Please ensure Javascript is enabled for purposes of website accessibility

Why Biotech Stocks Fell Sharply Today

By Todd Campbell – Sep 28, 2015 at 3:57PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Biopharma stocks continue to sell off on concern that political scrutiny will lead to less profitable medicine.

Source: Flickr user

What: Concerns that Congress could take action to usher in a new era of policies designed to curb drug prices were fueled by news that Democratic members of the House of Representatives sent a letter to a committee chair asking to subpoena Valeant Pharmaceuticals (BHC -1.64%) for documents relating to its drug pricing strategy.

So what: The news is the latest example of increasing political scrutiny following a recent New York Times article criticizing the practice of buying existing, neglected drugs and rebranding them with significant price increases.

Specifically, the Times highlighted how this past summer, one privately-held company acquired the rights to a 60 year old drug that is used to battle a rare infection in order to increase its price by more than 5,000%.

Uproar following this article led to Presidential-hopeful Hillary Clinton outlining a plan, described here, to rein in sky-high drug prices.

If price-lowering legislation eventually gets the go-ahead, then it could weigh down the industry's profitability and result in biotech investors revising downward their sales and EPS forecasts.

Although the practice of acquiring and increasing the price on existing drugs seems to be legislator's major focus today, drugmakers that are marketing or developing drugs for cancer or rare disease may face headwinds resulting from increasing pressure to reduce drug prices, too.

According to the Memorial Sloan Kettering Cancer Center, the vast majority of recently-approved cancer therapies have been priced near or north of $10,000 per month -- a significant increase to the prices associated with these drugs ten years ago. And therapies for rare diseases are among the most expensive on the market, with many enzyme replacement therapies used to treat rare genetic diseases fetching hundreds of thousands of dollars per year. Therefore, if legislators determine that these prices are exorbitant relative to the benefit they offer, then biopharma companies targeting these indications could be negatively affected as well. 

Now what: The regulatory and political risk healthcare companies face shouldn't be ignored by investors, but no one knows whether increased scrutiny will lead to legislation or what the real world impact of those policies may be. For that reason, investors may want to hesitate before drawing any short term conclusions regarding their portfolio.

Let's not forget that investors who sold healthcare stocks because of worries related to the Affordable Care Act missed out on significant upside over the past five years. A better investing strategy than reacting to the latest press release out of Washington may be to focus on the long term demand growth tied to a larger, longer-living, and increasingly insured America.  

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool owns and recommends Valeant Pharmaceuticals. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.