Generic Drugs Probe Seen As Possible 'Severe' Sector Overhang

Commenting on a news report by Bloomberg saying that the Department of Justice's Antitrust Division may bring charges against several generic drug manufacturers for alleged price collusion, Wells Fargo analyst David Maris said that this could add a "severe" overhang to the sector, an opinion shared by his peer at Leerink. Meanwhile, Deutsche Bank analyst Gregg Gilbert told investors that it may be hard to imagine an aggregate fine that would justify the extreme stock moves seen yesterday on the heels of the report.

DRUG PROBE: According to Bloomberg, U.S. prosecutors are undertaking a "sweeping" criminal investigation into potential price collusion among generic drugmakers. The DOJ's antitrust probe of the industry now includes more than a dozen companies and roughly two dozen products, sources tell Bloomberg, adding that the grand jury investigation is questioning collusion among executives and could lead to charges by the end of 2016.

OVERHANG FOR SEVERAL QUARTERS: In a research note to investors following the news of a DOJ generics probe, Wells Fargo's Maris noted that, if true, it could add a "severe" overhang to the sector that may last well past the presidential election and into the new year. Furthermore, the analyst said he is less concerned about the financial impact of fines, but rather how items like this can bring calls for controls and oversight. Leerink analyst Jason Gerberry also voiced a similar opinion, telling investors in a note of his own that the DOJ probe is likely an overhang for several quarters. Beyond the financial damages, companies cited in the report face the risk of senior management dislocation if executives are found guilty of any wrongdoing, the analyst noted. However, he believes the DOJ generally casts a wider net when issuing subpoenas to gather information and solicit testimony to build their case, meaning all 12 companies are unlikely to be found guilty. The challenge for investors is a complete lack of visibility into how this process will play out for the next month or two, Gerberry contended.

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