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October 27, 2017

New Theme Launch: Short U.S. Pharmaceuticals

The U.S. opioid epidemic is inflicting harm on the American economy on a scale not seen in previous drug crises. A survey by the NSDUH shows that 97.5 million Americans used, or misused, prescription pain pills in 2015. Drug-overdose deaths have tripled since 2000, and opioid abuse now kills more than a hundred Americans a day. According to the Medical Care Journal, the annual cost of the epidemic to the U.S. economy was estimated at $78.5 billion, a quarter of which was paid by taxpayers through increased public costs for health care, criminal justice, and treatment.

Rather than raise taxes to fund all that additional spending, U.S. officials have decided to put some of the financial burden on the industry that facilitated this wreckage. In the past year, at least 30 states, cities and counties have either filed lawsuits against opioid drug makers and distributors, or began the process for full-blown legal action. These officials are aiming for tobacco-style settlements to help deal with the astronomical costs of fighting the epidemic, which is threatening to bankrupt many counties.

Yesterday, President Trump upped the ante by officially declaring the opioid crisis a national public health emergency, and said he would use the federal government’s legal powers to pursue companies that helped fuel the epidemic. This giant cloud over pharmaceutical companies comes at a time when the sector is already under fire because of the escalating costs of drugs. In fact, some states have already begun to enact drug pricing legislation which, with the developing opioid-related litigation, would be a double whammy against the pharmaceutical sector.

These lawsuits, if successful for the states, could obliterate many drug makers in the opioid space – more so for those that don’t have the deep pockets of a giant like J&J. In a déjà vu situation, the lawyer who beat Big Tobacco is already working with a dozen states to take on the opioid industry in these lawsuits. As we noted in our September 13 DIBs report, BIG PHARMA’S OPIOID CRISIS, it is doubtful that these drug makers can fund a settlement as large as the $246 billion paid out by tobacco companies, even though the financial toll of this crisis is bound to be much greater. The prescription opioid market was worth only $8.5bn last year compared to the $94.4 billion generated in U.S. tobacco sales. Moreover, the publicly companies that dominate the branded opioid industry ended last year with aggregate net debts of more than $14 billion and have some of the highest borrowing levels in the pharmaceutical industry. Given these fundamentals and the very negative outlook, MRP is recommending a short on the sector. We will be tracking the theme through the VanEck Vectors Pharmaceutical ETF (PPH).

Pharmaceuticals vs Healthcare Providers vs S&P 500