News that the Justice Department is preparing criminal charges in its long-standing investigation into generic drug pricing hit those companies hard Thursday afternoon, wiping out $8.5 billion in market value and adding to already-serious worries about the industry’s near-term future, analysts said.
Those fears could be very personal for some company executives. First reported by Bloomberg, the looming legal action threatens not only generics makers, but executives themselves.
The good news: Though the danger is real--and quite significant--analysts and legal experts figure it will be confined to only a few of the 12 companies that have received federal subpoenas.
For those generics makers hit with charges, financial penalties are likely to run in the hundreds of millions or more. Based on his research, Bernstein analyst Ronny Gal said most DOJ investigations produce fines of less than $1 billion, but perhaps not in this case. “The argument is that this could be bigger here, given [the] size of the market; that sounds fair,” he said.
On top of that, there’s “the risk that there could be senior management dislocation if executives of the company are found guilty of any wrongdoing,” Leerink Partners analyst Jason Gerberry pointed out.
Until those charges hit--which Bloomberg says could happen by the end of this year--we won’t know whether investors' concerns are overblown. But after more than a year of intense pressure to explain drug pricing, the uncertainty itself is plenty to keep generics makers on the defensive. The investigation also could portend other legal problems, Credit Suisse’s Vamil Divan figures.
“It is also possible that the outcome of the investigation could lead to an increase in regulations and oversight on the generic industry going forward, leading to longer-lasting challenges,” Divan said Thursday.
Many of the companies listed in Bloomberg’s story declined to comment. Allergan, which recently sold its Actavis generics business to Teva Pharmaceutical Industries, told analysts that any liability transferred to Teva with the sale. Mylan, which previously disclosed its involvement in the probe, said it “is and has always been committed to cooperating with the Antitrust Division’s investigation.”
“To date, we know of no evidence that Mylan participated in price fixing,” spokeswoman Nina Devlin said via email.
A focused investigation
Analysts and legal experts see some partly sunny news among those dark clouds. Twelve companies and some two dozen products are targeted in the DOJ probe, Bloomberg says, but charges are unlikely to hit all of them, given the nature of proving a collusion case under antitrust law.
“The DOJ generally casts a wider net when issuing subpoenas to gather information and solicit testimony to build their case, meaning all 12 companies are unlikely to be found guilty,” Gerberry wrote in his investor note, adding, “if price collusion were to occur in generic pharma, it is usually between two to three companies.”
“Unless the DOJ finds evidence of price collusion on all 12 undisclosed products cited by Bloomberg, it is unlikely all the parties will be indicted,” Gerberry said, citing a legal expert with experience in price-fixing cases.
And evidence to prove collusion is extensive, RBC Capital Markets analyst Randall Stanicky pointed out Friday.
Prosecutors “would need to demonstrate that not only were prices raised at the same time, but that there was collusion in doing so (i.e., coordinating discounts, fees, prices, etc.),” Stanicky wrote.
Damages in these cases amount to twice the gain on price-fixing moves, Gerberry said in his note. If found guilty, follow-up class actions could result in damages three times the profits.
Two of the drugs in focus are the cardiovascular medication digoxin and antibiotic doxycycline. Mylan disclosed a subpoena related to doxycycline earlier this year in a Securities and Exchange Commission filing, as did Impax Laboratories. Other SEC disclosures, including those made by Teva, did not mention product names; in addition to doxycycline, Impax also specified the asthma remedy terbutaline, the numbing agent prilocaine/lidocaine, and psoriasis treatment calcipotriene.
Gal said his firm is skeptical that charges would hit the bigger generics makers. “[W]e do not think the major generic companies have likely participated in significant pricing collusion,” he wrote. “Obviously we do not know, but as one of the people we talked to joked with us--‘most of these guys will not bribe a waiter to get the table they want at a restaurant.’”