The biotech and pharmaceutical sectors are on shaky ground. Trump’s presidency is creating uncertainties, primarily because the incoming party plans to do something to keep drug prices from rising. Mylan (MYL), Teva Pharmaceuticals (TEVA), and Endo International (ENDP) are getting punished as they trade near yearly lows. Market are over-reacting. Rising drug prices account for just a portion of total health care costs.
First, lobbying activities are a cost to the drug industry to gain industry and government support for pharma companies. Second, R&D expenditures are elevated because of strict and sometimes unpredictable decisions from the FDA. If the government allowed for expediting trials, research costs would not be so high.
If Medicare allows for negotiating drug prices, drug companies would need to issue steep discounts. This would favor big generic pharmas, which have the scale to produce in large supply to cut costs. As big pharma gets even bigger, smaller companies wanting to compete would not be able to do so.
Investors may want to turn their focus on Teva and Endo International. Endo is trading near yearly lows as investors worry about the impact the newly elected government may have on generic drug suppliers. If price negotiations with insurers do not result in much of a change, Endo will recover.
