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Summary

  • Exercise of a federally-elected “bully pulpit” to play to the media and voters has some concerned about FDA further interference in setting prices of essential medications.
  • What looked (to the pols) to be a win-win public-relations ploy could turn out to be, in stead, a lose-lose.
  • Who was poorly informed? Or were there even more damaging presumptions afoot?
  • What was the widespread Wall Street reaction: “Fear and trembling” or a “Greater greed opportunity”?

On Friday, Congressman (D-CA) Henry Waxman's DC publicity machine blew off a lot of steam about how outrageous "Big Pharma" is with $84,000 charges for a single HIV medication treatment, and how Obamacare will refuse to be gouged.

CNBC's Bob Pisani reports the issues involved this way:

An experienced biotech analyst who covers Gilead said the key to understanding this was to compare the cost of Hepatitis C therapy before Sovaldi and after. He noted that the average price point for a full course of treatment using traditional drugs is $70,000 over a period of 24 to 48 weeks. The cure rate was around 55 percent. The Gilead-drug based treatment is half as long with less side-effects and the cure rate is at least 90 percent, and could be closer to 100 percent.

But what about that high price? This highlights a very interesting fact about drug pricing: In the U.S., there is no legislation that allows Medicare or Medicaid to negotiate price. The companies set the price and the discussion revolves around the rebates or discounts the company will provide. ... That is a public policy question, but for the moment it seems clear that negotiating higher discounts would be a priority for the U.S. government.

Our additional observation

There is a further comparison that puts even more perspective on the issue. When the 45% of cure-failures next turn to life-saving treatment, the alternative is a liver transplant. Cost: $1 million or more. And the US medical system has a "save life at all costs" mandate, apparently. Reports have it that 30+% of all US medical expenses come in the last 30 days of patient lives.

So where is that $1+ million cost going to get covered? Ultimately in the "medical insurance" that few 25-40 year olds feel compelled to "buy" (or be taxed).

Wall Street Reaction

Market-makers [MMs], who in their essential role of providing market liquidity to assist big-money funds and institutions adjust their portfolio holdings to deal with flaps like this, talk continuously with clients and have keen insights into their intentions through client "order flow".

When client trade orders find insufficient "other side of the trade" volume at an acceptable price (most of the time), the MM may put its own firm capital temporarily at risk to get the client's order "filled". Whether that happens or not depends on the cost to the MM of price-change hedging insurance to keep the MM risk-free.

Sellers of such insurance importantly (perhaps dominantly) include the proprietary ("prop") trade desks of other MM firms. All are supported by information gathering systems world-wide, developed over decades, and resourced by skilled analysts and cutting-edge communications technologies. They try to know what is likely to be coming on each scene at least as early as their clients.

So the Waxman-raised issue is hardly new to them. It was already baked into stock prices on Thursday before the smoke started blowing. If the event is meaningful, it should be apparent in the expectations of buyers and sellers, not only of the stocks, but of the price-change insurance on those stocks.

What the insurance buyers will pay for protection, and what the sellers demand to provide it, tells just how far that community believes prices may get pushed by those with the available capital to make the prices stick - the MMs' clients. Here is what changed in the price-expectations scene, along with the much-publicized market-quote-change scene:

The market quotes are in the first two columns after the ticker symbols. The other columns show the calculated changes from Thursday to Friday, with the Price Now column showing the market quotes changes. Underlying data for the other changes are not shown, and the table is ranked by severity of Quotes change and is truncated around the -3% level out of space considerations.

Please check the Averages footers to the columns. While prices for all 140 stocks and ETFs in the category dropped by -3½%, their average forecast coming prices were pulled down only -2.4% at the tops of ranges, but by -3.5% at their bottoms. So the upside prospects increased, as shown by +1.2%. Not shown, the downsides, reduced by as much as quotes fell, remained (from here) as they were before, in relation to prior quotes, not indicating any greater concerns than they already had.

Our measure of the proportions of upside and downside in the forecast ranges, is the Range Index. Its value is the part of the range below the current market quote. Because the range tops declined less than quotes, and the upsides increased, the Range Indexes declined by a small amount, indicating that on that basis they were a bit cheaper.

Of focal interest, Gilead Sciences (GILD) saw its market price drop -4.6%, but the top of its forecast price range was reduced by only -1%, so its upside increased by +4.1%. The impact on widely-recognized biotech Proshares Ultra Nasdaq Biotechnology ETF (NASDAQ:BIB) is more severe with a price drop of -8.8% but a forecast top change of only -3.1%, so its upside prospect grew by +6.8%. A quick scan of the table's Sell Target Potential column reveals other beneficiaries.

So while several high-profile market quotes dropped by -8% to -13%, the average change for some 140+ medical technology issues (pharmaceuticals, biotech, equipment, services) hardly took notice. Not exactly panic in the "street".

And, in fact, for those most impacted as to market quotes, their upside price expectations tended to decline far less than the cost to acquire a new larger opportunity.

Win-Win proposition, or Lose-Lose?

Did Waxman (and his staff) really not know the facts behind the cure proportions in the relevant illness treatments, and their alternatives costs (ignorance of fact) or were they unable to figure out the logical implications of those facts (intellectual incompetence)?

Or were they intentionally playing to an ignorant voter (and media) audience they believed had been dumbed down to a point where all it took was a dollar number larger than a week's paycheck to get a predictable knee-jerk reaction - from the jerks (a venal intent on the DC perps.)

When it's "somebody else's ox getting gored" that may work. But this time it's not the rich being threatened, it's your pitiful suffering neighbor down the street who has a chance to get his life returned. Who has the right to say what that should cost? The provider of the cure, or the tax collector?

The unintended consequences of Mr. Waxman's tirade is that his many nemeses on Wall Street have been given the opportunity to build even bigger profits in new positions at lower costs. If that side of the action gets out, it could turn the ploy into a lose-lose.

Conclusion

From the medical industry's earliest confrontation with government, back in the late 1950's, there has been a running war over control of the industry's economics. Nothing new here. But Obamacare does encourage the pols to new effort, and may allow more traction.

But so far the bets being made show more conviction of this being a buying opportunity than a capitulation of oncoming doom. The industry has technology on its side, with many evidences of progress, while public approval of congress and the federal administration at large is at a very low ebb.

Source: GILD, BIB, Others: How Worried Are Market-Makers About 'Government Pricing?'