Season Investments


The Billion Dollar Tweet

Posted on October 6, 2015

"Price gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on." – Hillary Clinton

2015-10-06_twitter.pngOver the past several years, no sector in the US stock market has been hotter than US Biotechnology companies. Since the end of 2012, the US Biotech industry, as measured by the iShares Nasdaq Biotechnology ETF, was up over 160% heading into the third quarter of this year. The tremendous price gains in this industry have been driven by advancements in drug technology, dramatic increases in the price of drugs, and a move toward consolidation through mergers and acquisitions. This trend started to lose steam this summer as the broader US stock market started to sell off. Then all the positive momentum came to a screeching halt two weeks ago when Democratic Presidential Candidate Hillary Clinton shot off a tweet in response to a NY Times article about a 5,455% overnight price increase for a 62 year old drug called Daraprim.


On Wall Street, it is all about trying to be two (or three or four…) steps ahead of the next guy, and the market’s reaction to Clinton’s tweet wasn’t pretty as the US Biotechnology sector sold off 5% on the day while the broader S&P 500 actually rose by a little less than 0.5%. That means that with an estimated market capitalization of around $65 billion, Hillary Clinton’s tweet erased over $3 billion of shareholder value from the US Biotechnology industry.


Daraprim is used to prevent malaria and treat a parasitic infection known as toxoplasmosis. The parasite associated with toxoplasmosis is actually very common and is estimated to affect over 60 million Americans according to the CDC. Most people with a healthy immune system can fight off the parasite and recover without any treatments, but for those with a weaker immune system, such as those with HIV/AIDs, Daraprim is the only FDA approved medication to treat the disease.

Although Daraprim was originally developed by GlaxoSmithKline, the right to market it here in the US had been sold and purchased by several different drug companies since first being invented back in 1953. The latest sale was to a privately held startup called Turning Pharmaceuticals this August as part of a packaged drug sale. Up until that point, the drug had been a loss leader for whoever held it and was drastically underpriced compared to other lifesaving medications according Martin Shkreli, a former hedge fund manager with a somewhat checkered past who is now CEO of Turing Pharmaceuticals. According to Shkreli, the move to raise the price of Daraprim “isn't the greedy drug company trying to gouge patients, it is us trying to stay in business." Additionally, Shkreli makes the arguments that profits from existing drugs pave the way for capital intensive research and development for new drugs. In the embedded video Martin Shkreli defends the move to raise the price of Daraprim in an interview with Bloomberg anchor Betty Liu.


Truth be told, increasing the price of established drugs has been the gravy train of the biotechnology sector over the past three years. A recent study conducted by the Wall Street Journal found that wholesale-price increases for a sample of 30 different drugs averaged 76% for the five year period from 2010 – 2014. According to Economics 101, the markets response to such a dramatic price increase should either be curtailed demand or competition from other drug manufactures making a cheaper alternative. In some cases, the latter may not be an option due to patent protection and the former may not come into play due to how our complex healthcare system works. From the same WSJ article linked above:

In most markets, products are ordered, paid for and consumed by the same party, notes Sara Fisher Ellison, a Massachusetts Institute of Technology economist. But prescription drugs are ordered by a physician, used by a patient and usually paid for by a third party, either an insurer or a large employer.

Neither doctors nor patients typically have much of a sense of drugs’ prices. That blunts what economists call price sensitivity, the tendency of higher prices to curb demand.

And therein lies the rub. How do we reconcile the profit motive of drug companies which leads to the development of new drugs to fight constantly evolving diseases with the very humane and noble desire to create a fair system which doesn’t take advantage of individuals in a time of need? The same WSJ article linked above also pointed out the fact that the price increase of many prescription drugs has outpaced inflation by a factor of eight over the past five years. But our question to the author would be why is a capatalistic society benchmarking profit growth against inflation in the first place? So who is right, Shkreli or Clinton? Like most things in life, the truth probably lies somewhere in the middle of these two viewpoints, but it is always important to understand both sides of the coin and the tension that lies between those opposing viewpoints.

elliott_headshot_bw.jpgAuthor Elliott Orsillo, CFA is a founding member of Season Investments and serves on the investment committee overseeing the management of client assets. He spent nearly ten years as a financial analyst and portfolio manager working primarily with institutional clients prior to co-founding Season Investments. Elliott earned a bachelor's degree in Engineering from Oral Roberts University and a master's degree from Stanford University in Management Science & Engineering with an emphasis in Finance. Elliott and his wife Gigi have three children and like to spend their time outdoors enjoying everything the great state of Colorado has to offer.

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