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Share prices of generic drugmakers tumbled yesterday following a Bloomberg article that the Department of Justice (DoJ) could file price collusion charges against these companies by year end.

According to the article, the DoJ investigation started a couple of years back and covers more than 12 companies and about 24 drugs. A grand jury is examining whether some of the executives colluded with each other to raise prices.

Companies that are reported to have received subpoenas include big names like Mylan N.V. (MYL - Free Report) , Teva Pharmaceutical Industries Limited (TEVA - Free Report) , which recently acquired the generics business of Allergan, Lannett Company, Inc. (LCI - Free Report) , Impax Laboratories Inc. (IPXL - Free Report) , and Endo International plc (ENDP - Free Report) among others.

Medical - Generic Drugs Industry Price Index

Another Challenge for the Healthcare Industry

The DoJ investigation into generic drug pricing poses another challenge for the healthcare industry which is already reeling under the effect of intense public, political and media scrutiny of high branded drug prices. The drug pricing issue has been affecting pharma and biotech stocks for over a year now with companies like Mylan and Valeant under attack for their pricing policies.

More recently, insulin drugmakers like Eli Lilly and Company (LLY - Free Report) and Novo Nordisk A/S (NVO - Free Report) have also been pulled into the pricing controversy with Sen. Bernie Sanders posting a series of tweets questioning the prices of their insulin drugs.

And now companies making generic drugs (cheaper copy-cat versions of branded drugs that have lost exclusivity) find themselves right in the middle of the drug pricing controversy.

According to a U.S. Government Accountability Office (GAO) report, more than 300 established generic drugs had an extraordinary price increase from 2010 to 2015 with these increases moderating generic drug price declines.

In 2014, Sen. Bernie Sanders and Rep. Elijah E. Cummings had called on the Obama administration to address “staggering increases” in generic drug prices. In a letter to the Department of Health and Human Services (HHS), Cummings and Sanders gave examples of dramatic price increases for generic drugs like albuterol sulfate (asthma, price shot up from $11 to $424 in less than a year) and doxycycline hyclate (antibiotic; the price for a bottle shot up to $1,849 from only $20).

The lawmakers had pointed out that the price hikes would not only affect consumers, hospitals and home health agencies, they would also put pressure on the budgets of Medicare, Medicaid, the Department of Defense and the Department of Veterans Affairs. According to the new 2016 Generic Drug Savings and Access in the U.S. report, compiled by the QuintilesIMS Institute on behalf of the Generic Pharmaceutical Association (GPhA), generics account for 89% of prescriptions dispensed in the U.S.

Impact on Stocks

Lannett, Impax and Endo were among generic stocks that were hit hard by the news with Lannett declining 26.6% while both Impax and Endo lost 19.5% each.

Other companies with a presence in the generics market also saw their shares slide – Teva fell 9.5% while Mylan and Dr. Reddy’s dropped 6.9% and 4.1%, respectively.  Teva is a Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Given the increasing focus on drug pricing, healthcare investors will remain jittery and the DoJ antitrust probe will remain an overhang until more details are available.

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