Steer Clear of Big Pharma and Biotech!

AdamLast October, I voiced my growing concernrn over bubble-like excesses in the health care industry.

I showed how the most speculative and volatile subsets of the health care industry ­– biotech and pharmaceuticals – had enjoyed a massive boom since the March 2009 bottom.

By last July, pharmaceutical stocks (XPH) were up 455%, and biotech stocks (XBI) were up 520%!

These insanely high prices, to me, looked eerily similar to the bubble-like prices we saw in mining stocks in early 2011, and in oil and gas stocks in early 2014.

Hence, my suspicion that our beloved health care industry might just be “the next boom to go bust.”

And I warnrned you that two health care ETFs – the SPDR S&P Biotech ETF (NYSE: XBI) and the SPDR S&P Pharmaceuticals ETF (NYSE: XPH) – lose between 45% and 70% in as little as 12 to 18 months.

It was a bold warnrning, I realize.

But so far, I’ve been right. Pharmaceutical and biotech stocks have taken a beating in the last four months, losing 15% and 26%, respectively!

That should make you take notice!

Of course, back in October, not everyone agreed with my skepticism of the health care industry.

In fact, one Boom & Bust subscriber wrote to say it was one of the “lamest explanations” he’s ever heard.

Paid-up subscriber Eric B. said:

The enablement of health care cost growth has been occurring since just about the inception of Medicare. Cost containment has been a recurring political issue during that entire time frame. So what makes you think that now is the time we have the political will to ignore the special interest groups in a trillion + dollar industry?

You now have a very significant (and growing) voting bloc (the baby boomers) who are dependent upon Medicare for their health care insurance. If their health care choices begin to diminish, they will become politically militant and threaten the withdrawal of support of their legislators. So again, what makes you think that now is the golden moment for health care cost containment?

Hey, I hear ya Eric!

As I said last fall, the health care industry has in recent years been one of the most robust and promising sectors of the U.S. economy. Fundamentally, the baby boomer generation has been, and will continue to be, a driving force of demand for health care services, equipment and pharmaceuticals.

But that doesn’t mean baby boomers will let the industry get away with murder!

Earlier this month, executives from Valeant Pharmaceuticals Internrnational (NYSE: VRX), alongside biotech’s notorious bad boy, Martin Shkreli, had a lot of explaining to do when they were subpoenaed to appear before Congress.

The topic of the day: price hikes of 212%… 525%… and 5,000%… on previously inexpensive, life-saving drugs…

Now, I realize it’s easy to shrug off the 5,000% price hike that the most-hated man in health care (Shkreli) enacted. “He’s an outlier… just one bad apple,” some people claim.

But Valeant Pharmaceuticals isn’t some fly-by-night scam artist, as Shkreli might prove to be. Valeant is a $32 billion company with 33 years of operating history.

What’s more, it’s highly doubtful that abuses of pricing power are limited to just these two.

According to a 2014 report in FiercePharma, there are at least 10 examples of insane drug price hikes… by major drug companies… prior to the 5,000% increase that shoved pharma’s dubious practices into the mainstream media circuit.

We’re talking about price hikes between 159% for Pfizer’s (NYSE: PFE) Viagra, to 841% for a narcolepsy drug made by Jazz Pharmaceuticals (NYSE: JAZZ).

Other documents obtained by Congress led Representative Elijah Cummings to conclude: “these tactics are not limited to a few ‘bad apples,’ but are prominent throughout the industry.”

Basically, in the words of Forbes columnist Arlene Weintraub: “[Shkreli’s former company] and Valeant are merely the poster children for what Congress now realizes is a much bigger trend in the pharma industry to raise prices to whatever the market will bear.”

I anticipate more trouble ahead for the industry’s lofty stock prices, especially now that a bright light is getting shone on the shady practices of Big Pharma and Biotech.

So now, the fight begins.

Drug-makers will claim they need to raise prices to fund future research and develop… oh, and to fulfill their duty to shareholders.

And opponents will argue that the price gouging is excessive, unsustainable and perhaps even unethical… since, at the end of the day, we’re talking about peoples’ health here!

While that fight unfolds – on a public stage, nonetheless – I think it’s best to maintain a healthy dose of skepticism when it comes to pricing practices of Big Pharma and Biotech.

So steer clear of their stocks! And stick to defensive sectors.

Adam O’Dell, CMT

Chief Investment Strategist, Dent Research

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.