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"Highway Robbery": Are Patients Paying For Biotech M&A Bubble?

Tyler Durden's picture




 

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 today as it could draw attention to the industry's pricing practices.

*  *  *

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."

 

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Mon, 04/27/2015 - 13:52 | 6034642 Oh regional Indian
Oh regional Indian's picture

Eez il papa catholeek?

Eeeeh?

 

Mon, 04/27/2015 - 13:54 | 6034653 813kml
813kml's picture

Even absolution has a copay nowadays.

Mon, 04/27/2015 - 14:13 | 6034714 Skateboarder
Skateboarder's picture

Inhibitex has gotta be the gayest name ever conceived.

Mon, 04/27/2015 - 14:25 | 6034763 max2205
max2205's picture

Just pull the plug 

Mon, 04/27/2015 - 14:38 | 6034805 813kml
Mon, 04/27/2015 - 14:48 | 6034840 Skateboarder
Skateboarder's picture

Side effects: drinking booze, smoking things, posting on ZH?

Mon, 04/27/2015 - 15:20 | 6034981 Osmium
Osmium's picture

Exactly.  Have you seen some of the names of the antibiotics lately?

Mycoxafloppin and Mydixadroopin

Mon, 04/27/2015 - 14:03 | 6034690 williambanzai7
williambanzai7's picture

Mon, 04/27/2015 - 14:08 | 6034702 RafterManFMJ
RafterManFMJ's picture

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.
****
I would have found out the value of what I wanted to buy *before* I made an offer or purchased it; I guess that's because I don't have an MBA.

Mon, 04/27/2015 - 13:52 | 6034643 813kml
813kml's picture

Is there anything that is not a scam anymore?

I bet even the Girl Scouts are somehow up to no good with their cookies.

Mon, 04/27/2015 - 13:54 | 6034649 Oh regional Indian
Oh regional Indian's picture

I think it's trouble when the cooks are up to no good with the girl scouts...!

Zut!

https://www.youtube.com/watch?v=R7QkQ4pZEa8

Mon, 04/27/2015 - 14:02 | 6034688 813kml
813kml's picture

I enjoy your videos (and blog) ORI, this world needs some ancient wisdom.  Keep on sitarin' in the free world.

BTW, you remind me of an Indian Frank Zappa.

Mon, 04/27/2015 - 14:08 | 6034701 Oh regional Indian
Oh regional Indian's picture

Thanks 813, quite the compliment, musically. Unless you meant facially ;-)

Mon, 04/27/2015 - 14:18 | 6034736 Usurious
Usurious's picture

Ori, have you read this book?

 

The Blood Never Dried?

 

http://www.amazon.com/The-Blood-Never-Dried-Peoples/dp/1905192126

 

 

Mon, 04/27/2015 - 14:28 | 6034771 Oh regional Indian
Oh regional Indian's picture

Have not Usurious, asusme you are recommending it?

Thanks, will check it out. Sounds disturbingly interesting.

Mon, 04/27/2015 - 14:48 | 6034842 Usurious
Usurious's picture

here is an excerpt.......those brits were/are some fucked up people....anything you can share about the East India Company from an Indian perspective would be appreciated...

 

https://thebloodneverdried.wordpress.com/2012/05/01/excerpts-from-john-n...

Mon, 04/27/2015 - 14:58 | 6034887 Oh regional Indian
Oh regional Indian's picture

Thanks Usurious.

Yes, really animal like behaviour, world over. Very sub-human, I suppose they sent their choicest psycopaths on conquests.

Here is one of the best conspiracy fact sites on things indian, including the east india company...

http://greatgameindia.com/

and another is...

https://wideawakegentile.wordpress.com/

Mon, 04/27/2015 - 15:25 | 6034999 Usurious
Usurious's picture

Thank you Ori..........

A quote from the book...what a fuck that Churchill was......

''India still had to face the greatest disaster to befall the country in the 20th century, the Bengal famine of 1943-44. This was the product of food shortages brought about by the war. The British administration responded with ‘a callous disregard of its duties in handling the famine.’ The result was a terrible death toll from starvation and disease in 1943-44 that totalled more than 3.5 million men, women and children.''

Mon, 04/27/2015 - 14:28 | 6034770 813kml
813kml's picture

A bit facially (minus the schnauze), but more philosophically and musically experimentally.

Mon, 04/27/2015 - 14:31 | 6034781 Oh regional Indian
Oh regional Indian's picture

Nice :-)

Mon, 04/27/2015 - 14:06 | 6034697 JRobby
JRobby's picture

Spun out

There are no limits

Mon, 04/27/2015 - 14:14 | 6034726 cigarEngineer
cigarEngineer's picture

Blood donation is a huge scam. They turn around and sell it for $700 per liter, while giving you dirty looks when you ask "how much will you pay me for my blood?"

Mon, 04/27/2015 - 13:53 | 6034645 pragmatic hobo
pragmatic hobo's picture

i thought price gouging is illegal ... hello justice dept?

Mon, 04/27/2015 - 13:54 | 6034650 i_call_you_my_base
i_call_you_my_base's picture

"hello justice dept?"

LOL, good one.

Mon, 04/27/2015 - 14:07 | 6034698 pragmatic hobo
pragmatic hobo's picture

... thanks ... i'll be here all week ...

Mon, 04/27/2015 - 13:57 | 6034663 Dr. Engali
Dr. Engali's picture

You spelled "Just us" wrong.

Mon, 04/27/2015 - 13:53 | 6034646 barry2001
barry2001's picture

If you are into drones check out this : www.pickyourdrone.com

Mon, 04/27/2015 - 13:56 | 6034659 pods
pods's picture

Well you can always avoid the Big Pharma raping, unless you buy the line that "genetics" put you where you are.

Most of these drugs are worth-less (than not taking them at all).

Want a free life saving heart drug?

http://www.drfuhrman.com/

You will have to actually do something more than open a bottle.

pods

Mon, 04/27/2015 - 13:59 | 6034672 Dr. Engali
Dr. Engali's picture

No thank you. I prefer the product with the sixty second list of side effects. The teevee says it's good for me...... mostly.

Mon, 04/27/2015 - 14:00 | 6034679 pods
pods's picture

The condition known as "Hot Dog Fingers."

https://www.youtube.com/watch?v=0o33tZfqF_M

On as serious note, most everyone will seach high and low for ANY reason for their predicament that does not involve looking into a mirror.

pods

Mon, 04/27/2015 - 14:07 | 6034699 Dr. Engali
Dr. Engali's picture

Isn't that the truth? I know several people who bitch about their health, but will look for any means besides good nutrition and exercise to fix it. I get sick of their whining.

Mon, 04/27/2015 - 14:35 | 6034793 Platinum
Platinum's picture

"I get sick of their whining."

 

They'll stop it eventually...

Reminds me of a gastropod I used to work with in Fat City (aka: Reno, NV). Looking at getting a quadruple bypass in her early 50's. Short, very fat, and ate like a fatty American "should". She was pissed that there wasn't a pill that could fix her.

Mon, 04/27/2015 - 14:09 | 6034705 daveO
daveO's picture

The cancer, aka Death Industry, is at the forefront of price gouging. I can't remember how many times I've had people bragging about the cost (to their insurance co, of course) of their 'life-saving' cancer drug for their 1 in a Billion form of rare cancer. Usually around $10K per month. I worked with a guy whose insurance was paying closer to $20K/month. Yea, sure, they're ALL extremely rare forms of cancer. What a scam! This has been going on for decades. The only reason it's now a MSM story is because Uncle Sugar needs to justify cost cutting and, eventually, death panels. 

Mon, 04/27/2015 - 13:59 | 6034673 Id fight Gandhi
Id fight Gandhi's picture

All the expensive NEW drugs... How about the the OLD cheap generic drugs they made expensive due to their manipulation.

Patients with asthma for example, need a rescue inhaler to stop an attack. Well first the big pharm buy up the generic inhaler makers who compete with them. To stabilize prices....

Then they lobby to stop CFCs to be banned inhalers and only allow their HFA types (patented of course) to "save the ozone."

And voila! That's how you get a $5 medicine to cost $70 every single month.

Mon, 04/27/2015 - 14:42 | 6034819 Skateboarder
Skateboarder's picture

Pure concentrated evil - holding people hostage by their health.

Mon, 04/27/2015 - 14:05 | 6034692 venturen
venturen's picture

Thank you comrade Obama! Has he setup his slush fund/charity yet?

Mon, 04/27/2015 - 14:11 | 6034710 Handful of Dust
Handful of Dust's picture
Increased human protections offered as H5N2 outbreak spreads

 

http://news.yahoo.com/increased-human-protections-offered-h5n2-outbreak-...

Mon, 04/27/2015 - 15:23 | 6034989 adr
adr's picture

I'm going to buy up basketball shoes and then get congress to pass a law requiring all basketball shoes to have an additive only I have. Then I can take something that sells for an average of $100 and make people pay $1000 for them.

I'll be nice and sell Baller insurance that costs $100 a month and pays for one pair of shoes a year.

Mon, 04/27/2015 - 15:27 | 6035007 BoPeople
BoPeople's picture

The perfect time to overpay for something is just before a market crash. Profits are going to be murdered anyway. You might as well do a whole bunch of one-time asset write-downs.

Of course, it only works for public companies and banks.

Mon, 04/27/2015 - 17:23 | 6035485 unicorn
unicorn's picture

Raise their tax 737% please.

Mon, 04/27/2015 - 18:37 | 6035763 Real Estate Geek
Real Estate Geek's picture

Patients paying is the old paradigm.  The new paradigm is for taxpayers to foot the bill

 

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