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Hillary’s tough talk threatens biotech’s lofty valuations

·Senior Reporter

Biotech (IBB) has been one of the market’s bright spots this year, but now the sector is getting hit, hard. After a few media reports of companies jacking up prices for rare orphan drugs, the public outcry has been fierce, and now presidential candidate Hillary Clinton is weighing in.

Hillary Clinton (D - Presidential Candidate)
Hillary Clinton (D - Presidential Candidate)

In a tweet posted yesterday, she railed that “price gouging like this in the specialty drug market is outrageous.” Biotech stocks summarily got slammed, and they are getting slammed again ahead of Clinton’s highly anticipated speech in Iowa, where she will lay out her plan to address rising drug prices.

As Yahoo’s Mike Santoli explains, it’s not surprising that Clinton and others like Vermont Senator Bernie Sanders are taking drug companies to task. “There's been this wave of companies that have essentially made it their business model to go and find these relatively narrow medicines that have not really been managed very carefully by their existing owners, to take them and jack up the prices because they're outside of the parameters of negotiated Medicare rates,” he says in the attached video.

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Turing Pharma's Martin Shkreli (via Twitter)
Turing Pharma's Martin Shkreli (via Twitter)

Take for example the story of 32-year old Martin Shkreli, CEO of Turing Pharmaceuticals. “[Turing] is a very controversial company run by a guy who also has had a couple of different run-ins with the biotech establishment and previously ran a hedge fund, who essentially got this pill that treats rare but very dangerous infections, and jacked [the prices] up forty times,” Santoli says. The drug, which treats a rare parasitic infection and has been around for 62 years, had its price increased from $13.50 a pill to $750 - overnight. “[Shkreli is] now the the poster child villain for drug price gouging at least by some people's estimation.”

Although Turing’s Shkreli is not shy about defending his company’s price hikes, he’s isn’t the only one raising prices in the pharma space. When it comes to biotech at large, high drug prices are the norm as companies try to offset huge research and development costs.

“Valuations of biotech stocks almost require that there be massive payoffs after years of investment,” Santoli points out. “Those massive payoffs often come in incredibly high list prices for those treatments once they are approved, and if there's going to be a lot more care and government control over exactly what somebody can charge here, and it's going to be Medicare negotiated profit, I don't think that these many biotech valuations can sustain that.”

As for the recent selloff in the sector, Santoli believes many traders were just locking in profits after a strong run up, but ultimately the selling in biotech was likely overdone. “We really won't know what real drug price controls are going to be in place for many years, even if Hillary Clinton were to be elected in 2016,” Santoli concludes.

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