Generic Pharma Stocks Plummet on Allegations of Price Collusion

At close of trading yesterday, Mylan (NASDAQ:MYL) was down 6.9 percent, Teva (NYSE:TEVA) had lost 9.5 percent and Endo International (TSX:ENL) dropped close to twenty percent. One of the biggest losers was Lannett (NYSE:LCI), with a 26.6 percent decline. The cause of these plummets? New developments in a price-fixing probe initiated two years ago.
The issue at hand is price collusion: namely, the suspicion that major generics manufacturers worked together to coordinate price hikes. On Thursday, it was revealed that the Department of Justice (DoJ) may file criminal charges by year end. Moreover, it appears the scandal is larger than originally thought, with over a dozen companies and two dozen drugs under investigation.
The DoJ will need to prove more than the fact that price hikes occurred at the same time. That, in and of itself, is not illegal. Instead, they will have to show that these generic drug manufacturers actively conspired and coordinated to raise their prices at the same time. That’s the only way to make criminal charges stick.

Still, investors are anxious. Every company named in the investigation saw their stock fall with the release of the news.
But as Caroline Chen of Bloomberg explained, not all of these companies are likely to face criminal charges. While each has been subpoenaed, we do not yet know exactly what they are being asked.
“The justice department goes and subpoenas a large number of companies when they are trying to find out information about others,” she said. “It’s not really surprising the justice department has thrown open a wide net here.”
Pharmaceutical price gouging is an ongoing issue—but historically, it’s patented drugs that have been under scrutiny. This year has seen that trend shift slightly, with lawmakers looking at off-patent medications like naloxone.
“The whole point of generics is that they’re supposed to be a cheaper alternative,” Chen explained. “They’re supposed to help drive cost-savings for insurers and for consumers after a branded drug comes off-patent.”
So it makes sense that lawmakers would also turn their attention here. Indeed, on the heels of the DoJ’s news, Senator Bernie Sanders and Congressman Elijah Cummings requested that federal antitrust regulators examine the pricing strategies of several generic drug manufacturers, particularly related to insulin and other diabetes drugs.
Included in their formal request? A chart, illustrating that price hikes for these drugs seems to occur in unison. That has Sanders and Cummings calling “price collusion”—exactly what the DoJ is currently investigating with other drugs and these two dozen companies.
Criminal charges for this two year long investigation could be filed as early as December. Given the stock movement yesterday, it seems many investors aren’t willing to wait for the results.
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Securities Disclosure: I, Chelsea Pratt, hold no direct investment interest in any company mentioned in this article.