headline risk is poison for pharma and biotech

With yesterday’s 300-point collapse, the Dow is now down 7.3 percent since January 1st. Other indexes have cratered as well. The smaller company Russell 2000 has shed over 11 percent.  In the midst of this carnage, investors are understandably searching for “safe haven” stocks that generate dividends, are inexpensive, and offer less volatility than the overall market. Unfortunately, these ports in the storm are few and far between at the moment. People are looking for any excuse to sell stocks right now, which means anyone looking to buy has to be particularly sensitive to headline risk.

Today no sector faces greater headline risk than the biotechnology and pharmaceutical space, especially companies that have engaged in price gouging. In this toxic environment, names like Valeant, Shire, Vertex, BioMarin, and others are the financial equivalent of the Zika virus.

On Thursday, the House Committee on Oversight and Government Reform will hold hearings to investigate exorbitant drug price increases. The committee’s ranking Democrat, Maryland Congressman Elijah Cummings, and other committee members will grill Valeant’s interim CEO Howard Schiller. The management of Turing Pharma–which first made headlines last fall for astronomically jacking up prices on an obscure but important medicine–will also be questioned. News outlets will broadcast the hearings far and wide, and company stocks could very well drop, some precipitously, as negative sound bytes make their way through the media.

Politicians will take every opportunity to exacerbate this negative publicity. The presidential campaign is just starting to heat up and nothing gets attention like exposing corporate greed. At a recent town hall Hillary Clinton read a note about a Valeant migraine medication that cost 356 percent more than it did a year earlier. Hillary did not mince words. “This is predatory pricing, it is unjustified, it is wrong,” she said, adding, “I’m going after them, we are going to stop this.”

Guess what?  Hillary is right. I’ve made no secret about my disgust for Valeant’s now publicized “buy and burn” strategy of acquiring smaller drug companies and axing research and development spending while ripping prices higher. Since Clinton first raised the issue of drug prices back in September, Valeant has garnered more bad press for its secret use of specialty pharmacies. The company’s sales force instructed doctors to get patients to buy Valeant drugs from those pharmacies so that the ultimate payer–either a for profit insurer or Medicaid and Medicare—would be coerced to pay for high priced Valeant drugs even when less expensive and equally efficacious alternatives existed.

What has disgusted me even more than Valeant’s business practices is the investment community’s defense of the company. Numerous high profile firms hold large stakes in Valeant. Bill Ackman’s Pershing Square, Jeff Ubbin’s Valueact, Steve Mandel’s Lone Pine Capital and Glenn Greenberg’s Brave Warrior Advisors all own millions of shares. When news of these transgressions came to light, I assumed these wealthy managers would denounce the company and exit their positions. I was wrong. One after another, they defended Valeant. None (to my knowledge) unloaded their holdings. Unbelievably, Ackman increased his stake in the company and, in his annual letter, blamed “attacks by short-sellers and the termination of a distribution agreement” for its stock’s decline. Wow.

Valeant deserves all of the negative press it receives. It massively overcharges taxpayers for drugs. Hopefully, Congress instructs Medicare and Medicaid, whenever possible, to help patients buy anything but Valeant drugs. And hopefully state and municipal pensions redeem all of their money from firms/funds that continue to own stocks in predatory drug companies. These are businesses that prey on the sick and the ill-informed. And fund managers who own their stocks are doing the same.


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  1. Pingback: headline risk is still poison for these stocks | the confessions of a contrarian investor

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