Funds Say Pharma Companies Should Defend Prices


Pharma companies have come under increasing political pressure in the United States over the prices of their drugs.

The pressure has started to affect the companies and their investors, and now a group of major funds has called on the companies to defend themselves more effectively. The funds called an unorthodox meeting with biotech and pharma lobbyists, telling them to make the case for maintaining their prices, writes Caroline Chen for Bloomberg. This is an issue that Morgan Stanley warned its clients earlier, as previously reported by ValueWalk.

Boston hotel hosts extraordinary meeting

Representatives of Fidelity Investments, T. Rowe Price Group Inc. and Wellington Management Co., meet pharma lobbyists at a Boston hotel in March. They apparently told pharma executives and lobbyists to “educate” the public about their medicines and thereby defend their pricing.

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Fund managers are worried that if pharma lobbyists stay quiet, lawmakers could impose caps on drug prices. It looks as though the companies received the message well, and some saw an opportunity to boost poorly-performing biotech shares.

“Biotech lives and dies on investors being willing to put money at risk for long periods of time,” said Ron Cohen, board chair of Biotechnology Innovation Organization, an industry group known as BIO, who attended the meeting.

The group is going to take on a more proactive role in defending drug pricing, out of fear that shareholders could sell up. “Ninety percent of companies fail, and investors are putting hundreds of millions of dollars over 10 to 15 years — they have to believe that if they win, they win big.”

 Sources say that the meeting was attended by Jim Greenwood, chief executive of Washington-based BIO, and George Scangos, the chief executive of Cambridge, Massachusetts-based Biogen Inc.

Official scrutiny of pharma companies set to continue

Drug pricing has become an issue on the presidential campaign trail and in Congress. Drugmakers such as Valeant Pharmaceuticals International Inc. and Turing Pharmaceuticals AG, have been blasted for price gouging during Congressional hearings. Although many argue that Valeant and Turing are the more egregious “pricers” in the industry, some experts have noted that other drug companies use similar tactics. The reputation of pharma companies has suffered and so have their investors. The Nasdaq Biotechnology Index is down 34 percent as of Monday’s close from its all-time peak last July. Indeed, Valeant’s fall has hurt other drug makers as well – we put together a chart using data from Capital IQ of some of the major companies in the space.
The funds said that firms should investigate new pricing models as well as educating people on the value of medicines. There was also a suggestion that investors should mention their concerns to policymakers.

“If they point out they are running funds that among them contain 401(k) dollars from maybe tens of millions of Americans and they’re integral to economic well-being, that is going to carry more weight,” Cohen said. “We can go in and make our cases, and people look at us and say ‘Well, of course, you’re self-interested.’” This is a bit disingenuous since American stock ownership is at an 18 year low (and presumably mutual fund ownership is also low) and investors would be better off in index funds, and most people would prefer lower healthcare costs to a few more percent returns to their mutual funds.

Prices have risen across the board, and it seems unlikely that the scrutiny will end soon. Pharma representatives say that prices do not take into account the many discounts that firms give to insurers.

In short, the pharma companies need to do more “education” to show that Valeant and Shkreli’s old company are bad while they are the good guys.