Did Henry Waxman's Letter to Gilead (GILD) Mark the Bursting of the Biotech Bubble?

Isiah Zinnerman  |

Henry Waxman (D-CA) has long been one of the more influential members of the House of Representatives, and he's also long been a thorn in the side to many on the private side of the health care industry.

Waxman announced that he would cap his 40-year political career by retiring after completing his current term in 2016, but he seems intent on brazenly defying T.S. Eliot by going out with a bang. On March 20, Waxman sent a letter to the CEO of pharma giant Gilead Sciences (GILD) , Dr. John C. Martin, chastising the company for the $84,000 price tag it has attached to its new Hepatitis C treatment, Sovaldi. This would bring to price for treatment to over $1,000 a pill.

And the biotech sector appears to have not taken this news in stride, with broad losses for health care and biotech stocks that appear to have, at least temporarily, halted the lengthy run that lasted throughout 2013.

Now, the question is hanging for health care stock and ETF investors: did Waxman’s letter finally pop the biotech bubble?

Waxman Letter a Pointed Rebuke of Private Pharma

While Waxman highlighted the potential treatments of the new drug, citing the 3.2 million Americans suffering from Hepatitis C and the 15,000 deaths it causes, he observed that the price tag may prevent a potential breakthrough treatment from reaching the general public.

“Our concern is that a treatment will not cure patients if they cannot afford it,” Waxman wrote.

However, the squeeze didn’t stop there, as Waxman pointed out the ways Gilead had gotten help from the federal government in bringing Sovaldi to market. Waxman not-so-gently reminded Dr. Martin that Gilead had requested a Priority Review and Breakthrough Therapy designation from the FDA in April of last year and had that status granted in December, allowing for a fast-tracked clinical process that could shave four months off of the approval process and save Gilead millions.

Waxman then wrapped up the letter with the part most concerning for those in the biotech industry: a request for, among other things, an explanation of the methodology for pricing of Sovaldi.

Stocks Shaken by News of Letter

Based on the performance of the most-traded health care ETFs, the health care sector didn’t see investors respond to the news of Waxman’s pointed request for an explanation well. The SPDR Health Care Select Sector ETF (XLV) remains up on the year more than 5.25 percent, but it declined just under 3 percent in just over a week following Waxman’s letter.

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And those losses were multiplied for the leading ETF for biotech plays, which contains considerably more small-cap biotechs that often hinge on the profitability of a single potential lead treatment in the company’s pipeline. The iShares NASDAQ Biotechnology Index (IBB) is down almost 11.5 percent from the letter to March 28, shifting what had been a 13.74 percent gain on the year to just a 3.69 percent gain.

A New Era for Health Care?

With the rapidly approaching deadline for signing up for insurance through the Affordable Care Act, Waxman’s letter could be viewed in the broader context of a potential sea change in the nature of health care costs.

Included in the Affordable Care Act were a variety of changes to the way insurers can structure their plans and how much of premiums must be spent on medical costs, both changes that could result in insurers taking a more active role in mitigating the cost of expensive treatments.

And the federal government appears to be more and more interested in finding ways to reduce costs. Much of the motivation behind the Affordable Care Act was the fact that health care costs as a percentage of GDP were skyrocketing, Medicare and Medicaid reimbursements are getting scrutinized more and more, and the bill created the Patient-Centered Outcomes Research Institute to research treatments and devices and find the most effective and most cost-effective methods for deploying care.

Too Soon to Say Much For Sure

So, is it possible that Waxman’s letter could be the beginning of the end for the huge gains in the pharmaceutical industry? Is this the pivotal point from which a broader reduction in health care spending as a percentage of GDP will ultimately reduce the profitability of the entire sector?

Probably not.

Firstly, even if we are entering a period of pull-back in the health care sector, it’s hard to envision Waxman’s letter as being all that pivotal. The broader market trends have been in a period of relative flux for years, and Waxman’s letter is, at most, just representing the same trend towards more cost-consciousness across the health care industry.

More importantly, though, the current pullback is too small at this point to mean much. A week of losses might be notable, particularly when it’s sparked by something as specific as Waxman’s letter, but when the S&P 500 health care sector is up over 55 percent over the last two years, and IBB has gained over 125 percent since the start of 2012 even if you factor in the last week and a half.

Finally, the timing of this bad week for biotech could have meaning beyond just Waxman’s letter. Monday represents the final day of Q1 2014, and it’s entirely possible that the need to satisfy quarter-end portfolio requirements have been part of the reason there’s been a relative freeze on buying in recent weeks. And it’s even possible that this is part of a broader pull-back from the huge 2013.

In short, this down-trend will have to last a lot longer and become a lot larger before it really starts to eat into the returns of health care investors. In the grand scheme of things, this is just a blip, and one that will be easily forgotten if health care stocks pick up steam again, as they have on Monday.

But that’s not to say that the broader trend of cutting health care spending won’t necessarily have consequences for health care companies in the long term, or that this isn’t necessarily the first step down that much-longer path. With Obamacare, the American health care system is undergoing a substantial change to the nature of the way its services are delivered, and it’s not hard to imagine that, sooner or later, health care stocks are going to start to be affected by these changes.


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