The 2016 lawsuit that named 18 generic drug companies and two individuals for illegal price fixing has now been expanded to 20 companies and 15 individual senior executives. This may have been possible because two former senior executives are now cooperating with the Attorneys General of 44 states that are accusing the drug companies.
One of the prime accused is Teva Pharmaceutical Industries USA, a unit of Israeli company Teva Pharmaceutical Industries Ltd (TEVA - Free Report) , which is the world's largest producer of generic medicine.
The plaintiffs allege in a 500-page lawsuit that over the years, Teva and other generic drug makers operated under a non-compete understanding that helped them stick to “a fair share” of the market. In 2012, they wanted more from the relationship, so decided to also “significantly raise prices on as many drugs as possible.”
It alleges that Teva then connived with the companies with which it already had “very profitable collusive relationships” to take each other’s lead in raising prices. This was behind the higher prices on at least 86 of a total 112 Teva products that saw price hikes between Jul 2013 and Jan 2015, causing “many billions of dollars of harm to the national economy over a period of several years.”
Further, "Prices for hundreds of generic drugs have risen – while some have skyrocketed, without explanation, sparking outrage from politicians, payers and consumers across the country whose costs have doubled, tripled, or even increased 1,000% or more."
Worse, the executives involved in the wrongful act were fully aware of its illegal nature. The lawsuit alleges that the deals were made in utmost confidentiality and without leaving a trail as far as possible. There were also attempts to destroy evidence that was accidentally/incidentally created.
“We have hard evidence that shows the generic drug industry perpetrated a multibillion dollar fraud on the American people,” Connecticut Attorney General Dem. William Tong said. “We have emails, text messages, telephone records and former company insiders that we believe will prove a multi-year conspiracy to fix prices and divide market share for huge numbers of generic drugs.”
Moreover, they covered a broad range of medications including tablets, capsules, creams and ointments for diseases including diabetes, high cholesterol, high blood pressure, cancer, and epilepsy.
Teva is the only country to have responded to the suit, saying that “The allegations in this new complaint, and in the litigation more generally, are just that – allegations…Teva continues to review the issue internally and has not engaged in any conduct that would lead to civil or criminal liability."
Note that it remains a civil suit at the moment, i.e. one that generally involves disputes between individuals regarding their legal duties and responsibilities toward each another. While it follows that the punishment in such cases is less than in a criminal suit, it also means that guilt is proved if the evidence suggests that it was the most likely outcome (there is no need to prove beyond doubt).
Escalating Drug Costs a National Concern
The Trump administration has made the control of drug costs part of its agenda and it will be bringing a new law requiring companies to include prices in product ads that cost a Medicare or Medicaid consumer more than $35 a month. But opinion is divided on whether this will help because uninsured people continue to cut back on medication they need because of prohibitive prices.
But this just scratches the surface of the problem, which is very complex and involves many players. Smaller generic drug makers are actually routinely pushed out of the market by patent holding drug companies that get into beneficial agreements with pharmacy benefit managers (PBMs). The racket became more beneficial in 2006 when Medicare started covering prescription drugs.
The bigger pharmaceutical companies were granted patents to award innovation, so they could recover cost and create funds for further innovation. But when patent periods run out, and it’s time for increased competition to bring down cost, they reportedly start gaming the system. So smaller, low-cost generic companies just don’t survive. This, along with the higher profit motive leads them toward collusions and gaming strategies of their own.
More recently, Amazon (AMZN - Free Report) , Berkshire Hathaway (BRK.B - Free Report) and JPMorgan (JPM - Free Report) started a joint venture called Haven with the goal of bringing together entrepreneurship, technology and clinical medicine through a network of effective healthcare professionals and organizations that can lower the total cost of treatment for employees. But while this might help determine the best healthcare plan to follow and protect a person from unnecessary overuse of drugs, it may not in its present state be able to take care of the rot in the drug pricing system.
Impact on Investors
The immediate impact on Teva and its peers is obviously negative as seen in the chart below. The Medical-Generic Drugs industry (industry rank 182, or bottom 29% of more than 250 Zacks classified industries) to which it belongs has done miserably in the last week, dropping 4.8%. This is somewhat better than Teva’s 5.4% decline, but well below the 2.2% decline in the S&P 500.
As far as the Zacks industry rank is concerned, the top half has beaten the bottom half by a factor of more than 2 to 1 over the last 10 years. So this isn’t one of the best places to park your money.
But investors are also consumers. So anything that has the effect of making costs more manageable is bound to be a positive at some level. It’s a tough call determining the exact impact, if and when the litigation succeeds or at least if it results in a method of controlling price fixation in the industry. But any positive result could be years away.
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