zondag 6 augustus 2017

Wolf Richter; Pharma Shares Melt Down, But Consumers Might See Relief

Effects of competition after government cracks down on price fixing? Shares of Teva (TEVA), the largest generic drug manufacturer in the world, plunged 13% on Friday, to $20.60, after having already plunged 24% on Thursday, after having reported that second quarter revenue and profits had been beaten down by a 6% decline in generic drug prices. Since July 2015, shares have plunged 70%. Though revenues rose, Teva booked a net loss of $6.0 billion in the quarter. It listed a slew of special items, including a $6.1 billion write-off “related to the US generics reporting unit.” It announced that it would slash its dividend by 75%, lay off 7,000 employees globally, including in Israel where it is headquartered, pull out from 45 countries, and close 15 plants. It is grappling with a generics market where competition started to push down prices in 2015. “Negative net pricing” is what the company calls this. During the earnings call, Dipankar Bhattacharjee, head of Teva’s Generic Medicines Group, explained that their customers, wholesalers and buying groups, were consolidating and pushing for price reductions, and that Teva cut prices “to secure additional business.” These pricing pressures would accelerate this fiscal year, the company said. That’s good for consumers who’ve been bludgeoned over the past many years by soaring pharmaceutical prices. But it appears to be a tough pill to swallow for the stock market.
AmerisourceBergen Corp., the second-largest of the three big US drug wholesalers, reported on Thursday a 8.7% decline in operating profit in its pharmaceutical distribution unit. It expects generic prices to skid by a range of 7% to 9% in its current fiscal year. Its shares (ABC) plunged 10.5% on Thursday and skidded 1% on Friday, to $80.83. They’re down 13.8% over the past four trading days and down 23% since July 2015. CEO Steve Collis told The Wall Street Journal: “There’s no doubt that when you have a key product category with a 9% deflation rate, that’s a headwind you’re getting.” The three primary drug wholesalers in the US account for $400 billion of pharmaceutical sales per year. Drugs, the legal variety, are a disproportionate part of the US economy. According to the Commerce Department, drugs account for about 12% of total US wholesales. Fed Chair Janet Yellen had cited the drop in prescription drug prices as one of the factors that pushed down inflation. Considering this price drop transitory, she brushed off the dip in inflation. In 2015, unexpected competition began to set in where wholesalers try to gain market share among independently owned pharmacies by cutting their pricing on generics. And in order to be able to cut prices, wholesalers are pushing drugmakers for better deals.
Mylan, which is big into generics, saw its shares (MYL) drop 5% on Friday, to $32.92 after having dropped 6% on Thursday. They’re down 15.6% over the past four days. Back in June 2015, they were still trading at $74, when the EpiPen price gouging blew into the open. Since then shares have dropped by half. Perrigo makes a variety of products including generic drugs. Its shares (PRGO) dropped 10% over the past four days, to $67.43, and are down 64% over the past two years. Endo International (ENDP), which makes generic drugs and specialty branded pharmaceutical products, has plunged 15% over the past four days to $9.38. Shares are down about 90% from July 2015. Last November, it emerged that Endo, Mylan, and more than a dozen other drugmakers have been under antitrust investigation by the Justice Department for two years. During a government crackdown on price fixing, these cushy clubs just aren’t quite the same anymore. Why did share prices of these companies begin to sag in mid-2015?
Here’s a theory: People in the know of the government crack-down on price fixing could figure out that this would unleash competition, and they could figure out what competition would do to drug prices, and to the performance of these stocks. And they started selling. But that’s just a guess. “There was this egregious pricing, and it was a windfall” for some generic drugmakers and wholesalers, John Ransom, a Raymond James analyst, told The Journal. “These guys were over-earning with the pharma pricing bubble.” McKesson, the largest drug distributor, reported a week ago that its quarterly net income from continuing operations before taxes had plunged 50%. It cited the price deflation of generic drugs. CEO John H. Hammergren, in a interview, specifically blamed “more competition” for this price fiasco. McKesson’s shares (MCK) dropped 4.5% over the past four days and are down 34% since July 2015. Shares of Cardinal Health (CAH), the third-largest drug distributor, dropped 8% on Wednesday, and edged down on Thursday and Friday, for a three-day loss of 10.6%. Cardinal CEO George Barrett blamed a relatively small number of generic drugs for the surging prices over the past few years and told The Journal that the sudden reversal came as a surprise: “We’ve returned to more normal patterns, but the shift was rather rapid at that time, which was jarring to the system.”
Novartis, whose shares have dropped 20% since July 2015, warned during its July 16 earnings call that prices of generic drugs had fallen 8% in its second quarter, contributing to a 15% plunge in US generics sales. The head of the generics division, Richard Francis, told analysts: “The whole sector in generics is feeling pricing pressure in the US.” Outrageous price surges baffled rational minds over the past few years and cleaned out wallets and bank accounts of consumers or their employers while transferring wealth to the pharmaceutical industry. But finally, generic drug prices are easing back down, which allows consumers or their employers to spend their money on other things. This form of “deflation”, the result of reintroducing a modicum of price competition, is healthy for the economy and a godsend for consumers. Given the vast amounts of money spent on drugs in the US, these price declines helped push down overall inflation, but Yellen rightfully brushed it off. Drug prices should have never soared to these levels in the first place. The best thing that could happen would be a continuation of the “negative net pricing,” as Teva called it, for an unexpectedly long time. Procter & Gamble got tired of feeding an opaque, slimy industry of bots and fake clicks....