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Healthcare Investors Suffering Losses While Drug-Pricing War Rages

By: Adam Feuerstein | 04/08/14 - 11:23 AM EDT

Stocks in this article: GILDESRXABBVMRKBMYAMGNREGN

Drug makers and drug payers are at war over pricing. Investors are pinned down in the middle and taking heavy losses.

The latest salvo was lobbed Tuesday by pharmacy benefits manager Express Scripts (ESRX) against Gilead Sciences (GILD) and its $1,000-per-day hepatitis C pill Sovaldi. Express Scripts says the U.S. healthcare system can't afford Sovaldi so it wants to form a coalition of private employers, insurance companies and the government focused on fair drug pricing. But first, Express wants Gilead to cut the price of Sovaldi or be frozen out when competing hepatitis C therapies are approved later this year and next, according to a Bloomberg report. 

Gilead shares are down 2% to $70.72 Tuesday, which is what's been happening each time an insurance company or politician attacks Solvaldi's price tag. The stock has lost 4% of its value so far this year.

Gilead's long-standing argument is Sovaldi actually saves the healthcare system money in the long run because hepatitis C patients are cured faster and in greater numbers compared with other therapies. Sovaldi prescriptions are soaring and the drug may generate upwards of $10 billion for Gilead in 2014. However, Sovaldi's jaw-dropping financial performance raises fears that all the hepatitis C patients eager for treatment will overwhelm the healthcare system's ability to pay. 

Investors tend to panic when drug pricing is criticized because long-term profit growth for biotech and drug companies relies a good bit on their ability to set prices without government interference or significant insurer pushback. The Nasdaq Biotechnology Index is flat today but in the red for the year after being up by 20% in late February. The incredibly fast sell off is largely attributed to the controversy over drug pricing, which has caused generalist investors to move money out of biotech stocks and into safer havens. 

On April 4, alone, investors removed $372 million from the iShares Nasdaq Biotechnology ETF, the largest single-day withdrawal since 2001, according to Bloomberg

By making a big stink in public, Express Scripts is clearly trying to pressure Gilead to lower Sovaldi's price. But what happens if Gilead refuses? In order for Express Scripts to make good on its threat, the other major hepatitis C drug makers with new therapies nearing approval -- Abbvie (ABBV), Merck (MRK) and Bristol-Myers Squibb (BMY) -- need to "play ball" and lower their prices, says ISI Group analyst Mark Schoenebaum.

"Thus, the future of Hep C pricing still appears to be largely in the hands of the branded drug industry. And there really isn't much precedent at all for branded companies competing on price in a major (approximately double digit) way," Schoenebaum writes in an email to clients Tuesday morning. "Plenty of companies play around with rebates and discounts, but it's rare that the net price difference between major brands is more than a few percentage points. So, will just a few percentage point discount really cause payers to not offer Gilead's regimen at all?"

The battle right now is over hepatitis C drug prices, but the larger war will surely encompass other specialized drugs and diseases. The next target might be the so-called PCSK9 cholesterol blockers from Amgen (AMGN), Regeneron Pharmaceuticals (REGN) and others that are also nearing approval.

With uncertainty in the air, drug and biotech stocks will continue to suffer. 

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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