(Bloomberg) — For 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 Inc. (Nasdaq:VRX) and Turing Pharmaceuticals AG — 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 percent Tuesday, and has been down 11 of the last 15 trading days, wiping out $150 billion 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 $300 million. “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 Sept. 21, when Democratic presidential candidate Hillary Clinton criticized 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, Sen. Bernie Sanders, has also been vocal on the issue, and health care 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 Inc. (NYSE:PFE), the biggest U.S. pharmaceutical company, has raised prices on 133 of its brand-name products in the United States this year, according to research from UBS, more than three-quarters of which added up to hikes of 10 percent or more. Rival Merck & Co. (NYSE:MRK) raised the price of 38 drugs, about a quarter of which resulted in increases of 10 percent or more. Pfizer sells more than 600 drugs globally while Merck has more than 200 worldwide, including almost 100 in the United States Pfizer shares are up 12 percent in the last year, and Merck is down 16 percent.
While the stock-market rout has affected the entire drug industry — even European stocks such as Shire PLC (Nasdaq:SHPG) and Genmab A/S have been caught in the sell-off — some investors are distinguishing between the practice of raising prices on older drugs and the idea of maximizing profits from innovative new treatments.