Martin Shkreli, CEO of Turing Pharmaceuticals, made news this week when he announced he would raise the price of a medication his company had acquired, Darapim (pyrimethamine), from $13.50 to $750 per pill.
Darapim, which has been on the market for 62 years, is an antiparasitic used to treat acute malaria and toxoplasmosis. It's also used off-label to prevent and treat opportunistic infections in AIDS patients. "Off label" simply means doctors use it for indications not reviewed by the FDA. For patients with these indications, the drug can be lifesaving.
Predictably, Shkreli's announcement caused a public uproar, and yesterday, the CEO backed off his position, promising to deliver the drug more cheaply. We have yet to see what the final number will be.
During the public protest, carried out largely online, one 21-word tweet stood out among the rest.
It came from Hillary Clinton and read, "Price gouging like this in the specialty drug market is outrageous. Tomorrow I'll lay out a plan to take it on."
In response, biotech ETFs dropped about 5%.
Here's what Clinton's plan turned out to include - and what it would really mean for your biotech holdings...
As promised, Clinton quickly followed up her brief tweet with a more substantial plan that included these points:
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And the market responded to Clinton's comment and plan the way it does to nearly any news pertaining to the pharma sector: with volatility.
But much of that is unwarranted.
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Over the long run, I wouldn't expect any of this to cause fundamental changes in market valuations.
Currently, only about 12% of all biotech and pharmaceutical companies are profitable. Valuation lies mostly in the expectation of future profits. Like I said, most new drugs are coming from small- to mid-cap biotechs that struggle for financing, not giant pharmaceutical firms making exorbitant profits.
So any plan that stands in the way of reaching profitability for 88% of the companies that are developing important, innovative new drugs has no possibility of passing. It would simply be too destructive to the industry and to the healthcare of Americans.
The current Clinton plan reflects some naiveté about how the drug industry works, and I would expect it would see a lot of revision before it could pass muster in Congress.
In other words, don't panic. Biotech/pharma may see some rebalancing over the next few years, but by and large, it will continue to offer great opportunities to investors.
As for Shkreli... He got smacked down, and he deserved it.
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