The first official charges against drug producers unlawfully fixing the price of generic drugs could be filed already by the end of this year. More than a dozen of companies made their way to the DoJ list, with some of the producers falling over 20% on the news yesterday.
The scandal around the price manipulations of big pharma companies seems to never end this year. Just a few weeks after Mylan's (NASDAQ: Mylan [MYL]) EpiPen price controversy, it turned out that the U.S. Department of Justice has been working on a thorough investigation of the price collusions within the industry of generic drugs that can potentially result in criminal charges. Bloomberg reported late yesterday that the 2-year long DoJ's investigation into the price fixing was very close to its end, meaning that we are likely to see the real charges against several companies or individuals announced in the next few months.
The federal prosecutors have lately turned their attention to drug pricing in the pharmaceutical industry, following the big pricing scandals around such brands as Valeant Pharmaceuticals (NYSE: VRX) and Mylan over the last year. Previously, generic drugs mostly escaped the attention of the lawmakers who were focused on the more expensive branded drugs but the newly discovered DoJ probe is dragging the generics into the spotlight.
The investigation announced by Bloomberg involves an anti-trust probe against such well-known drug makers as Teva Pharmaceuticals (NYSE: TEVA), Mylan, Taro Pharmaceuticals (NYSE: TARO), Endo International (NASDAQ: ENDP), Actavis, Lannett Co. (NYSE: LCI), Sun Pharmaceuticals Industries (NSE: SUNPHARMA) and Mayne Pharma Group (ASE: MYX), among others. Almost all of the companies admitted their cooperation with the Department of Justice on this case and several firms including Mylan and Teva issued statements assuring their stakeholders that the firms did not participate in any price fixing activities and this investigation would not affect the earnings.
However, shares of all companies involved in the probe sharply fell on the news yesterday. Endo lost whopping 20% and settled at about $14.60, Mylan slipped 6.9% to $34.14, Teva fell almost 10% to $39.20 whereas Lannett and Impax plummeted 27% and 20%, respectively, demonstrating the highest one-day drop among the aforementioned drugmakers. Taro declined by about 7% to $93.60 while Mayne dropped 16% to A$1.43. This was yet another gloomy trading day for biotech investors that are heavily suffering from the volatility in the industry this year, with the main biotech ETF, iShares Nasdaq Biotechnology ETF (NASDAQ: iShares Nasdaq Biotechnology Index Fund [IBB]), falling 27% so far in 2016.
"This could add a severe overhang to the sector that may last well past the presidential election and into the new year,” said Wells Fargo analyst about the impact of the DoJ's investigation.
Even though the list of companies that are being reportedly involved in the investigation is quite big, only a few drugs were named to be under DoJ scrutiny. Digoxin, a heart failure drug, as well as doxycycline, a very common antibiotic, are the drugs that are potentially affected by price collusion activities of the producers making deals on raising the prices. According to Bloomberg, in the years of 2013 and 2014, Medicaid, a health coverage provider, spent 121% more money on purchasing doxycycline as compared to the previous year, even though there was 38% less prescriptions for that drug in this period. Similarly, the provider spent 90% more on digoxin, despite a 16% drop in prescriptions in the same period, what points at disproportionate price increases.
In addition to that, the GAO report said that digoxin and doxycycline suffered from big price changes back in 2012, without specifying particular producers involved in this. Bloomberg adds that digoxin's price grew almost 7 times in 2013 when Lannett and Impax were constantly pushing the price higher one after another. Impax increased the price for digoxin from $0.14 per pill to $1.185 per pill for a 100 pack, shortly after Lannett had done the same. Back then, Impax and Lannett were the main producers dominating the market of this drug, say the experts.
The Wall Street Journal mentions that this is also not the first time these two drugs are involved in lawsuits as several drug purchasers filed lawsuits against some of the producers of digoxin and doxycycline in the past. The plaintiffs claimed that Mylan, among other drugmakers, unlawfully increased the price for these drugs by over 800% between 2012 and 2014, yet Mylan declined these claims. Around the same time, several members of the U.S. Congress contacted Actavis, Mylan and Teva asking them to provide "information about the escalating prices they have been charging for generic drugs."
The immediate drop in the stock prices of all drugmakers mentioned by the Department of Justice demonstrates how serious the reaction of the stock market is likely to be when the official charges arrive. The scandal around price collusion in the industry would have a devastating effect on the market, considering that generic drugs account for 88% of all drug subscriptions in the United States, which is far larger than the marketshare of individual branded drugs caught in a crossfire before.
It will become clear in the next few months how far the Department of Justice would push the charges and whether the sector would be able to save itself from sinking. But what is clear already now is that investors should definitely keep an eye on this if they want to avoid unpleasant surprises later.