Industry Price Index
Pricing Pressure Weighing on Stocks for More than a Year
Drug pricing is an issue that has been weighing on the sector for more than a year now. Although the high prices of drugs have always been a source of concern and discussion, the issue gained tempo in Sep 2015 when Hillary Clinton tweeted about the pricing of drugs in response to an approximately 5,000% hike taken for an old drug, Daraprim (pyrimethamine), by Turing Pharmaceuticals.
Since then, drug stocks have been under intense pressure given the increasing media and political focus on price hikes. Companies like Valeant Pharmaceuticals International, Inc. VRX, which was once a Wall Street favorite, were hit hard with share prices plunging on the pricing controversy. Valeant has had a dismal run declining 93.4% from Sep 2015 compared to the Zacks categorized Medical-Drugs industry decline of 40.3% during this period.
Mylan N.V. MYL also found itself caught up in the pricing controversy thanks to the huge price hike for its life-saving combination product, EpiPen. Meanwhile, Pfizer Inc. PFE got stuck with a record £84.2 million fine this week for charging excessive and unfair prices in the UK for phenytoin sodium capsules, an anti-epilepsy drug.
What do the Industry Bigwigs Have to Say?
Allergan plc’s AGN CEO Brent Saunders has long been warning of such a scenario. At a conference earlier this month, he had said that Trump’s election as the next President does not mean that the focus will be off drug prices. He pointed out that affordability would remain a key area of discussion as many Americans are angry about the rising cost of healthcare and their medicines.
In September this year, Saunders had taken a step forward by announcing that the company would not engage in price gouging actions or predatory pricing and would limit price increases to single-digit percentages no more than once a year. The company had announced other measures as well as part of its social contract with patients.
Saunders has been an advocate of self-regulation and has been urging other companies to limit price increases before the entire industry faces the impact of government regulation that stifles innovation and patient care.
Another company that recently followed in Allergan’s steps is Novo Nordisk A/S NVO, a big player in the diabetes market. The company said that it will do its part to ensure access and affordability of medicine and pledged to limit any potential future list price increases to no more than single-digit percentages annually. Meanwhile, Regeneron Pharmaceuticals, Inc.’s REGN CEO has also been pretty vocal about drug pricing. Regeneron is a Zacks Rank #2 (Buy) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Bottom-Line
While it is anybody’s guess as to what actions will be taken by the government, one thing is pretty clear -- rising drug prices will remain in political and media focus. Biotech leaders have the option of following Saunders’ example and put self-regulation policies in place and adopt a more rational approach towards drug pricing or they could very well find themselves in the midst of a tweeting storm which will impact the entire industry when the next drug pricing scandal breaks out.
Saunders’ tweet in response to Trump’s statement sort of sums it all up -- “Imagine if he used twitter and went after an actual drug price increase? Industry can fix this w self regulation?”.
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