Pharma stocks dive on price-fixing probes; better days for healthcare sector uncertain no matter who’s in the White House

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The generic drug industry was jolted last week as shares of many major companies tumbled after a news report said that a federal inquiry into drug price-fixing was wider than previously believed and could lead to charges by the end of the year.

The drug industry was jolted as a federal inquiry into drug price-fixing was wider than believed Click To Tweet

Shares in Teva Pharmaceuticals Ltd. (Petach Tikva ISR), the world’s largest generic drugmaker, fell 5% for the week to $40.24, and the stock of competitors like Mylan NV (Amsterdam), Endo Pharmaceuticals Inc. (Newark DE) and Impax Laboratories Inc. (Hayward CA) had similar declines. They recovered somewhat on Election Eve as Wall Street holds its breath for the outcome.

The report from Bloomberg, said that the investigation, being conducted by the Justice Department, was looking at more than a dozen companies, and that the prices of about two dozen drugs were involved. A spokesman for the Justice Department declined to comment. Several of the companies either did not respond or declined to comment beyond statements they had previously made about the inquiry, which began about two years ago.

Investors were clearly not going to wait for any additional confirmation.

In a note last Thursday, David Maris, an analyst for Wells Fargo, said the potential impact of such an investigation could shadow the industry well past today’s election and into the new presidential administration.

“We are less concerned about the financial impact of fines, although they could be significant, but rather how items like this can bring calls for controls and oversight,” he said.

Some generic drug companies, including Teva, Mylan, Endo and Impax, have said that they received a subpoena. Mylan, for example, said that it had received a subpoena last December from the Justice Department related “to the marketing, pricing and sale of our generic doxycycline products and any communications with competitors about such products.”

Drug companies have come under intense scrutiny over the last two years over the prices of their drugs, particularly old drugs that have lost their patent protection but have, in some cases, jumped in price. In the case of doxycycline, an antibiotic, for example, the price went from $20 a bottle in October 2013 to $1,849 by April 2014, according to members of Congress who are investigating drug prices.

The same report found that the price of a pill of digoxin, an old heart medicine, rose to $1.10 in 2014 from 11 cents in 2012. Companies, including Impax, have said that federal investigators have asked about digoxin and other drugs. Close to 90% of all drugs dispensed in the United States are for generic versions, which are generally far less expensive than name-brand drugs

When it rains it pours?

As if news of the DOJ’s investigation wasn’t enough to shake the health sector, two prominent US lawmakers on Thursday called on federal antitrust regulators to probe whether Sanofi SA (Paris), Eli Lilly and Co (Indianapolis IN), Merck & Co. (Kenilworth NJ) and Novo Nordisk A/S (Bagsvaerd DNK) colluded to set prices for insulin and other diabetes drugs.

The request by Vermont Independent Senator Bernie Sanders and Democratic Congressman Elijah Cummings of Maryland follows a similar letter they sent last fall calling for an investigation into 14 drug companies over price increases of generic drugs. US prosecutors could file the first charges by the end of the year in their subsequent criminal investigation of generic drugmakers over suspected price collusion, Bloomberg reported on Thursday.

In their latest letter to the Justice Department and Federal Trade Commission, Sanders and Cummings raised questions about sky-rocketing prices for insulin, and included a chart showing that many of the price spikes appeared to occur in tandem. They noted that the original patent on insulin, a hormone used by diabetics to control blood sugar levels, expired 75 years ago.

Sanofi spokeswoman Ashleigh Koss said in a statement that “Sanofi sets the prices of our treatments independently.” Novo Nordisk also said it sets prices “independently” and stands by its business practices. Officials at Lilly and Merck did not immediately respond to requests for comment.

Steve’s Take: So what do we really have here? Just more saber rattling by the legislative and administrative branches of government about pharma prices, in particular, rising to “unconscionable levels? ”

It all started on September 21 with Hilary’s “Tweet heard round the world’s” stock bourses that crushed biotech companies. Well, it’s now Election Day and Wall Street is holding its breath in a wait-and-see stance.

Here’s how some of us see the near- and mid-term outlook after the campaign tumult finally begins to die down.

As long as there is gridlock in Washington, meaning no one particular party controls both the House and the Senate, it’s good for healthcare stocks. So a “wave election” would be the worst-case scenario for the sector.

In the event Hillary Clinton assumes the White House, I believe it’s important to look at her 100-day agenda to see what she has in mind for the healthcare industry. Her now infamous tweet about price-gouging had an immediate, devastating effect on Pharma-stock prices and Congress certainly took her up on that issue with probe after probe announced in recent weeks.

With the benefit of the aforementioned hindsight, what happens following today’s election? Let’s look at the possible scenarios.

With a Clinton White House and Republican Senate, it’s likely there will continue to be pressure on drug prices. Not that anything could necessarily be done legislatively but the White House does control the administrative branch and we would likely see continued pressure from the OAG/Department of Justice, the Federal Trade Commission, and CMS, just to name a few regulatory agencies.

Of course, the issue of high consumer-drug prices cuts across both sides of the aisle, and even with a deadlocked Congress, there’s a fairly high risk of some legislation being passed to placate voters in both parties.

Then again, come the spring, we could see relief emanating from the budget process, separate and apart from the regulatory and legislative branches. We could see endless hearings with drug prices eventually becoming immune to current governmental pressures and those stocks, particularly in the Pharma arena, begin to rebound in the second half of the year.

As far as the fate of Obamacare is concerned, as long as the GOP controls the house, attempts to repeal the ACA will continue. But such efforts will fail as long Ms. Clinton is in the White House and Democrats are the majority in either of the other two venues.

Repealing Obamacare would be downright dangerous for healthcare providers and payers. On the one hand, for example, hospitals gave up $155 billion in cuts and/or so-called “pay-fors” to get reform, but on the other hand what they got was a significant Medicaid expansion and some help in paying for uncompensated care and relief for being the insurers of last resort–at the hospital level–from the exchanges. So even though the exchanges have not worked out successfully for many, especially the commercial insurers, they have been incrementally positive for the broader sector.

Steve's Take: A full repeal of #Obamacare would be the worst of all possible outcomes Click To Tweet

If Obamacare were to be repealed and replaced with what Donald Trump terms “something much better,” but the cuts remain in place, that would be the worst of all possible outcomes for providers and payers.

Lastly, if Trump is in the White House and Congress is split, this would be extremely hazardous for healthcare stocks, as the level of uncertainty would be acute. Stocks would re-rate negatively again, because they’ve clearly already discounted that possible scenario in the last 10 days.

It would be an incredibly financially challenging situation, to say the least, that there’s already been $1 trillion in savings that came via the ACA. That huge savings would fly out the window, and even Donald Trump doesn’t have enough money to replace that.