A New Type of Investor Relations for Biopharma

The biopharma industry is facing strong pressure to justify its pricing practices. And not just from politicians.

The biopharma industry leadership is getting an earful from some powerful people about their pricing practices. No, we are not talking about Hillary Clinton, Bernie Sanders, Donald Trump or any of the members of Congress weighing in on drug costs.

We are talking about some of the largest investors in biopharma.

According to Bloomberg, a group of leading investors met with industry leaders (including key executives in the BIO and PhRMA trade associations) in Boston last month “to urge to do a better job in defending their industry and take control of the conversation before lawmakers try to regulate prices.”

Now, it is not like the industry’s Washington advocates have been ignoring the issue. But that isn’t really the important message from the meeting. Rather, it is the latest sign that the politicians attacking drug pricing have found a lever that may actually be effective to drive change: the declining stock price.

It has been interesting to watch the disconnect between the substance of the Washington threat to drug pricing and investor reactions. When Henry Waxman wrote a letter demanding justifications for Gilead Sciences Inc.’s pricing of Sovaldi in 2014, it had no chance of leading to hearings, much less legislation– but it sure spooked investors. (Also see "Washington Threatens; Wall Street Reacts" - Pink Sheet, 9 Apr, 2014.)

When Hillary Clinton tweeted her “outrage” of Turing Pharmaceuticals AG’s price increases, most pundits in Washington still assumed there was a strong chance that the next President would be a Bush or a Rubio – but investors reacted as if Clinton was already in office with a Democratic Congress ready to enact her plan in the first 100 days. (Also see "When Empty Threats Work: “Price Negotiation” In White House Budget Spooks Wall Street" - Pink Sheet, 10 Feb, 2015.)

But perhaps the best example of the attempt to apply political pressure via activist investors has come from the Senate Aging Committee. In its two recent hearings on drug price increases (focusing primarily on Turing and Valeant Pharmaceuticals International Inc.), the committee put an unusual twist on the witness list. The basic format was typical: a panel of patients and providers to testify about the harms caused by extreme price increases followed by executives from the companies to face grilling about their practices.

But in both hearings, there was an extra witness at the table: a large investor. During the first hearing, the investor was Dan Wichman from Broadfin Capital, who helped fund Martin Shkreli’s first company (Retrophin) but did not invest in Turing. During the second hearing, Valeant investor William Ackman (Pershing Square) was at the witness table – and in fact was perhaps the most effective in convincing the panel that Valeant is indeed reforming its practices. (Also see "Congress Already Impacting Industry Drug Pricing Abuses, Valeant Says" - Pink Sheet, 27 Apr, 2016.)

The theme was set up in questioning by Sen. Thom Tillis (R-NC), who questioned Valeant about the relative size of its sales from “re-priced” drugs versus its lost market capitalization in the context of the criticism. Ackman stressed that the market cap collapse had indeed catalyzed change at the company and delivered a message across the industry that the practice of acquiring older products to “re-price” them must end. By the end of the hearing, Ackman even seemed to win over skeptics of Valeant’s sincerity by arguing that his new role on Valeant’s board is in line with Pershing’s posture as an activist, hands-on investor, in contrast to its more “passive” role with Valeant previously.

Ackman’s message resonated all the more because of the pending management change at Valeant, with outgoing CEO Michael Pearson offering a very public mea culpa as one of his last actions before stepping down.

Whatever else follows, the Turing/Valeant story will reinforce the message that jawboning remains an effective strategy for combating prescription drug prices at the federal level in the US. That is not a new insight – but each new case lays out paths for future investigators to explore.

There is no government mechanism to set drug prices in the US, and (barring a Bernie Sanders single payor landslide) there isn’t likely to be one any time soon. But by putting pressure on biopharma investors, politicians may have found a way to rein in or curb perceived abuses without needing to enact new policies.