Opko Health’s New Era Begins : Motley Fool

Following massive investments over the past two years that have swelled spending on research and development and included a slate of acquisitions, Opko Health (NYSE:OPK) could soon be on its way to delivering consistent quarterly profit to shareholders.

Bigger is better
Opko Health’s billionaire founder, Philip Frost, is legendary for orchestrating acquisitions that add value. After acquiring IVAX Pharmaceuticals in the 1980s and then growing it through M&A, he sold the company to TEVA Pharmaceuticals for $7.4 billion in 2005.

Frost could do even better than that with Opko Health.

After inking a slew of deals in the past to boost Opko Health’s drug pipeline, Frost bought the specialty laboratory company Bio-Reference Labs for $1.5 billion this past summer.

Because Bio-Reference Labs is the third largest laboratory services company, with roughly $200 million in pre-acquisition quarterly sales and $0.24 in quarterly pre-deal earnings, the acquisition significantly increases Opko Health’s sales while also giving it valuable cash flow to advance its pipeline and the potential for ongoing profitability.

Delivering on deals
One of Opko Health’s first acquisitions was rolapitant, a phase 3-ready drug that treats chemotherapy-induced vomiting and nausea, that Frost bought from Schering-Plough in 2009.

In 2010, Opko Health turned around and licensed rolapitant to Tesaro (NASDAQ:TSRO) for up to $121 million in milestone payments and tiered double-digit royalties and in September, the FDA-approved rolapitant for use under the brand name Varubi.

Since Tesaro was founded by Lonnie Moulder, the guru who helped launch the successful chemotherapy nausea drug Aloxi, and antinausea drugs like Merck’s Emend generate hundreds of millions of dollars in sales annually, Opko Health could start seeing meaningful revenue from Varubi soon.

Opko Health is also about to find out whether its acquisition of Cytochroma to get its hands on the vitamin D prohormone Rayaldee pays off.

Rayaldee is under FDA review for approval as a therapy to boost vitamin D in patients suffering from chronic kidney disease.

Stages 3, 4, and 5 CKD patients often suffer bone loss tied to imbalances in vitamin D that require treatment and that treatment typically consists of supplements that can deliver vitamin D inadequately or medicines that aren’t all that effective. If approved, Opko Health believes that Rayaldee could offer a better alternative in a market it estimates to be worth $12 billion.

Of course, no one knows how much of that market Rayaldee can capture, but investors should get a better idea next year given that the FDA’s decision on Rayaldee is expected on March 29.

Opko Health’s long-acting human growth hormone, hGH-CTP, which can be dosed once weekly instead of daily like current therapies, is also nearing the finish line.

The company acquired hGH-CTP when it bought Prolor for $480 million and earlier this year, Pfizer (NYSE:PFE) inked a deal that could be worth hundreds of millions of dollars to Opko Health, plus royalties and potential profit sharing.

Specifically, to protect the market share for its human growth hormone Genotropin, Pfizer paid Opko Health $295 million in up-front cash and agreed to pay another $275 million in potential milestones, plus royalties, to license hGH-CTP. Pfizer also agreed to split profit on Genotropin with Opko Health if hGH-CTP notches approval for use in children.

Results from hGH-CTP’s phase 3 trial are anticipated in the second half of 2016 and if those results are good and hGH-CTP eventually wins the FDA go-ahead, then it will compete in a market worth over $3 billion annually.


Looking forward
Opko Health’s C-suite is packed with former IVAX leaders, including Jane Hsiao, who is vice chairman and worked at IVAX with Frost for more than a decade, and Steven Rubin, Opko Health’s executive vice president, who worked at IVAX for five years.

That team appears to have cobbled together an intriguing mix of drugs, products, and services and their efforts could soon pay off.

Given Opko Health’s upcoming catalysts including Varubi royalties, Rayaldee’s FDA decision, and hGH-CTP late-stage trial results, 2016 is shaping up to be a critical year for Opko Health that investors shouldn’t ignore.


Jim Cramer ( The Street ) Valeant Ranked HOLD ( Cooperman Hedge Fund Adds)



The primary factors that have impacted our rating are mixed – some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company’s strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, unimpressive growth in net income and generally higher debt management risk.

HIGHLIGHTS The revenue growth greatly exceeded the industry average of 3.7%. Since the same quarter one year prior, revenues rose by 35.5%. This growth in revenue does not appear to have trickled down to the company’s bottom line, displayed by a decline in earnings per share.

Net operating cash flow has increased to $736.40 million or 19.02% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -0.70%.

VALEANT PHARMACEUTICALS INTL has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year.

During the past fiscal year, VALEANT PHARMACEUTICALS INTL turned its bottom line around by earning $2.67 versus -$2.62 in the prior year. This year, the market expects an improvement in earnings ($11.32 versus $2.67). The company’s current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization.

In comparison to the other companies in the Pharmaceuticals industry and the overall market, VALEANT PHARMACEUTICALS INTL’s return on equity is significantly below that of the industry average and is below that of the S&P 500. Despite any intermediate fluctuations, we have only bad news to report on this stock’s performance over the last year: it has tumbled by 43.73%, worse than the S&P 500’s performance. Consistent with the plunge in the stock price, the company’s earnings per share are down 82.71% compared to the year-earlier quarter. Although its share price is down sharply from a year ago, do not assume that it can now be tagged as cheap and attractive. The reality is that, based on its current price in relation to its earnings, VRX is still more expensive than most of the other companies in its industry.

US pharmaceutical companies are involved in the discovery, manufacturing, distribution, and research of generic and branded drugs. The industry accounts for 27.3% of the healthcare sector and is capital-intensive with exorbitant R&D costs. Most companies are mature and characterized by high margins and higher dividend pay-outs. Major players include Pfizer (PFE), Bristol-Myers Squibb (BMY), Abbott Laboratories (ABT), and Eli Lilly (LLY).

The industry employs more than 400,000 in the US. The 50 largest companies control over 80% of the market. The industry faces unprecedented challenges from stringent environmental regulations and patent expirations on billion-dollar products. Industry experts believe that generic competition will wipe out more than $60 billion from US industry sales over the next five years as more than three dozen drugs lose patent protection. Merck lost a $3 billion patent protection for its osteoporosis drug Fosamax in 2008 while Eli Lilly lost an estimated 90% of Zyprexa sales. The FDA is rejecting more drugs on safety concerns and a lack of compelling evidence of definite advancement from existing drugs.

The industry depends on federal subsidies for cost reductions. The US government enacted the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) in 2003 to provide prescription drug benefits to the elderly and disabled. Medicare Part D, a component of MMA, which came into effect in 2006, altered the revenue model of pharma companies. Revenue from such programs is expected to reach $724 billion by 2015 as federal subsidies will lower co-payments and deductibles for specialty drugs.

Horizontal and vertical integration has created health maintenance organizations (HMOs) and pharmacy benefit management firms (PBMs). In order to cut costs and remain competitive, the US pharma majors have been outsourcing research to low-cost service providers in India and China.

The promising era of personalized medicine has begun. Dozens of exciting new drugs for the treatment of dire diseases such as cancer, AIDS, Parkinson’s, and Alzheimer’s are either on the market or are very close to regulatory approval. The industry has shifted its focus from blockbuster drugs (chemistry-based drugs) to specialized products, geared towards specific disorders. According to government estimates, American drug purchases may reach $497 billion by 2016, supported by a rapidly aging population, inflation, and the introduction of expensive new drugs.

Leon Cooperman’s Omega Advisors to the list of investors pinched by the rout ofValeant Pharmaceuticals (VRX).

In a quarterly 13-F filing unveiled today, Omega revealed it added a new position in the controversial drug maker to its portfolio during the third quarter that totaled 484,915 shares worth $86.5 million as of Sept. 30. During that three-month period, the stock price ranged from an intraday high of nearly $264 to a low of $152.

Since Sept. 30, when Valeant closed at just over $178, the stock has dropped almost 60% to a recent $73.32. At the most recent price, Omega’s stake is worth roughly $35 million.

Today marks the deadline for big money managers to reveal holdings as of Sept. 30. Firms that wield more than $100 million need to hand over lists of equity holdings within 45 days following the quarter’s end.

Valeant wasn’t the only new position reported by Omega. The fund also added a new stake inPfizer (PFE) totaling 4.8 million shares and a position in Amazon (AMZN) worth $18.3 million.

Puerto Rico Tax Haven Welcomes Americans this – and every- April 15th

Valeant : Dead Company Walking ?


The Valeant saga is probably a long way from a resolution. Anyone that says they know how it will end is either delusional or looking to influence the stock. That being said, there are a few clear lessons to be gleaned from the story thus far:

  1. Organic growth is superior to growth by acquisitions—especially when growth by acquisitions is financed with large amounts of debt and even more especially when that debt is fueled by Wall Street bond offerings.
  2. In industries that rely on intellectual property, research and development spending is critical for survival.
  3. Accounting transparency is a big deal. I’m not saying for sure that Valeant is Enron Part II, but I will say that unscrupulous behavior is a lot harder to detect when its wrapped up in complicated financial arrangements.
  4. The more a company works to highlight non-GAAP (AKA crap) results, the more investors should focus on GAAP results instead. As Gretchen Morgenson pointed out last week in the New York Times, Valeant earned $912 million in 2014 GAAP profits, while its non-GAAP reported cash earnings were $2.85 billion.

None of these lessons are new. They’re commonsense, investing 101, which leads one to wonder why so many successful money managers have risked huge amounts on such an inherently sketchy business. Sequoia Fund’s stake in Valeant is a staggering 34 million shares. Bill Ackman’s Pershing Square Capital owns 20 million; SF-based ValueAct, 15 million; NYC-based Paulson & Co, 9 million; NYC-based Lone Pine, 5 million; and Greenwich-based Viking Capital, 5 million. New York’s Brave Warrior Advisors (managed by Glenn Greenberg, son of legendary baseball player Hank Greenberg) has reportedly tied up more than a third of its assets in Valeant. These are massive investments from some of the biggest, best-known funds in the world—and that is exactly where the problem lies.

These outsized bets are a side effect of liquidity. As assets under management grow, liquidity constraints reduce the number of potential stocks and bonds where a manager might make a meaningful investment.

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Charlie Munger Isn’t Done Bashing Valeant : Legal BUT Immoral

Charles Munger saw it coming, and now he’s shaking his head.

Months before Valeant Pharmaceuticals International Inc. tumbled under attack from short sellers, Munger told investors in Los Angeles the company reminded him of the excesses of the 1960s conglomerate craze. “I’m holding my nose,” Warren Buffett’s longtime business partner said.

Turns out, those remarks were just the start of his concerns.

In an interview Saturday, Munger tore anew into the besieged drug company, calling its practice of acquiring rights to treatments and boosting prices legal but “deeply immoral” and “similar to the worst abuses in for-profit education.” In his role as chairman of Good Samaritan Hospital in Los Angeles, Munger said, “I could see the price gouging.” And speaking as a storied value investor, he said, its strategy isn’t sustainable: “It’s deeply wrong.”

Once a high-flying stock — and a darling of star money managers like Bill Ackman — Valeant has slid more than 60 percent since its peak in August. A short-seller accused it of using a mail-order pharmacy, Philidor RX Services LLC, to inflate sales and engage in accounting tactics reminiscent of Enron Corp., the power trader that collapsed in 2001. Lawmakers are examining how Valeant set higher prices for medications.

The company denied the short-seller’s allegations in a conference call on Oct. 26 and said Friday it would sever ties with Philidor. It also has said that price increases for treatments are often whittled down in negotiations with insurers.

‘Holding My Nose’

“We operate our business based on the highest standard of ethics, and we are confident in our compliance with applicable accounting rules, regulations and laws,” Laval, Quebec-based Valeant said in an e-mailed statement Sunday. “Our commitment is to the patients who use our drugs, the doctors who prescribe them, our partners who make them available across the country, and to our shareholders.”

Munger’s stance has extra significance, because some of the drugmaker’s largest shareholders follow the style of investing that he and Buffett, 85, popularized. Ackman frequently expresses his admiration for their firm, Berkshire Hathaway Inc. And Valeant’s largest investor, Ruane Cunniff & Goldfarb, which runs the Sequoia Fund, shares a decades-long history with Buffett.

Munger, 91, brought up Valeant in March, before an audience of about 200 people assembled to hear him at the annual meeting of Daily Journal Corp., where he is chairman. He was discussing a passage in Buffett’s recent letter.

Companies like ITT Corp., Munger said, made money back in the 1960s in an “evil way” by buying businesses with low-quality earnings then playing accounting games to push valuations higher. Investment managers looked the other way. And worse, he added, it was happening again.

“Valeant, the pharmaceutical company, is ITT come back to life,” Munger said at the gathering. “It wasn’t moral the first time. And the second time, it’s not better. And people are enthusiastic about it. I’m holding my nose.”

Unlike Enron

ITT acquired more than 350 companies during its years as a conglomerate, wrapping together Sheraton hotels, Avis Rent-a-Car, the maker of Wonder Bread and other businesses. It broke up in 1990s. One of its descendants, an industrial company, later took back the name.

As Valeant’s stock plummeted over the past two weeks, some big shareholders came to its defense, propelling the debate into a business-media spectacle. Ackman held a four-hour presentation on Friday, comparing the company to Berkshire as he sought to persuade investors that Valeant should be trading higher. His pitch fell flat, and the stock closed lower.

Ackman said during the presentation that he spoke with Munger about his March remarks. The Berkshire vice chairman’s objections focused on leverage, tax rates and acquisitions, and Munger explained that he says what comes to his mind, according to Ackman.

Munger elaborated on Saturday: Valeant relied on “gamesmanship” to run up its value. Its strategy, using acquisitions and price increases, is different from ITT, but it still created a “phony growth record,” he said. Unlike Enron, Valeant’s stock isn’t a house of cards because it has some some valuable properties, including its portfolio of treatments, he said. He isn’t holding or shorting the shares.

Old Ties

Valeant said Sunday that it sets prices that reflect the value of its drugs, and that it offers assistance programs to “remove the financial obstacles that may keep patients from obtaining the medications they need.”

A spokesman for Ackman declined to comment further on Munger’s latest remarks, referring to the Friday presentation. Sequoia’s managers, Robert Goldfarb and David Poppe, didn’t respond to messages seeking comment. They also have defended their investment.

Buffett’s ties with the fund stretch back decades. In 1969, he shut down his investment partnership to focus on Berkshire and suggested that clients put their money with William Ruane, a friend from Columbia University.

Ruane co-founded the Sequoia Fund in 1970 along with Richard Cunniff. Over the next decades, the pair used many of the same investing strategies that Buffett and Munger employed, looking for undervalued stocks that would climb over the long-haul. While both Ruane and Cunniff are now deceased, Berkshire is the second-largest holding at the $8.1 billion fund.

The biggest is Valeant. On June 30, the holding accounted for 29 percent of assets, largely because it had gained so much since Ruane Cunniff bought the stock.

Dismissing Comparison

Munger’s critique has been a topic of conversation at the fund manager. At a May investor meeting for Ruane Cunniff, someone asked what Goldfarb and his colleagues thought about the dig from Buffett’s right-hand man, according to a transcript of the event.

Ruane Cunniff dismissed the comparison to ITT, saying that Valeant is more concentrated in a single industry and less likely to dilute shareholders by issuing stock to fund deals. The share plunge in recent weeks has pushed Sequoia’s current managers to publicly defend their pick to investors.

“Valeant is an aggressively managed business that may push boundaries, but operates within the law,” they wrote in a letter last week. The recent value of $110 a share “does not strike us as a rational price for a company with a diverse collection of product lines and strong earnings growth.”

Having so much of the fund in one company troubled two of its independent directors — Vinod Ahooja and Sharon Osberg — who resigned last week, the Wall Street Journal reported Thursday, citing an unidentified source. The fund’s chairman, Roger Lowenstein, confirmed the departures, without giving a reason for why they stepped down.

Praising Goldfarb

Munger said Saturday that he had lots of admiration for Goldfarb, adding that “he’s been very right” on Valeant because the Sequoia Fund invested so early in the drugmaker.

It’s easy to see why investors have been so taken with the stock, Munger said. “It looks kind of Buffett-like,” because Chief Executive Officer Mike Pearson “cut out all the glitz” of running a drug company, he said. However, Valeant’s tumbling share price shows why morals should still be a part of the calculation for making an investment, Munger said.

“They’re deeply intertwined,” he said. “I don’t think that investing should be divorced from reality.”

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The Bear Market Has Just Begun


Today the narrow-minded canyons of Wall Street are littered almost entirely of trend-following bulls and cheerleaders who don’t realize how little there is to actually cheer about. Stock values are far less attractive than they were on that day back in 2009 and this selloff has a lot longer to run. There are hordes of perma-bulls calling for a V-shaped recovery in stocks, even after multiple years of nary a downtick.

Here are six reasons why I believe the bear market in the major averages has only just begun:

1) Stocks are overvalued by almost every metric.One of my favorite metrics is the price-to-sales ratio, which shows stock prices in relation to the company’s revenue per share and omits the financial engineering associated with borrowing money to buy back shares for the purpose of boosting EPS growth. For the S&P 500 (INDEX: .SPX), this ratio is currently 1.7, which is far above the mean value of 1.4. The benchmark index is also near record high valuations when measured as a percentage of GDP and in relation to the replacement costs of its companies.


2) There is currently a lack of revenue and earnings growth for S&P 500 companies. Second-quarter earnings shrank 0.7 percent, while revenues declined by 3.4 percent from a year earlier, according to FactSet. The Q2 revenue contraction marks the first time the benchmark index’s revenue shrank two quarters in a row since 2009.

S&P 500
  • Virtually the entire global economy is either in, or teetering on, a recession. In 2009, China stepped further into a huge stimulus cycle that would eventually lead to the largest misallocation of capital in the history of the modern world. Empty cities don’t build themselves: They require enormous spurious demand of natural resources, which, in turn, leads to excess capacity from resource-producing countries such as Brazil, Australia, Russia, Canada, et al. Now those economies are in recession because China has become debt disabled and is painfully working down that misallocation of capital. And now Japan and the entire European Union appear poised to follow the same fate.

This is causing the rate of inflation to fall according to the Core PCE index. And the CRB Index, which is at the panic lows of early 2009, is corroborating the decreasing rate of inflation.


But the bulls on Wall Street would have you believe the cratering price of oil is a good thing because the “gas tax cut” will drive consumer spending – never mind the fact that energy prices are crashing due to crumbling global demand. Nevertheless, there will be no such boost to consumer spending from lower oil prices because consumers are being hurt by a lack of real income growth, huge health-care spending increases and soaring shelter costs.

4) U.S. manufacturing and GDP is headed south. The Dallas Fed’s manufacturing report showed its general activity index fell to -15.8 in August, from an already weak -4.6 reading in July. The oil-fracking industry had been one of the sole bright spots for the US economy since the Great Recession and has been the lead impetus of job creation. However, many Wall Street charlatans contend the United States is immune from deflation and a global slowdown and remain blindly optimistic about a strong second half.

Unfortunately, we are already two-thirds of the way into the third quarter and the Atlanta Fed is predicting GDP will grow at an unimpressive rate of 1.3 percent. Furthermore, the August ISM manufacturing index fell to 51.1, from 52.7, its weakest read in over two years. And while gross domestic product in the second quarter came in at a 3.7 percent annual rate, due in large part to a huge inventory build, gross domestic income increased at an annual rate of only 0.6 percent.

GDP tracks all expenditures on final goods and services produced in the United States and GDI tracks all income received by those who produced that output. These two metrics should be equal because every dollar spent on a good or service flows as income to a household, a firm, or the government. The two numbers will, at times, differ in practice due to measurement errors. However this is a fairly large measurement error and it leads one to wonder if that 0.6 percent GDI number should get a bit more attention.

5) Global trade is currently in freefall. Reuters reported that exports from South Korea dropped nearly 15 percent in August from a year earlier, with shipments to China, the United States and Europe all weaker. U.S. exports of goods and general merchandise are at the lowest level since September of 2011. The latest measurement of $370 billion is down from $408 billion, or -9.46 percent from Q4 2014. And CNBC reported this week that the volume of exports from the Port of Long Beach to China dropped by 10 percent YOY. The metastasizing global slowdown will only continue to exacerbate the plummeting value of U.S. trade.


6) The Fed is promising to no longer support the stock market. Back in 2009, our central bank was willing to provide all the wind for the market’s sail. And despite a lackluster 2 percent average annual GDP print since 2010, the stock market doubled in value on the back of zero interest rates and the Federal Reserve ‘s $3.7 trillion money-printing spree. Thus, for the past several years, there has been a huge disparity building between economic fundamentals and the value of stocks.

But now, the end of all monetary accommodations may soon occur, while markets have become massively over-leveraged and overvalued. The end of quantitative easing and a zero interest-rate policy will also coincide with slowing U.S. and global GDP, falling inflation and negative earnings growth. And the Fed will be raising rates and putting more upward pressure on the U.S. dollar while the manufacturing and export sectors are already rolling over.

I am glad Ms. Yellen and Co. appear to have finally assented to removing the safety net from underneath the stock market. Nevertheless, Wall Street may soon learn the baneful lesson that the artificial supports of QE and ZIRP were the only things preventing the unfolding of the greatest bear market in history.

Michael Pento produces the weekly podcast “The Mid-week Reality Check,” is the president and founder of Pento Portfolio Strategies and author of the book “The Coming Bond Market Collapse.”


SAGE Therapeutics BUY Target Price $40

SAGE : NASDAQ : US$29.05
Target: US$40.00

SAGE Therapeutics is a development/clinical stage
biopharmaceutical company founded in 2010 that is
focused on developing and commercializing drugs to
treat central nervous system (CNS) disorders where no
effective or FDA approved options exist.
Life Sciences — Biotechnology
Investment highlights
Estimate $980M US peak sales for SAGE-547
We estimate $980M US peak sales from ~13,300 SRSE patients,
representing 55% of total super refractory status epilepticus (SRSE)
patients and 13.8% of all ~96,000 patients treated for status epilepticus
in the hospital. We assume a cost of ~$75,000 per patient annually,
which we believe is appropriate for the hospital setting given these
patients are critically ill and are on last lines of therapy.
SAGE-547 has clear mechanism of action
SAGE-547’s mechanism is well understood, upregulating GABA at two
synapses (α1 and α 4) while current therapies only hit GABA at α1
receptor. We believe this gives the drug an advantage over other
therapies because the dual interaction can potentiate stronger GABA
duration, leading to improved seizure control.
Current therapies remain ineffective
Current therapies remain ineffective in controlling SRSE (response rates
<40%) or have intolerable side effects, giving SAGE-547 a low risk of
penetrating in this market. Additionally, we want to emphasize the
severity of this disease where patients in the ICU carry a mortality risk
of close to ~50%, making this an area of high unmet medical need.
Expect positive SAGE-547 weaning data in December
We expect positive data for SAGE-547 when patients are weaned off
drug and brought out of coma in December for at least n=10 patients.
Previous data suggested resolution of SRSE in 9/10 patients, whereas
new data will discuss weaning patients off drug and reversing coma

Why Investors Love Drug Companies

  APRIL 28, 2014

Few people have done better in the recent stock boom than biotech investors. Biotech was the best-performing market sector last year, and in the past two years its stocks rose a hundred and twenty per cent. But suddenly, in late March, the stocks tanked, some falling more than twenty per cent in a few weeks. The selloff can be explained to some extent as a market correction and part of a wider flight from risk. But the real story concerns a revolutionary new hepatitis-C drug developed by the biotech giant Gilead.

Hepatitis C affects 3.2 million Americans; untreated, it leads to scarring of the liver and to liver cancer. Until now, the best treatments cured only about half of patients and often had debilitating side effects. But in December the F.D.A. approved the first in a new wave of hep-C drugs, Gilead’s Sovaldi. This is huge news—not just in medicine but on Wall Street. Vamil Divan, a drug-industry analyst at Credit Suisse, told me, “Sovaldi and the other new hep-C drugs are great drugs for a tough disease.” Sovaldi can cure ninety per cent of patients in three to six months, with only minor side effects. There’s just one catch: a single dose of the drug costs a thousand dollars, which means that a full, twelve-week course of treatment comes to more than eighty grand.

For Gilead this is great. Take an expensive treatment, multiply by a huge number of hepatitis-C patients, and you get a very lucrative business proposition. It’s also good news for patients. But it’s a big problem for insurers and taxpayers, who—given that hepatitis-C patients have an average annual income of just twenty-three thousand dollars—are going to end up footing much of the bill. There has been an uproar of criticism. Private insurers blasted Gilead’s pricing strategy; the pharmacy-benefit manager Express Scripts said that it wanted its clients to stop using Sovaldi once an alternative appears. Then, on March 20th, three Democratic members of Congress sent Gilead a letter asking it to explain why Sovaldi costs so much. The letter had no force of law, but it spooked investors by raising the spectre of what they most fear—price regulation.

Investors love drug companies in part because they often have tremendous pricing power. Drugs designed to fight rare diseases routinely cost two or three hundred thousand dollars; cancer drugs often cost a hundred grand. And, whereas product prices in most industries drop over time, pharmaceuticals actually get more expensive. The price of the anti-leukemia drug Gleevec, for instance, has tripled since 2001. And, across the board, drug prices rise much faster than inflation. The reason for this is that prices for brand-name, patented drugs aren’t really set in a free market. The people taking the drugs aren’t paying most of the cost, which makes them less price-sensitive, and the bargaining power of those who do foot the bill is limited. Insurers have to cover drugs that work well; the economists Darius Lakdawalla and Wesley Yin recently found that even big insurers had “virtually zero” ability to drive a hard bargain when it comes to drugs with no real equivalents. And the biggest buyer in the drug market—the federal government—is prohibited from bargaining for lower prices for Medicare, and from refusing to pay for drugs on the basis of cost. In short, if you invent a drug that doctors think is necessary, you have enormous leeway to charge what you will.

Still, this is an inherently fragile arrangement, dependent on our willingness to keep paying whatever the companies ask. The signs of a backlash are clear. More than a hundred cancer specialists have called for action to lower the price of cancer drugs. The chair of M. D. Anderson’s leukemia department co-authored an article saying that the cost of cancer drugs is “out of control.” The United Kingdom has announced a cap on annual drug spending, and Germany has adopted stringent rules to determine what drugs it pays for. Now Sovaldi has people talking again about allowing the U.S. government to do something similar. “It’s a growing issue, and this outcry may be a sign that we’re going to see more pushback,” Divan said. Every other developed country, after all, has some form of drug-price regulation, and it’s not as if drug companies then abandon those markets. Gilead sells Sovaldi in the U.K. for fifty-seven thousand dollars per treatment, nearly thirty per cent less than the price we pay.

Price restrictions have always been a political non-starter here, but at some point the math of the situation will be hard to resist. According to a study by the research group I.S.I., by 2018 spending on “specialty drugs” like Sovaldi could account for half of all drug spending in the U.S. Furthermore, one traditional argument against price controls is looking weaker: biotech companies claim that prices need to be high to reward risky and expensive innovation, but the fact that they’re churning out drugs and profits so consistently seems to undermine that claim. Biotech, in other words, may become the victim of its own success: the bigger the profits, the bigger the likelihood of regulation.

You might think that this prospect would encourage companies to be more cautious. But, if you assume that price controls are coming, the rational play is to squeeze out all the profits you can now. The uproar over Sovaldi may, somewhere down the line, help contain drug prices. But in the short run it could well make drugs even more expensive. And that’s what you call a serious side effect.


At AMP we are looking to Harris and Harris Group ( TINY) – little know and about to file for three or more IPOs in the next year.They avoid long periods of research and expensive investing by investing in advanced research projects.

OPKO Health ( OPK) is following the same route and has the backing of Dr. Phillip Frost – former head of TEVA.

or to the cynic