Pharmaceutical Companies Gird for Drug-Price Reckoning

Uproar over suddenly hiked-up medications may not crush health care stocks for long, but it does force the industry to justify value.

Martin Shkreli, Chief Investment Officer of MSMB Capital Management

Martin Shkreli, chief investment officer of MSMB Capital Management, sits behind a chess board in New York, U.S., on Wednesday, Aug. 10, 2011. MSMB made an unsolicited, $378 million takeover bid for Amag Pharmaceuticals Inc. and said it will fire the drugmaker’s top management if successful. Photographer: Paul Taggart/Bloomberg

Paul Taggart/Bloomberg

When photos of 32-year-old former hedge fund manager Martin Shkreli splashed across computer screens last month, the Turing Pharmaceuticals founder became the face of what many view as an unsustainable crisis of high prescription drug prices. Shkreli’s company had purchased the rights to Daraprim, a treatment for a rare parasitic infection that afflicts those with AIDS or other immune disorders, and subsequently raised the price by more than 5,000 percent, from $13.50 to $750 per pill.

“The headlines about Shkreli sounded terrible,” says Michael Yee, a senior biotechnology analyst at RBC Capital Markets in San Francisco.

The Shkreli episode was an outsize version of the sticker shock that’s been plaguing the pharmaceutical industry for years. On the one hand, pharma companies and their investors take on significant risk to bring drugs like Daraprim to the market and believe they should be compensated for that risk. On the other, patient advocates argue that there is a moral obligation to ensure that those who need such drugs can afford them — particularly when the drug in question already has an established base of users.

Many analysts remain bullish on biotech despite the recent tempest over prices, saying that the long-term prospects for many drugs and products will stand the test of situations like the one created by Turing, which was little known before the ruckus. But experts agree that a more subtle concern about the industry has arisen in recent years, which pharmaceutical firms may be forced to address in coming months, whether through better communication about product values or through congressional committee grillings.

Turing’s eye-popping price increase for a medication used by a few thousand people each year, coupled with Shkreli’s lawsuit-laden professional past — Retrophin, another biotech company he founded, is suing him for $65 million for allegedly bringing that company public to satisfy a fraudulent scheme to enrich hedge fund firm MSMB Capital Management, of which Shkreli was a co-founder — and his self-satisfied demeanor in interviews, seemed to make him the perfect target for people harboring frustrations over drug pricing. One of those people happened to be presidential candidate Hillary Clinton, for whom drug pricing has been a pet cause since the days of the failed health care reform effort in the early 1990s by the administration her husband, former president Bill Clinton. On September 21 Clinton tweeted a link to a story in the New York Times about Shkreli and Daraprim with the message: “Price gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on.”

The tweet sent biotech stocks, which had reached highs in July, into a tailspin. It only took a few minutes for the iShares Nasdaq Biotechnology ETF to register the comment: Activity spiked, and the price fell 4.57 percent before the close. The biggest losses on the Nasdaq on September 21 were biotech stocks, including BioMarin Pharmaceutical and Biogen, which both lost 6 percent, as well as Retrophin, which lost 14 percent. Meanwhile Laval, Quebec–based Valeant Pharmaceuticals International, one of the most active acquirers of drug companies, has seen its shares slide more than 30 percent since mid-September. At the end of that month, Democrats in Congress asked Jason Chaffetz, the Republican chair of the House Committee on Oversight and Government Reform, to subpoena Valeant for documents related to the sudden price hikes of two heart medications, Nitropress and Isuprel.

The day after the Daraprim news broke, Clinton tweeted a link to her plan: capping out-of-pocket drug costs for families at $250 per month for covered medications. The stock tumble continued, and the Nasdaq Biotechnology index fell 6.3 percent by midday on October 6.

“There has generally been nervousness around biotech stock performance and with overall market volatility — namely, China and a large S&P correction. The comments from Hillary spooked a lot of people, giving them an additional reason to take their profits in biotech stocks,” says Yee. “There’s a fear that this is more of the beginning of the cycle, rather than the end.”

As the presidential campaign warms up, it’s unlikely that Clinton’s rhetoric about drug prices will end, and other Democratic candidates may take up the same cause. But Yee points to “general agreement” on Wall Street that “a proposal by Hillary Clinton is extremely unlikely to result in any material changes,” and also to the fact that the cheap prices of stocks such as Biogen over the past few weeks don’t represent pipeline value.

“Whenever biotech companies get near no-pipeline-value [prices], it should be a buying signal,” he says.

The outcry sparked by Shkreli and Turing likely originated in Gilead Sciences’ launch of hepatitis C drug Sovaldi in 2013. Headlines then drew attention to Sovaldi’s $1,000-per-pill price tag, whereas Gilead emphasized the drug’s more than 90 percent cure rate.

“Cancer drugs have approached these price points in the last three years, but I think it was really the hepatitis C category that blew the lid off the story,” says Philadelphia-based health economist and consultant Jane Sarasohn-Kahn, who runs health care advisory firm THINK-Health.

The shocking price tag also came at a time when many in the U.S. were adjusting to higher deductibles requiring more out-of-pocket costs, in the wake of the implementation of the Affordable Care Act. The introductions of the hepatitis C drug and several pricey cholesterol drugs, new this year, from Amgen (Repatha) and Sanofi and Regeneron (Praluent), which insurance companies hesitate to cover, have created hostile sentiment among consumers. Experts maintain, however, that the stress on stocks may be easier to contain than Big Pharma’s reputation. They key will be communication with investors about the value their products offer, whether it be curing hepatitis C or cutting down on hospitalizations and doctor visits for patients with high cholesterol.

“It’s easy to point at a high price tag of one specific drug and hold that out as emblematic of a problem that’s systemic,” says Greg Levine, co-chair of the life sciences practice group at law firm Ropes & Gray in Washington. “The industry is really trying hard to spread the word about the value new medicines deliver and make that educational message resonate, but it’s challenging to have a rational debate in the current environment.”

Levine, who was a member of the Hillary Clinton’s Task Force on National Health Care Reform in the early 1990s, notes that drug price reform often comes up during election cycles, and in the past it has not had a long-term impact on pharma companies or their stocks.

Yee also points out that drug costs make up only about 10 percent of the overall cost of health care in the U.S., and about 11 percent of Medicare spending. Though the controversy around it may be loud, it’s a small part of the market.

“It’s a very emotional issue,” says Yee. “There are a lot of moral and ethical questions people are asking, yet we need to balance that with the fact that this is a free-market society. The industry requires entrepreneurs and investors to take on significant risk in drug development — it’s one of the most risky businesses anyone can take on — and prices reflect that.” In the cases of Shkreli and Valeant, the risk taken on by the companies is up for question. The firms acquired drugs that had already been approved and were in use by patients before hiking the prices. The companies argue, however, that the profits from more expensive drug sales will go back into research for new ones. Whether or not Congress or future drug improvements prove this to be true, analysts and consultants say the companies will have to work harder to convince the market that their products are worth what they claim.

Follow Kaitlin Ugolik on Twitter at @kaitlinugolik.

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