An investigation into pricing practices in the generic drug industry has substantially expanded, and implications may be far more widespread than initially expected. Meanwhile, Apple is fighting a preliminary order that will ban the sale of its iPhones that utilize certain software.
By Kris Rosemann
Price fixing of generic drugs broke into the news as an antitrust lawsuit over just two drugs in late 2016, but the investigation now reportedly involves at least 16 companies and 300 drugs. The generic drug industry is one that has been lauded as a potential savior of rampant healthcare costs in the US, but Joseph Nielsen, an assistant attorney general and antitrust investigator in Connecticut, used evidence such as the volume of drugs and number of companies involved in supporting his claim that this may be the largest cartel in the history of the US. Teva Pharmaceuticals (TEVA), Mylan (MYL), Dr. Reddy’s (RDY), and Sun Pharmaceuticals Industries (SMPQY) are among the 16 companies included in the investigation. Generic drug sales totaled $104 billion in 2017 in the US, and generics account for ~90% of prescriptions written but only 23% of costs, according to the Association for Accessible Medicines.
Shares of Apple (AAPL) found a new source of selling pressure after Qualcomm (QCOM) won a preliminary order from a Chinese court banning multiple iPhone models in the country as a result of patent violations. The Fuzhou Intermediate People’s Court in China, a court that banned Micron Technology (MU) from importing certain chips earlier in 2018, found that Apple violated two Qualcomm software patents regarding resizing pictures and managing applications, and the order impacts iPhones from the 6S through the X. The patents, which are separate from those in the wide-ranging legal battle between the companies, only concern software, so Apple could make changes to its software to avoid the patents and sell iPhones in the region.
The Greater China region, which includes Hong Kong and Taiwan, accounts for nearly 20% of Apple’s total sales as of fiscal 2018. In the following statement, the company indicated that its phones are still available for purchase in the country.
“Qualcomm’s effort to ban our products is another desperate move by a company whose illegal practices are under investigation by regulators around the world. All iPhone models remain available for our customers in China. Qualcomm is asserting three patents they had never raised before, including one which has already been invalidated. We will pursue all our legal options through the courts.”
A number of Apple suppliers have faced tough sledding of late following guidance reductions based on weak smartphone demand or reduced orders from a large customer, which was rumored to be Apple, including Lumentum Holdings (LITE), Qorvo (QRVO), and Cirrus Logic (CRUS). We continue to include Apple as an idea in both simulated newsletter portfolios. Our fair value estimate for shares currently sits at $236 each, and the tech giant’s Dividend Cushion ratio is an impressive 6.1.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.