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There Are Some Sick Stocks in the Biotech Industry

By Alyce Lomax - Sep 29, 2015 at 7:43AM

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Hillary Clinton's recent biotech bashing brings to mind a question: Is this industry socially responsible?

One would think the biotech industry would be one of the most socially responsible, stakeholder-friendly industries by definition. The medications and treatments such companies develop and/or sell help heal people, or keep them healthy, after all.

Actually, though, the integrity of drugmakers has become questionable given the astronomical prices for so many prescription drugs -- has the quest for money and profit become too much of their mission?

High-profile presidential hopeful Hillary Clinton recently pushed biotech companies into the spotlight for their "price gouging" ways, and as a result, many such stocks took a dive after her fighting words for the campaign trail.

The price tags on some medications sound obscene and bring to mind questions about individual and societal burdens. It's hard to ignore the points critics make about whether their costliness is really justified -- or if the industry could be viewed as one on the slippery slope to social irresponsibility.

Sticker shock in the medicine cabinet
Clinton sent out a short-but-sweet tweet slamming a drug for a parasitic infection, Daraprim, whose price jumped 5,000% from $13.50 per pill to $750 after Turing Pharmaceuticals bought the rights to it. It was no whiz-bang new medication, either -- it's 62 years old.

A few more of the high-profile companies hitting headline news (and experiencing hits to their stock prices) because of some of their high-priced medications include Biogen, whose multiple sclerosis drug Tecfidera is one that's well known as a high-priced treatment among many, and Gilead Sciences, which has a $1,000 per day hepatitis-C drug, Sovaldi.

There are a variety of complex reasons the price of prescription drugs has become so out of hand, and companies do need funds to create new and better drugs. Of course, as investors, we can appreciate research and development, and of course we like to see profitable companies.

However, if we're thinking about money and meds, some companies may be a bit more problematic than others.

The prescription for profit maximization
Valeant Pharmaceuticals (BHC -0.65%) is one of the companies whose price has taken a clobbering, and it is one of the most interesting cases. The company already had a reputation for purchasing other companies for their drugs and then hiking their prices while cutting research and development budgets, but now that reputation has been sharpened even more given all of the news coverage.

Valeant CEO Michael Pearson's statement reported by The Wall Street Journal last year says it all, describing its strategy as "a business model that gets rid of the value-destroying part of pharmaceutical companies and keeps all the pieces that are value sustaining."

Let's pause to think about whether investing money in new drugs is, in fact, value destroying. That concept can be viewed as pretty soul-destroying coming from a company that provides pharmaceuticals.

Earlier this year, The Wall Street Journal similarly pointed to Valeant as a poster child for this practice in an article called, "Pharmaceutical Companies Buy Rivals' Drugs, Then Jack Up the Prices." It led off with an example of Valeant buying the rights to two heart drugs, and on the very same day, hiking their prices by 525% and 212%. Speaking of presidential hopefuls and pointed jabs, Bernie Sanders wrote to Valeant regarding the heart drug prices.

A Valeant spokesperson told the WSJ, "Our duty is to our shareholders and to maximize the value" of the products it sells. Investors can certainly say they know they're purportedly the stakeholders who really count with pill-peddling companies utilizing these strategies, but at what cost?

Hillary Clinton outlined a few ideas for how to curtail outrageous drug pricing, including price caps, but one was to require companies to spend a certain amount of their revenue on research and development. That sure does sound like it could be a particular risk to companies that consider R&D "value destroying."

For a socially conscious investor, spending on R&D is arguably of the most value to the future of humanity. The bottom-line profit motive, on the other hand, carves a slippery slope in healthcare-related industries.

There is a Friedman-esque doctrine applied to this industry, focusing on the moneymaking prospects in, say, eradicating the apparently intense human suffering caused by problems like erectile dysfunction or wrinkles instead of treating and curing rare but serious or even deadly diseases.

A question of social responsibility?
Investors can do far worse than contemplating exactly how the companies they own balance profit and stakeholder care. Hopefully more corporate managers will take more empathetic views and remember the beauty of holding higher purpose over profit, which is actually a protective measure. And when they won't, hopefully more shareholders will exert more pressure on them to do so, especially in industries where human well-being hangs so firmly in the balance.

Socially responsible investing is often viewed as having an emotional component -- the desire to invest in companies that do the right thing, however one defines it, and to avoid companies that don't -- and of course, that's a factor. However, what many people miss is its more clinical role in risk mitigation, focusing on the true long term.

Companies that take care of stakeholders and have strong senses of higher purpose avoid all kinds of risks -- such as the threat of loud anti-campaigns of all kinds, like that of campaigning politicians, not to mention consumer distrust and regulatory intervention.

When a presidential candidate is pointing to an industry and waving a red flag about egregious practices, there's something to worry about. There's good reason some biotech stocks find themselves ailing. This is, of course, an admittedly complex issue; to discuss it with Motley Fool community members who are interested in sustainable and responsible investing, visit the Sustainable Investing Forum.

Check back at Fool.com for Alyce Lomax's columns on environmental, social, and governance topics.

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