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The iShares Nasdaq Biotechnology ETF
[NASDAQ:IBB], which tracks the Nasdaq Biotechnology Index [NASDAQ:NBI], plunged 3.14% on Tuesday ahead of the Democratic Party presidential debate in Las Vegas, NV, but managed to bounce back 0.94% on Wednesday to close at $301.58 after neither Hillary Rodham Clinton or Bernie Sanders raised issues about the high cost of new drugs and biotech company profits. Since September 21, when Mrs. Clinton went on a Twitter frenzy and sent out a tweet about “outrageous” price gouging by a pharmaceutical CEO, the IBB index has plunged 14.84%, wiping out over $132 billion in market capitalization of the biotech and healthcare sectors.
About 38.57% of the holdings in the IBB index are the five big cap biotech companies, Amgen
[NASDAQ:AMGN], Celgene [NASDAQ:CELG], Regeneron Pharmaceuticals
[NASDAQ:REGN], Gilead Sciences [NASDAQ:GILD] and Biogen [NASDAQ:BIIB], with a combined market cap of over $450 billion.
Both Democratic candidates are feeling increasing pressure to develop answers for the problem of high-cost prescription drugs. Hillary Clinton proposed capping out-of-pocket drug expenses at $250 a month, reducing the exclusivity period to 7 years from its current 12 years, and requiring most drug makers to spend a defined portion of their profits on research and development. Her rival, Senator Bernie Sanders, a Democratic Socialist, wants people to be able to buy low-cost drugs from Canada and to allow Medicare to negotiate with drug companies over prices.
Investors should be less concerned about Senator Sanders’ proposal, as many political experts such as CNN chief political analyst Gloria Borger who said, after the debate, that “Sanders is unelectable”. According to the New York Times, some health economists warned that Mrs. Clinton’s new government mandate for company spending on medical research could create perverse incentives that could raise, instead of lower, the costs of developing drugs.
According to Clinton’s plan, shorting the exclusivity period will force the biopharma companies to jack up drug prices in order to recoup billions of dollars in drug development costs within 7 years, instead of spreading it out over 12 years. Due to the complexity of biologics, a product can only be made that is similar, but not identical, to the original drug. Depending upon its size and complexity, the price of biosimilars could just come in between 10% to 20% less than the cost of the branded manufacturer's drug. Hence, it would not be possible for low-cost drugs to be offered to American consumers by shortening the exclusivity period and allowing biosimilars to compete in the market.
The Tufts Center for the Study of Drug Development at Tufts University released a report last November showing that developing a new prescription medicine that gains marketing approval, a process often lasting longer than a decade, is estimated to cost about $2.6 billion. The total cost could run up as high as $2.9 billion, if the cost of post-approval R&D including studies to test new indications, new formulations, new dosage strengths and regimens, and to monitor safety and long-term side effects in patients required by the U.S. Food and Drug Administration (FDA) as a condition of approval, is included.
Some experts believe that the Tufts numbers are far too conservative. The actual cost of new drug discovery and developments could reach $4 billion plus if the extraordinarily low success rates are taken into account. According to Nature, the clinical development success rates of investigational drugs are dismal, as only 1 in 10 drugs that enter clinical phases are pushed through to FDA approval. Although the issue is so complex as it is, there won't be low-cost drugs, just only rhetoric, unless U.S. tax-payers begin subsidizing the costs of new drug development.
From our technical analysis, IBB has been moving in a symmetrical triangle since early this year. The breakout attempt in June failed after the index hit an all-time high at $400.79 in mid-July, followed by the formation of a head-and-shoulders chart pattern. The index bounced off the bottom trendline support of the symmetrical triangle chart pattern at $284.16 in late August and has been volatile since then. In the near term, IBB could pull back to retest the trendline support at around the $292 level before moving higher, as a political cloud now hangs over the biopharmaceutical sector.
Disclosure: Long Position BIIB, REGN and CELG in Portfolio. No positions in other companies or indices mentioned. |
