When will the news cycle end on this drug price inflations scandal? When will it stop having legs? Isn't that the gigantic, multi-hundred billion dollar question? Has the press had its way? Can there be more follow-ups?
I write that because some of these valuations are getting a little nutty. I mean, honestly, how can Celgene (CELG) be selling at a market multiple on next year's earnings? How is that possible, especially given how they are going to be able to exploit all of those formulations from Receptos (RCPT)? That seems preposterous to me.
I know there are issues with Gilead (GILD) and reimbursement, but should it really be selling at 8x earnings? Am I the only one who thinks that the earnings that the multiple is leaning on are real? This isn't a commodity chemical company. They don't make cold rolled steel.
Sure, Amgen (AMGN) is not perfect. But how can it sell well below the multiple of Abbott Labs (ABT)?
Do you think that Action Alerts PLUS portfolio holding Allergan (AGN) can even stay independent when it nets out to have no debt when the Teva (TEVA) deal closes for its generics?
Yet if you are selling these, you don't care. You just think "there's more bad headlines to come." You are thinking "they are going to be able to put these down like dogs " in Washington, or that some big healthcare chain is going to say no to Revlimid or stop using Botox or give up on Eylea, the great drug from Regeneron (REGN).
I think that headline risk is powerful. Those of us old enough can remember when U.S. Surgical was doing fabulously, with really high margins for its staples product and then suddenly Johnson & Johnson (JNJ) came in well underneath U.S. Surgical's pricing but above JNJ's average margin per product. U.S. Surgical got crushed and JNJ soared.
Many of us can remember when Bill Clinton targeted the drug companies, and then his wife, Hillary did the same. Or how about the Canadian import threat? How about the notion of Medicare being like the Veterans Administration and jamming the price down for all drugs?
In each case, the group went down much more than it has. I get that. That's why people keep fleeing. However, there came a day when the headlines dissipated, the drug companies beat back those who tried to stop them and the industry became stronger than ever.
I am not saying that we are at that moment. I am saying that the newspapers are always reluctant to write the same story the same time the next day. And the television media that follows has pretty much beaten the story to death anyway.
So, ask yourself, before you sell them, do you know the price to earnings multiples that you are selling them at? Are you simply trading the ETFs and don't even care about the names themselves? Are they just names to you?
Because to me they are companies with real products and real earnings power that aren't going away and, other than in some really extreme cases, will continue to do what they have been doing, raising prices when they can...and getting away with it. You might hate that, but that's the country -- and the world -- that we live in.