Cures-for-dollars model comes undone as biotech stocks plummet

BloombergNew YorkFor the last five years, biotechnology and pharmaceutical stocks have surged on an assumption about the companies that invent and sell drugs for American patients: Invent amazing treatments that save lives and cure the sick, and you can charge pretty much what you want.That thesis is under more pressure than any time in recent history, in part because of increasing scrutiny of how some drugmakers price their medicine. In the last month, media reports about price increases for therapies that have been on the market for years have caused Democratic presidential candidates to call for regulating the sector’s business practices, including what companies spend on research and how much they can charge.Much of the criticism has focused on a few companies - like Valeant Pharmaceuticals International and Turing Pharmaceuticals - that have bought old drugs and raised prices to increase profits. But the pressure on stocks has spread far wider. The Nasdaq Biotechnology Index - a 143- company barometer of the industry - fell 3.8% Tuesday, and has been down 11 of the last 15 trading days, wiping out $150bn in value.“I definitely think the concern over pricing is the main cause here,” said Jeff Jonas, a portfolio manager at Gabelli Funds who helps manage about $300mn. “I don’t think any of this is going to be able to pass politically, but I don’t think the market’s focused on the next six or 18 months. I think they’re focused on the next day or what the next negative article is going to be.”The index’s drop began in earnest on September 21, when Democratic presidential candidate Hillary Clinton criticised Turing and its Chief Executive Officer Martin Shkreli for “price gouging,” after the closely held drug company bought a decades- old treatment and raised the price from $13.50 a pill to $750. Clinton’s rival, Senator Bernie Sanders, has also been vocal on the issue, and healthcare costs are likely to be a topic at their first presidential primary debate next week.Much larger drugmakers use smaller price increases each year to generate more revenue from older medications. Pfizer, the biggest US pharmaceutical company, has raised prices on 133 of its brand-name products in the US this year, according to research from UBS, more than three-quarters of which added up to hikes of 10% or more. Rival Merck & Co raised the price of 38 drugs, about a quarter of which resulted in increases of 10% or more. Pfizer sells more than 600 drugs globally while Merck has more than 200 worldwide, including almost 100 in the US Pfizer shares are up 12% in the last year, and Merck is down 16%.While the stock-market rout has affected the entire drug industry - even European stocks such as Shire and Genmab have been caught in the sell-off - some investors are distinguishing between the practice of raising prices on older drugs and the idea of maximising profits from innovative new treatments.“Nobody’s arguing Eliquis shouldn’t be $10 to $12 a day. Or nobody’s arguing that Opdivo is too much” at $150,000 a year, said Marshall Gordon, an investor with Clearbridge Investments, citing drugs from Pfizer and Bristol-Myers Squibb Co that have helped patients avoid a stroke, or live longer with cancer. “They are taking issue with abuses of the system, companies that dramatically increase prices of old drugs,” not companies whose focus is investing in innovation.The threat of government action may also blunt dealmaking by companies like Valeant, Horizon Pharma and Mallinckrodt, said Michael Levesque, an analyst with Moody’s Investors service. “We expect that specialty drug companies will pull back on acquiring other companies’ products for pricing upside until the scrutiny subsides,” he said.Yet even companies far removed from the buy-and-raise business model have been hurt. Bluebird Bio is developing treatments that reprogramme the immune system to attack cancers, one of the industry’s most exciting areas. After a 2013 initial public offering, it rose 10-fold to a market valuation of more than $6bn, despite having no products on the market. Since May, it has lost half its value. A competitor, Juno Therapeutics, is down 31% over a similar period.“Whenever you get a group to see a correction like this, it’s hard to not go after the names that have very high valuations on ‘years-in-the-future’ kind of metrics,” said David Heupel, senior healthcare analyst at Thrivent Financial, which manages $97bn. “Most of the companies aren’t expected to make money for quite some time.”Separately, shares of Exact Sciences Corp sank 46% on Tuesday after a US panel of medical experts questioned the benefits of its colon cancer test, which is sold as Cologuard. US laws generally lets insurers limit coverage for screenings that the panel doesn’t back.