Biotech stocks, in general, are more volatile than the average stock. Small-cap stocks (VB), in general, are more volatile than the average stock. Small-cap biotech stocks then may very well be the most volatile of any grouping of stocks. Unfortunately, the recent direction of volatility across equities in the biotech arena has been of the sharp, downward variety and has been most unwelcome, amid a broader market decline.
Mr. Market is having a temper tantrum, but all the while, he may have every right to be upset. The iShares Nasdaq Biotechnology ETF (IBB) is perhaps the best proxy for the market’s appetite to bet on the development of long-term drugs and therapies. The industry ETF, which sports a trailing price-to-earnings ratio of 26 times, as of September 25, excluding those in the ETF not yet turning a profit, was probably due for some “air-letting,” but investors in biotech equities have started to get very nervous as regulatory uncertainty creeps ever more into the picture.
The New York Times ran an unfavorable article September 20 over what it described as “overnight” price increases on some “mainstays of treatment,” bringing to light potential abuses by several drug companies, allegedly. The market has for some time been aware of the hefty price tags on some of the most groundbreaking therapies, including Vertex’s (VRTX) Orkambi for cystic fibrosis, ~$260,000 per year, and Gilead’s (GILD) Harvoni that cures hepatitis C, ~$95,000 per year, but the price increases on some of the “older” drugs seems to have rubbed politicians the wrong way. Hillary Clinton would later tweet that she plans to make specialty drug market reform a priority.
Price gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on. -H https://t.co/9Z0Aw7aI6h
— Hillary Clinton (@HillaryClinton) September 21, 2015
Bloomberg then reported that Democrats in the US House, perhaps piling on, have sought to “subpoena (Valeant, VRX) for documents relating to drug price increases,” likely related to two heart drugs, whose prices were raised significantly after being acquired. Though it seems that any real reform may be some time away, the ball now appears to be rolling, perhaps with Hillary making the biggest first push. With the topic now in the open, it’s very likely that something will be done, as the topic may take center stage during much of the Presidential debates. Whether a Republican or Democrat wins the White House in 2016, however, regulatory risk is ruling the day, and biotech investors are bailing.
The only “biotech” included in the Best Ideas Newsletter portfolio is Gilead Sciences. We posit, however, that much of its share price pressure has resulted from being lumped in as a top holding in the iShares Nasdaq Biotech ETF, which has faced indiscriminant selling as a result of the recent poor news flow. Gilead’s Harvoni faces direct pricing competition from AbbVie’s (ABBV) Viekira Pak, and unless Congressional Democrats are pushing to prove price collusion in the hepatitus C market, Gilead is likely immune to recent developments, even if it is not completely resistant to the impact from exclusivity wars at the PBMs. At roughly 8 times 2016 earnings per share, even if Gilead’s drug prices are cut in half, the company would still be trading at a mere market multiple. Though that’s quite a nice margin of safety, we’re watching shares closely in any case.