TCS Daily


Political Risk in Big Drug Stocks

By James K. Glassman - September 4, 2000 12:00 AM

During his Aug. 17 acceptance speech, Al Gore included pharmaceutical firms in his laundry list of alleged corporate villains, along with "big polluters," Big Oil and Big Tobacco. We naturally oppose putting any law-abiding firms on a government hit list (we note that Big Oil didn't make the list only a short while ago, when oil prices were at practically an all-time low), but the inclusion of Big Pharma is a new and disturbing threat to America's high-tech economy.

And it may not be just a problem with Gore. George W. Bush's current proposal is a move toward the free market, allowing seniors to choose from among different plans, including some that offer drug coverage. But the Bush campaign has said that he will soon announce more details about the government assisting in the purchase of drug coverage. This sounds like it could be trouble, but we'll reserve judgment for now.

Now back to Gore: Since the convention speech, Wall Street has apparently decided that Gore was just kidding. Shares in the research-intensive drug houses have been roughly flat since Gore's remarks, and a few firms have even gained ground. Street analysts remain fairly bullish on drug stocks.

For long-term investors, I think Wall Street is making the right call. This is a great growth industry and, absent political mischief, should continue to be great for the foreseeable future. I own shares in two of Merrill Lynch's "HOLDRs," one that features a basket of pharmaceutical stocks (ticker symbol: PPH) and one that includes biotech firms (BBH). These securities offer undivided beneficial ownership in 20 stocks in a given industry segment. HOLDRs are different from mutual funds in that the expenses for HOLDRs are very low and the investments are held in a trust which allows you to take possession of the individual company shares if you choose to do so. (This triggers a small fee of about ten cents per HOLDR.) HOLDRs trade like regular stocks and offer a way to invest in a whole industry, instead of just picking one stock. So I'm invested in the discovery and marketing of new medicines, I believe the industry will grow over the long haul, and I have no plans to sell.

But I don't think Gore is kidding, and, let's face it, he has about a 50-50 chance of being the next President and about a 30-70 chance of being a President with a Democratic Congress - with such leaders as Reps. Henry Waxman and David Bonior - behind him. Gore has a long record, going back to his days as a Congressman, of criticizing patent protection and the innovative drug firms that rely on it. More recently, the Administration announced in May that it would give sub-Saharan African countries some leeway in violating U.S. patent laws on AIDS drugs. The idea was to make drugs cheaper for people who desperately need them. But it sent a clear message to companies considering investment in new AIDS treatments: don't count on being able to profit from your inventions.

Gore has never understood that big pharmaceutical profits are what investors demand in return for funding huge medical research budgets. Less profit means less R&D, which means fewer medicines to eliminate human suffering. It costs $350 million to bring a new drug to market; this is a risky business, and high risk requires high returns.

Ideas, especially bad ones, tend to gain momentum in Washington if they're not rebutted, and so far I don't hear too many discouraging words about adding more government into the health care system. Gore wants to expand Medicare to cover prescription drugs for oldsters - increasing Federal spending and bringing price controls to a vibrant, high-tech market. Seniors would have to pay a new monthly premium and 50% of the cost of prescriptions up to $4,000 in annual drug costs, above which the government would pay the whole drug tab. So it's not free medicine for old folks, but it means spending more of your tax dollars and that almost certainly means that the Health Care Financing Administration (HCFA) would gain the power to set prices.

This would be terrible news for investors in drug companies, and worse news for patients waiting for a cure. And while I too believe that ultimately the Gore effort will fail, it is an element of risk that has not been fully appreciated by many investors. So for long term holders of pharmaceutical and biotech stocks, be prepared for some rough water ahead.
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