The Week Ahead In Healthcare

By Stephen D. Simpson, CFA | July 06, 2012 AAA

For better or worse, late June through mid-July tends to be a period where very little of note happens. There are no major medical conferences during this period, the FDA seems to avoid scheduling PDUFA dates during this time period, and there are no significant earnings on the calendar. With analysts and managers using the time to take rare vacations (or not-so-rare excursions to the golf course), stocks tend to drift and investors can likely expect the same for the week ending July 13.

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Queuing up Vivus
Biotech company Vivus (Nasdaq:VVUS) has a July 17th PDUFA date (that is, the date by which the FDA must approve or reject a drug) for its weight loss drug Qnexa. While the FDA has generally been waiting until the last day to issue its approvals, there's at least a chance that approval could come early and be announced next week.

At this point, a FDA rejection of Qnexa would be shocking. Back in April, Vivus announced that the FDA had pushed the PDUFA date back 90 days for a more thorough REMS review - an act that would be exceptionally unusual if the agency wasn't prepared to approve the drug. What's more, while there are some occasionally serious side-effects tied to Qnexa, they are not especially frequent and the efficacy of the drug is better than that of Arena Pharmaceuticals' (Nasdaq:ARNA) recently-approved Belviq.

Vivus has been strong almost all year long, and currently sports an enterprise value north of $2.5 billion. That said, it would be entirely normal for Vivus shares to sell off after receipt of approval (the infamous if not cliché "buy the rumor, sell the news" effect).

SEE: A Primer On The Biotech Sector

Glaxo's Settlement Is Business as Usual
While this is supposed to be a forward-looking article, some discussion of GlaxoSmithKline's (NYSE:GSK) recent $3 billion government settlement seems appropriate. Glaxo paid up as a compensation for various criminal and civil violations tied to the marketing of 10 different drugs (including Paxil and Wellbutrin) over a number of years.

At the risk of sounding unduly cynical, this is part of doing business in the drug world. Off the top of my head, I cannot recall a major drugmaker that has not paid a similar settlement in the last five or so years. Pfizer (NYSE:PFE) has been involved in several such settlements, and other companies like Johnson & Johnson (NYSE:JNJ), Bristol-Myers Squibb (NYSE:BMY), Sanofi (NYSE:SNY) and AstraZeneca (NYSE:AZN) have had to reach for their checkbooks as well. While Glaxo's settlement stands out as an especially large settlement, you could just as easily look at it as a more efficient alternative to numerous smaller settlements.

These settlements are all remarkably similar. While there are often settlements for reporting inflated drug prices or illegally incentivizing documents to prescribe specific drugs, far and away the most common allegation is illegal off-label marketing. Although physicians are generally given considerable freedom to prescribe drugs for off-label indications (and insurers generally pay for it), companies are not supposed to promote these indications.

Though there is admittedly some grey area here (companies can share clinical data in some cases), the fact is that drug companies don't care that much about following this rule as it is currently written. It takes many years for the government to pursue these cases, and the settlement amounts capture only a small portion of the lucrative profits that these drugs have generated in the meantime. Consequently, it's little more than a cost of doing business and a sign that the company in question needs to be a little more careful next time.

SEE: A Primer On Investing In The Tech Industry

The Bottom Line
Healthcare stocks continue to outperform this year. The Health Care Select Sector SPDR (ARCA:XLV) is up 10.32% year to date, beating the 8.9% return of the S&P 500. The iShares Dow Jones US Pharmaceuticals ETF (ARCA:IHE) is up 15.42%, while the iShares Dow Jones US Medical Devices ETF (ARCA:IHI) is up 12.92%. The SPDR Biotech ETF (ARCA:XBI) has risen 40.44% year to date.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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