Shares of Valeant Pharmaceuticals continue to dive after a seething report issued this month by investors betting against the company compared it to Enron and critics questioned its drug-pricing and other business practices.
Valeant is just the latest in a string of biotech companies and drug makers to face such high-profile attacks. Since the beginning of the year, investors who bet a stock will go down by selling borrowed shares have lodged 43 campaigns against dozens of health technology companies, according to Activist Shorts Research, or ASR.
As millionaire and billionaire investors take on drug companies — and each other — Americans who rely on the medications at the center of much of the controversy could wind up big winners. Many of these short sellers will not only enrich themselves, but they may also end up lowering drug prices for everyone.
Here’s a look at three investors that could make a difference in what you pay for pills and medical treatments.
The Accidental Hero
Cutting drug prices was not what Shkreli, a young but well-known biotech short seller, wanted to do when he crossed into notoriety last month. His drug company, Turing Pharmaceuticals, made headlines when it raised the price on a drug used by cancer and AIDS patients by 5,000 percent, putting the spotlight on an increasingly common practice of biotech companies buying undervalued drugs only to hike their prices later.
Despite media reports of the practice before Turing’s move, it was Shkreli’s brash personality and lack of remorse that helped keep it in the limelight. Shkreli publicly bickered with journalists and everyday Americans on Twitter and Reddit, quoting Eminem at times, and did a television blitz defending his position. He briefly became known as the most hated man in America.
While Shkreli promised to roll back the price increases when the backlash became too much, it was too late. As part of her presidential campaign, Hillary Clinton seized on the issue and put out a plan to reform the drug industry to protect Americans from price-gouging, while House Democrats subpoenaed Valeant for documents relating to its price hikes. That roiled biotech stocks as investors considered the possibility that the future of drug-price gouging was grim. Specialty drug-maker Imprimis Pharmaceutical said last week it would make available an alternative to the Turing drug for as little as $99 for a 100-pill bottle.
All thanks to the most hated man in America.
Since January, the head of Dallas-based hedge fund Hayman Capital Management has filed petitions to invalidate drug patents at 14 drug companies while also shorting their stocks, according to ASR. Revoking the patents would allow other drug companies to produce cheaper, generic versions for consumers.
After losing two petitions this summer, Bass got two victories this month when the U.S. Patent and Appeal Board granted reviews for his petitions against Celgene Corp. and its drug for skin disease caused by leprosy and against Shire PLC and its drugs that treat bowel disorders.
Celgene tried to stop Bass’ petition process this summer by filing a motion saying that he was abusing the patent review process for financial gain.
“I hope the irony is not lost on anyone that the drug companies and their lawyers are alleging that I have a profit motive,” Bass said on CNBC in September. “It should be axiomatic that very few people are going undertake a crusade like we have without a profit motive. I’m sure there are few but they are few and far between.”
He further noted that Celgene’s drug, which has been around for decades, has sales of $5 billion a year and the company has raised its price by 400 percent to 500 percent. Allowing generic drugs to compete would lower the price by 80 percent to 90 percent.
“If we win, it benefits the public at large,” he said. Celgene’s motion against Bass was later thrown out.
Cable Car Capital
San Francisco-based investment adviser Cable Car Capital has been on a crusade against Exact Sciences Corp. and its test for colorectal cancer, the third most common cancer, since last October. Cable Car recommended that Medicare and Medicaid should lower the reimbursement rate for the test because it was a screening test, rather than a diagnostic one, and it delivered many false positives. That would effectively lower the price the company could charge for the test.
The investment firm, which was shorting the stock during this process, so far has failed to reduce the reimbursement rate for test. But this month, the U.S. Preventative Task Force recommended it to be an alternative test — not a primary one — when it comes to screening for colorectal cancer.
“What physician is going to prescribe an alternative test when far cheaper, established recommended screening tests are available?” Whitney Tilson, the short seller taking on Lumber Liquidators, said in a report published on Seeking Alpha. Tilson also revealed that he was short the stock, which tanked 46 percent after the USPTF’s recommendation.
As for Cable Car, it’s not done yet. It submitted another, revised argument to the government to reduce the reimbursement rate for the test.