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Sentiment vs sales: GSK leads the way on global access to medicines

Sentiment vs sales: GSK leads the way on global access to medicines
April 7, 2016
Sentiment vs sales: GSK leads the way on global access to medicines
IC TIP: Sell at 1,421p

What does this mean for GSK?

Patent protection is gold dust in the pharmaceutical industry. Companies with intellectual property (IP) rights attached to their products have exclusivity to sell in the countries where the patents are registered. Without the threat of competitive products, drugs companies can, in theory, charge what they want for these items, generating big margins.

But patents for medicines only last a finite number of years. When the protection on a drug expires, sales fall as the market opens up to cheaper alternatives which, understandably, physicians chose to prescribe and patients opt to buy. So, by not registering for patent protection on its drugs in the "least economically developed" and "low income" countries, it's likely GSK will see sales suffer in these nations.

A bizarre business decision, you might say. It certainly seems that way - in any other industry, a move like this would be met with scorn from investors, analysts, and industry experts alike. But the pharmaceutical sector is a different kettle of fish. Rather than abandon ship on the news that GSK is likely to be reporting reduced revenue from 85 of the countries that it sells to, investors have rewarded the group for what has been described as a "brave and positive step", and the share price showed incremental improvement over the last week.

 

Pricing controversy and the pharmaceutical industry

IP and pricing is always a touchy subject in the healthcare sector. Big pharma companies walk a very fine line in balancing profit making and not overcharging for potentially life-saving drugs.

It's a topic that came to a head last September when US company Turing Pharmaceuticals raised the price of its anti-inflammatory drug for cancer and Aids patients by 5,000 per cent. This was met with outcry from many, including democratic presidential frontrunner Hillary Clinton. Her tweet proclaiming that "price gouging" in speciality pharma was "outrageous" led to a significant sell-off across the US biotech and pharma index. Investors were clearly panicked about the future of pricing - and profits - across multiple healthcare companies.

However, fellow drug makers also joined the criticism of Turing and, in an attempt to repair some of the damage to the industry's already wavering reputation, were keen to point out that one rogue company did not represent the values of its peers. But the media storm surrounding this issue has dredged up other companies whose malpractices do blight the reputation of the industry - none more so than Valeant (Ca:VRX).

 

The woes of Valeant

The Canadian drugmaker was hailed as the fastest-growing pharma stock early on in 2014 - an impressive statistic considering the meteoric growth seen in the sector that year. Valeant's strategy was to buy rival companies, cut the research budget and raise the price of the medicines. For a while, this dubious tactic worked and last summer the company reached a market capitalisation of $90bn - larger than GSK.

But when Mrs Clinton's proclamations of price gouging grabbed headlines, the Valeant bubble burst. Politicians and customers criticised it for putting profit over public health and short-sellers questioned the group's financials. Towards the end of 2015 Valeant's share price had plummeted as it uncovered accounting irregularities and revealed it was under investigation by the US Securities & Exchange Commission. Then, in March of this year, during an investor conference call - as reported by the Financial Times - Mr Pearson admitted that the group might default on its debt and revealed several of its core franchises were struggling. That day the share price dropped another 50 per cent and Mr Pearson was soon out of a job.

 

Looking to the future

Pressure is mounting on pharmaceutical companies as global issues such as ageing populations, the looming threat of antibiotic resistance and spread of communicable diseases increase the cost of healthcare. It's what lies behind the deal-making frenzy in the sector lately as companies attempt to stock their pipelines with the latest, high-tech drugs.

It has also brought the pricing issue into sharper focus. Healthcare companies need to make money to plug back into research and development or acquisitions to bring new drugs to market. Yevgeniy Feyman, a fellow at the Manhattan Institute, a conservative think-thank, told the FT that "high-risk drug development must reap high rewards, otherwise investors would direct their money to the next Snapchat instead of an Alzheimer's cure".

It's a tough debate, and one that makes the pharmaceutical industry unique. GSK's praise for putting healthcare provision over profits demonstrates this is a sector where businesses are sometimes judged sentimentally, as well as on financial performance.