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Pharma Stocks, Once Immune to Huge Fines, Now Vulnerable to Legal Penalties

Bribes, lies and fraud are nothing new at big pharmaceutical companies, and the cost of getting caught at such transgressions has rarely been so great that it’s prevented long-term gains for investors. That may be changing, but not for the reasons you think.

Shares of most of the major drug makers are down this year in a market that’s broadly recorded 7%-plus gains.

Merck Stock Chart

Merck Stock Chart by YCharts

The declines follow – but are not necessarily related to – recent headlines that read more like mobsters’ rap sheets than the activities of blue chip companies. Most have agreed to pay government fines for criminal practices, including: Merck (MRK), $950 million for pushing painkiller Vioxx for unapproved users and hiding its health risks; GlaxoSmithKline (GSK), $3 billion, in large part for paying doctors and manipulating research to sell more drugs; and Pfizer (PFE), $60 million for bribery. Johnson & Johnson (JNJ) recalled products ranging from contact lenses to artificial hips because of undisclosed dangers with using them. Other cases relate to defrauding Medicare. Less than half of 500 patient groups surveyed thought the industry had a good or excellent reputation.

And that was just in recent months. Companies paid billions in fines in past years too, sometimes individually. Until this year, big dividend payments paired with at least modest share price gains kept most shareholders pretty happy anyway. Watchdog groups and some academics worry that the companies make more money flouting the law and paying the fines than restricting their prohibited practices.

Merck Total Return Price Chart

Merck Total Return Price Chart by YCharts

In the past, the sheer size of these companies has helped their share prices remain aloft even through grim news. A $3 billion fine, for example, is just a small portion of GlaxoSmithKline revenues in a year.

GlaxoSmithKline Revenues TTM Chart

GlaxoSmithKline Revenues TTM Chart by YCharts

In the future, however, those fines may feel a lot bigger. As most Big Pharma investors know, revenue growth – the thing that usually feeds share price gains -- has slowed dramatically in recent months as brand drugs go off-patent and new blockbuster drugs remain allusive.

Merck Revenue Growth Chart

Merck Revenue Growth Chart by YCharts

No one is going to jail for breaking the rules, and patient groups don’t really have the power to affect pharmaceutical company profits. But if the drug pipeline doesn’t come through with some very profitable new products in the near future, suddenly, what seemed like trifling amounts might suddenly seem quite a lot to pay for bad behavior.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings, stock screener and portfolio strategies.

Read more articles about: Company Analysis  

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