What Hillary's Pharma Plan Means for Biotech Investors

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...

Clinton's Pharma Policy Proposal Needs Some Work

As promised, Clinton quickly followed up her brief tweet with a more substantial plan that included these points:

• Calling a halt to current direct-to-consumer advertising subsidies and redirecting that effort to investing more in research and development. This basically means you'll see less advertising for prescription drugs in the media. It would not affect the cost of most drugs, which are promoted by educating medical specialists, not the public.
• Capping monthly and annual out-of-pocket costs for prescription drugs. This is an issue for insurance companies, but more so for Medicare, and will mean closing the so-called "donut hole" - a coverage gap in Medicare prescription drug plans that cost consumers a lot of out-of-pocket money.
• Encouraging more competition among prescription drug makers in order to lower prices. Clinton would like to encourage more generic versions of specialty drugs, including the most expensive, called biologics (drugs derived from living entities such as bacteria or viruses). Although it may be possible to do this for some first-generation biologics, newer medications will likely remain protected, as they are incredibly expensive to develop, and R&D for many of them takes place not in big pharmaceutical companies, but in smaller, pre-profit biotechs. This is especially true for drugs that treat "orphan indications," that is, serious or life-threatening illnesses that are so rare it makes little economic sense to produce them unless you can charge high prices for them.
• Allowing the importation of drugs from other countries. This will be a nightmare for the FDA, and I would expect a lot of lobbying against it. Many drugs currently approved for use in Europe, the Middle East, and Asia have been rejected by the FDA for use in the United States. Drugs that have already been approved by the agency are often manufactured overseas right now, with no effect on U.S. drug prices.
• Getting higher rebates for prescription medications via Medicare, and allowing Medicare to negotiate drug and biologic prices. Medicare has actually been trying to do this for some time, but so far, without much success. In any case, it's a tricky road to walk - you really don't want to dis-incentivize manufacturing drugs that people desperately need for good health, but there certainly are some medications that are more expensive than they need to be.

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.

Look for This Controversy to Pass Quickly

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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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