[This story first appeared in Investor’s Business Daily on Nov. 4, 2016.]
Biotechs and drugmakers rallied Friday following a big drop-off Thursday on news that the U.S. Department of Justice is investigating a dozen companies suspected of price collusion, including industry leaders Teva Pharmaceutical (TEVA) and Mylan (MYL).
After plunging 9% Thursday to a four-month low, IBD’s 44-company Medical-Generic Drugs industry group was up 4.7% in afternoon trading on the stock market today. The group is the second-best performer out of 197 groups tracked for the day so far.
IBD’s 421-company Medical-Biomed/Biotech industry group, meanwhile, was up 3.4% Friday afternoon and was the fifth-best performer.
Investigation Follows Mylan EpiPen Debacle
Price collusion is a new challenge for the industry, already wracked by controversies over spiraling prices. It’s illegal for companies to agree on a set price or coordinate discounts.
In September, Mylan CEO Heather Bresch was grilled by a congressional committee over the sixfold price increase of a two-pack of EpiPens to $600. Last year, former Turing Pharmaceuticals CEO Martin Shkreli drew national ire after raising the price of an AIDS medication by a factor of 56.
U.S. prosecutors could file the first charges before year’s end, according to anonymous sources cited by Bloomberg. Biotech and drug stocks plunged Thursday following the report.
A two-year investigation spans more than a dozen companies including Teva, Mylan, Lannett(LCI), Impax Laboratories (IPXL), Covis Pharma, Sun Pharmaceutical, Mayne Pharma, Taro Pharmaceuticals (TARO) and Endo International (ENDP) subsidiary Par Pharmaceutical. Teva’s Actavis unit, acquired from Allergan in August, also has been implicated.
IBD’S TAKE: The SPDR S&P Biotech ETF got a nice 3.6% boost Friday, rising on a buyback following the slump Thursday. Other ETFs wobbled as the election season aims for a dynamic close next week. ETFs are a proxy for the broad market. See who’s winning on IBD’S ETFs & Funds page.
Several companies have acknowledged the DOJ investigation in U.S. Securities and Exchange Commission filings.
In May, Allergan (AGN) received a DOJ subpoena requesting information about its generics business. Liability has since been transferred to Teva, which acquired Allergan’s generic business, Actavis, in August. Teva twice disclosed two subpoenas from the DOJ and Connecticut Attorney General.
Allergan declined to comment beyond the previous disclosure and liability transfer. Teva spokeswoman Denise Bradley told IBD, “Teva is not aware of any facts that would give rise to an exposure to the company with respect to these subpoenas.”
Mylan has already disclosed a subpoena regarding antibiotic doxycycline. But there’s been no subpoena for information regarding the pricing tactics of digoxin, a blood-pressure drug. Mylan, Mayne, Par, Actavis, Sun and Lannett all make digoxin. Covis makes Lanoxin, the branded version.
“Mylan is and has always been committed to cooperating with the Antitrust Division’s investigation,” spokeswoman Lauren Kashtan told IBD in an email. “To date, we know of no evidence that Mylan participated in price fixing.”
Sun Pharma declined to comment beyond saying it would continue to cooperate with the DOJ.
Lannett, Impax, Covis, Mayne, Taro and Endo didn’t immediately return requests for comment.
Allergan Dip ‘Inappropriate,’ Teva An ‘Overreaction’
Credit Suisse analyst Vamil Divan didn’t immediately see that the news would create long-term damage outside of a near-term overhang on the stocks. Allergan stock lost 4.6% on Thursday, while Teva fell 9.5%. But Allergan stock was up 3.3% Friday afternoon, and Teva was up 3.5%. Mylan stock was up more than 4%.
The drag on Allergan was inappropriate considering the Actavis sale, he wrote in a research report. In Teva’s case, the sharper deluge was likely an overreaction, he said.
“We acknowledge the investigation will likely be an overhang on Teva and the generics space until we have more clarity on the outcome and understand any potential financial or criminal penalties that may be imposed,” Divan wrote.
Taking the Unpaved Road 