Earlier this week, there was outrage on the Internet after it was announced that Turing Pharmaceuticals of New York would be hiking the price of Daraprim from $13.50 a pill to $750 a pill.
Turing bought the drug from Impax Laboratories in August for $55 million and raised the price.
Daraprim fights toxoplasmosis. The infection is particularly dangerous for people who have weakened immune systems, like AIDS patients, as well as for pregnant women.
Twittergeddon
After the Twitterstorm, the CEO of Turing, Martin Shkreli, changed his mind, saying: “Yes it is absolutely a reaction — there were mistakes made with respect to helping people understand why we took this action, I think that it makes sense to lower the price in response to the anger that was felt by people.”
The price will be lowered to allow the company to break even or make a smaller profit.
Shkreli’s initial argument was that money raised from the price increase of Daraprim would go into research for a better drug with fewer side effects.
I don’t run a drug company, but the pure greed seems unjustifiable in this case, and the fact that it was quickly overturned by a public blowback seems like a win.
Biotech Boom
One thing I do know is that biotech is one of the things the United States does well. We are in the midst of a biotech boom.
There is a new test for Alzheimer’s that will lead to early treatments.
There are brain implants for paralyzed people that move bionic arms and legs.
Immunotherapy drugs are using people’s own immune systems to fight cancer.
There have been a flurry of breakthroughs in stem cells, which could lead to new treatments for everything from Lou Gehrig’s disease to heart disorders.
And perhaps the biggest biotech trend in is personalized medicine, with drugs and treatments tailored directly to a patient’s genetic and biological makeup.
Drug Profits
All of these breakthroughs have one thing in common: the profit motive. Forbes put the cost of creating a new drug at $5 billion. Out of 10,000 drugs that start development, only 10 reach the market.
The top five biotech companies spend about 15% of their profits on R&D every year. The only way these companies can innovate is to make money from those 10 drugs over the 20-year patent life. In 2014, drugs going off patent cost the major drug companies roughly $34 billion.
Do I think Turing was greedy and trying to get rich? Sure. But I also know that if companies can’t make money, there will be fewer new life-saving drugs.
There is no doubt that health care in this country is a mess. I don’t, however, think that crony capitalism will solve it.
That’s Outrageous
Hillary Clinton used the outrage to gin up new campaign contributions from the Big Pharma companies.
Three days ago, Hillary Clinton, in reaction to the Turing price hike, put out a tweet that crushed biotech stocks:
Price gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on. -H
In other words: Donate to my campaign if you know what’s good for you.
It should be noted that Clinton and Obama were the top recipients of donations from Big Pharma during the 2008 campaign. It should also be noted that Turing is small pharma — very small.
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Action Alert
At the time of this nefarious tweet, I put out an action alert in my service Options Trading Pit. I wrote:
First of all, Hillary isn’t even the front-runner for the Democrats.
Secondly, price controls will never get through the enormous big pharma lobby.
Third, if it did happen, it would be two years from now at the earliest.
Fourth, it would be called “Patient Protection Bill for the Little Guy, Average Worker and their Children.”
And in the long history of naming bills for the opposite of what they do (think “Patriot Act”), it would screw the little guy, entrench the rent seekers, and send pharma stocks to the moon (think AIG after Obamacare).
History suggests that government regulation will be the best thing that could happen to Big Pharma stocks.
Here is the two-year chart for the biotech ETF (NASDAQ: IBB):
It is up about 250% over the last five years.
The uptrend remains, and until that changes, you should buy the dip.
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
