A 5.5% fall in shares of Mylan NV (NASDAQ:MYL) on Aug. 24 trade was quickly followed by a 2% gain for MYL stock overnight. Will investors ever stop rewarding Big Pharma greed?
It’s not just Mylan that stands today accused of hiking the prices of EpiPens, used to treat allergic reactions, before generic competition arrived, drawing the personal ire of Presidential front-runner Hillary Clinton.
Scandal, in the Big Pharma trade, has become business as usual.
As an investor, I feel like Diogenes looking for an honest pharma investment. Worse is that those companies that go to market modestly may find themselves attacked by activist investors like Carl Icahn who demand they be more aggressive.
Aggressive is becoming a code word for erasing ethical and even legal lines.
Big Pharma: MYL Isn’t the Only Greedy One
The Valeant Pharmaceuticals Intl Inc (NYSE:VRX) mindset of “maximizing profit” by cutting research, raising prices to the sky and moving the profits offshore has overtaken the industry.
Valeant and former CEO Michael Pearson represent the industry trend of a decade. Pearson took his post in 2008 and immediately set to work, acquiring other companies, cutting research budgets, hiking prices and moving the profits to Canada for its lower tax rate.
VRX might still be doing all this, with the exception of Philidor, a specialty pharmacy that only existed to push Valeant prices through insurers. Before the Philidor story came to light — with short-seller Citron Research calling it “the pharmaceutical Enron” — shares hit a peak of $257 per share. They opened for trade August 25 at $31. Pearson resigned his post in March.
Philidor was a uniquely American scandal, because U.S. policymakers don’t even allow Medicare to bargain on prices, let alone insurance companies, and require that whatever is prescribed and legitimate be paid for. Most countries put a second roadblock in front of drug acceptance, demanding proof that a treatment is cost-effective, before insurance will pay.
As a result of this policy, Americans routinely pay more for drugs than other people. Harvoni, the Hepatitis C cure from Gilead Sciences Inc. (NASDAQ:GILD), costs $94,500 in the U.S. but only $900 in India, leading to a new form of medical tourism.
Gilead pioneered a new way of pricing drugs, based not on the cost of research, but on comparing the cost of palliative care for a lifetime and that of treatment. Cancer drugs represent life itself, so Keytruda from Merck & Co., Inc. (NYSE:MRK), which caused remission in former President Jimmy Carter, is priced at $150,000 per year.
Former pharma executive Martin Shkreli, an Albanian immigrant, put a human face on this when his Turing Pharmaceuticals hiked the price of Daraprim 5,500%, then bragged about it to anyone who would listen. He’s in the news today for defending MYL.
Add to that the mania for “tax inversions,” U.S. Big Pharma companies selling themselves to foreign companies to avoid corporate taxes. New rules from the U.S. Treasury eventually killed the largest inversion, in which Allergan plc Ordinary Shares (NYSE:AGN) was due to buy Pfizer Inc. (NYSE:PFE) for $160 billion. Allergan CEO Brett Saunders personally went on TV to fulminate against the new rules. He drove into New York from his home in New Jersey.
All this is in addition to scandals involving kickbacks, marketing drugs for unapproved uses, bribery or manufacturing mistakes that can result in baby powder causing cancer.
The preceding paragraph was created by my typing the names of top Big Pharma companies into Google with the word “scandal” and seeing what came up. It was too easy.
In my work, I look for companies with an approach to research that can result in many different cures, with growing cash flow and declining debt. But they are rare. As a company, I like Regeneron Pharmaceuticals Inc (NASDAQ:REGN) but, with a price-to-earnings multiple of 63, it’s awfully rich.
Maybe the scandals can knock it down a little.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
