It’s no secret that biotech has been on an incredible run over the past several years. In fact, as we pointed out late last month, it’s been the top performing sector for five years running, has outperformed the S&P by a count of 3.5:1, and is up four-fold since the dot-com bubble. Additionally, there were a record 82 IPOs in the space in 2014, eclipsing the previous record of 67 and the number of companies with valuations greater than $2 billion has tripled in just four years.
One of the drivers behind the sector’s strength has been M&A. For instance, there were $17 billion worth of deals on March 30 alone, a record for the healthcare industry and an indication that 2015 may well top 2014 to become the best year ever for healthcare takeouts as buyers, anxious to plug holes in their pipelines and snap up new drugs that treat rare diseases, have paid an average of more than 30 times revenue for billion-plus deals over the past three years, Bloomberg noted last month. The following chart is quite telling:
The same dynamic appears to be driving the M&A binge that often drives speculative manias: everyone fears missing the boat. “Health care is obviously dominating the M&A scene. There seems to be a self-imposed pressure that if they identify a target they like, then they have to move quickly because somebody else might come along and pick it off,” one analyst who spoke to Bloomberg said. The following chart shows the sector’s performance along with plots for the various M&A deals that have gone off over the course of the rally:
While it’s an open question as to whether acquirers are grossly overpaying in the race to find drug targets that fit well with their existing pipelines and offer the best chance for marketing synergies, it appears that at least in some cases, the premiums paid in healthcare M&A deals are being passed right along to patients. Here’s WSJ with more:
On Feb. 10, Valeant Pharmaceuticals International Inc. bought the rights to a pair of life-saving heart drugs. The same day, their list prices rose by 525% and 212%.Neither of the drugs, Nitropress or Isuprel, was improved as a result of costly investment in lab work and human testing, Valeant said. Nor was manufacture of the medicines shifted to an expensive new plant. The big change: the drugs’ ownership…More pharmaceutical companies are buying drugs that they see as undervalued, then raising the prices…Some payers and health-care providers complain they are already feeling the hit from large and sudden price increases for drugs like Isuprel and Nitropress.Cleveland Clinic says the price hikes for the two Valeant drugs is unexpectedly adding $8.6 million, or 7%, to this year’s budget of roughly $122 million for medicines administered at its hospitals…Early last year, Mallinckrodt PLC paid $1.4 billion for Cadence Pharmaceuticals, though the Ofirmev pain injections that were the crown jewel of the deal were projected to have just $110.5 million in 2013 revenue, according to a Mallinckrodt conference call with analysts discussing the deal.Three months later, the list price for a package of 24 Ofirmev vials jumped almost 2½ times to $1,019.52, according to health-care data firm Truven Health Analytics, which publishes average wholesale prices based on information from drug companies.“It seemed like highway robbery,” said Erin Fox, who directs the drug-information service at University of Utah Health Care. After the increase, three of the Salt Lake City health system’s four hospitals were spending as much as $55,000 a month on the drug, up from $20,000 to $25,000 a month, Ms. Fox said.The price increases can be very lucrative for companies. Horizon Pharma PLC upped the price of Vimovo pain tablets after buying the rights from AstraZeneca in late 2013. On Jan. 1, 2014, its first day selling Vimovo, Horizon raised the list price for 60 tablets to $959.04, a 597% increase, according to Truven.
Here's a rather alarming chart that demonstrates the above:
But for all of those out there who depend on these medications, do not despair because Kyle Bass is on your side and he'll be glad to shell out the $27,000 it costs to file a patent dispute so long as he can maybe short the stock of the patent owner ahead of time — of course it's all in the interest of cheaper drugs.
Although we can't be sure, the WSJ piece could be at least partially responsible for the weakness in biotech on Monday as it could draw attention to the industry's pricing practices.
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Perhaps the most absurd thing about all of the above is the following which outlines Valeant's stance on the two "life saving" heart drugs the company acquired:
After Valeant agreed to buy the drugs in early January, the company hired a consultant to look at their prices. The consultant found the prices didn’t reflect the benefits of the drugs to patients.
Assuming there is no amount of money that one would not pay to save their own life, then according to the logic employed by Valeant's consultant, the price of the two drugs should just be "infinity."