By Val Brickates Kennedy, MarketWatch
BOSTON (MarketWatch) — Drug stocks have had a particularly painful ride this week as investors took to heart speculation the U.S. government might soon cut back on drug reimbursement payments, which would push down sales, as part of an aggressive effort to rein in public spending.
There’s no question that the explosive debate on Capitol Hill over the nation’s crippling debt, coupled with fears the U.S. is entering a second recession, has been toxic to the stock market this week. As of Thursday afternoon, the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.42% had retreated 5.7% while the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.44% tumbled below the hallowed 12,000 mark to 11,533.
Pharmaceutical stocks, generally considered a safe-haven because their non-cyclical nature, were especially hard hit by the economic fallout. By Thursday afternoon, the NYSE Arca Pharmaceutical Index /zigman2/quotes/210598443/delayed DRG -0.20% had slid 6.2% to 304, a level not seen since late March.
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Sector analysts this week attributed some of the volatility to investors cashing out of the sector, which had done comparatively well against many of its peers. But fears of possible cutbacks in Medicare prescription benefits definitely fanned selling.
“Ultimately, they’ll be some pressure on reimbursement,” said Les Funtleyder, a healthcare analyst who manages Miller Tabak’s Healthcare Transformation Fund . “There’s motivation on the part of the government to cut costs.”
Funtleyder said that in particular, investors are concerned reimbursement cutbacks would flatten drug price growth.
“The key will be for companies to prove the value of their drugs,” he added.
Deutsche Bank’s Barbara Ryan said there’s also concern that drugs for poorer Medicare recipients will end up being reimbursed at Medicaid pricing levels, which are lower than those of Medicare.
If that were to occur, said Ryan, it could reduce industry revenues by about 1%.
Biggest decliners this week among sector large-caps included Teva Pharmaceuticals Industries /zigman2/quotes/205657894/composite TEVA -3.00% , down 13%; Pfizer Inc. /zigman2/quotes/202877789/composite PFE -0.63% and Novo Nordisk A/S /zigman2/quotes/203484366/composite NVO -0.13% , both down 9%; and AstraZeneca PLC /zigman2/quotes/200304487/composite AZN +1.46% and Sanofi /zigman2/quotes/201967021/composite SNY -1.02% , both down 8%.
Pfizer shares were also hurt by a lackluster quarterly-sales report, rolled out on Tuesday.
Biotech stocks fared worse, with the NYSE Arca Biotechnology Index /zigman2/quotes/210598458/delayed BTK -0.54% falling 14.2% to 1,161 by Thursday evening. Investors haven’t seen that level since December 2010.
Of the larger-cap biotech issues, Human Genome Sciences , which has just launched a highly-anticipated treatment for lupus, felt the most pain, with shares tumbling 24%. Also suffering was InterMune Inc., down 24%, followed by Amylin Pharmaceuticals and Vertex Pharmaceuticals /zigman2/quotes/202259802/composite VRTX -0.92% , both down 15%.
Funtleyder notes that the biotech sector has long been considered to be largely secure from reimbursement cutbacks, despite the fact that their drugs are generally far more expensive than traditional pharmaceuticals, with some treatments running close to $100,000 per course. But that could soon change, he warns.
“The government is aware of the large numbers involved,” said Funtleyder.
In addition to limiting price increases on product, the government could also push for the implementation of less stringent guidelines for the regulatory approval of “bio-similars,” Funtleyder added.
Bio-similars are essentially generic versions of established biotech drugs.