The news of the price hike provoked the ire of much of the internet and, in particular, Democratic front-runner for the US presidential election Hillary Clinton, who followed up an initial tweet on Monday that she wanted to tackle ‘price gouging’ in the pharmaceutical sector with a speech in Iowa where she unveiled a policy to tackle the matter.
The question for investors is, do the recent falls open up buying opportunities in a sector that has risen significantly year to date, or should they be seen as shots across the valuation bow?
The first thing to point out is that there is little in the way of read through from the growth concerns in China that were largely behind August’s falls and the fundamentals within the sector.
As Linden Thomson, manager of the Axa Framlington Biotech Fund points out, the biotech sector suffers from increased risk aversion in general and so can get hard hit when macro worries increase.
“The sector has risen about 30% year to date, but there were some things making me cautious. Among them, there has been a lot of M&A which has stretched some of the fundamental valuations metrics,” she said.
But, while she has been cautious in the short term, she remains bullish on the sector longer term.
“It is one of the few sectors at the moment that continues to grow. Demographics continue to be supportive, as do various lifestyle issues and Obamacare has been a tailwind,” she added.
That said, she does highlight two risks currently facing the sector: The growth in biosimiliar drugs, or generics and the sustainability of pricing
And, it is here where the falls of the past week come into consideration, especially in terms of pricing.
While Thomson is of the view that prices are unlikely to continue growing as strongly as they have done in the past, she does not expect major ground to be made yet on the regulation front, as these issues are very complex and involve a number of players.
Lydia Baenziger, portfolio manager at BB Biotech agrees that pricing concerns are both a risk and a complex issue that is unlikely to be resolved quickly
She told Portfolio Adviser that there have been certain areas, where price hikes were enormous and not necessarily warranted by expensive R&D efforts, often in specialty pharma, but also in other areas.
But, she added: “More than ever, pursuing value-based pricing will be key for companies to prosper in such a price sensitive environment. However, it will also be a very delicate balance act for a future US government in mitigating the price issue without discouraging innovation and limiting patient access to the best possible therapies.”
From an sentiment point of view, she says pricing clearly will remain a big concern.
“Picking companies that have a responsible way of dealing with these discussions will be key.”
Asked where she is seeing value currently, Baenziger said: “Large caps look still very affordable at these levels given their high growth trajectory. Strong balance sheets of large cap biotechs and Pharma companies furthermore will drive M&A, especially as some companies are looking to maintain their growth into the 2020ies.”
