The major indexes have experienced small losses on the week, nearly all of which came amid selling on Tuesday. There were a few key news stories that explicate the sell-off.
Early in the week startup company Turing Pharmaceutical announced a massive price hike (from $13.50 per pill to $750, more than 5000 percent) for its recently purchased rights to the 62-year old drug Daraprim, an antiparasitic compound used primarily to prevent malaria and treat toxoplasmosis and other infections in immunosuppressed individuals. This drew widespread public criticism as well as harsh comments from presidential candidate Hillary Clinton, sending a ripple through the biotechnology sector. Some are apprehensive that a Clinton government could result in tighter restrictions on drug pricing. While the broad stock market is down slightly on the week, SPDR Biotechnology (XBI) has lost nearly 11 percent over the past few days, perhaps due to Clinton’s comments reviving fears of government control. If firms were to fall prey to these fears, investors could choose to put their capital in other less politically contentious sectors.
It is important for investors to remember that so-called “predatory” pricing is a fairly common occurrence in pharmaceuticals and generally results in little, if any long-term impact on the sector. Daraprim is used by only 2,000 Americans per year, making it especially vulnerable to hikes. We have seen this with other antiparasitics in recent years; when demand is extremely low competitors have no interest in creating a similar or “generic” drug and the price remains high or hikes to justify its production. When mergers in 2003 dropped the number of manufacturers of the heart medicine digoxin from eight to three, its price rose 600 percent.
We have seen this political effect before as well. In 2014 Representative Harry Waxman sent a letter to the CEO of Gilead (GILD) Sciences questioning the high price of the Hepatitis C drug Sovaldi. The treatment would cost over $80,000 but had a cure rate in excess of 90 percent. The stock dropped sharply after the announcement of the letter as investors feared government intervention. The stock rebounded after the dust settled. Statements by politicians can make headlines but ultimately, the fundamentals of a company will dictate its stock price. We expect the same thing to occur now; once the current news cycle concludes, the biotechnology sector should rebound.
Caterpillar (CAT) dragged on the materials and industrial sectors. The company has seen weak sales for nearly three years running, but when the company announced layoffs on Thursday, it triggered more selling. Although CAT is a Dow component, it is the best performing index on the week thanks to strong earnings from Nike (NKE) and Janet Yellen’s speech on Thursday.
Shares of Nike rose to an all-time high on Friday, with a gain of nearly 9 percent. The company saw earnings rise 23 percent last quarter and beat analysts’ average estimate by 15 percent. Janet Yellen’s speech on Thursday revived hopes of a rate hike, sending financials higher on Friday. Speculators only give a December rate hike 35 percent odds though, down from 50 percent a few days ago.
Commodities continued to drift lower, with copper hit by a weak flash manufacturing PMI out of China. The U.S. dollar marched higher and emerging market currencies slumped. Volatility was high in Brazil, which saw its currency rally nearly 8 percent on Thursday night after the central bank made comments about actively defending the real. Although this is a massive one day move, it only brought the real back to where it traded on Monday.
In the United States, the flash manufacturing PMI for September was solid and the same rate as August’s reading. New home sales were up strongly and jobless claims were lower than forecast. Second quarter GDP growth was revised up to 3.9 percent. This is the third and final estimate before a final revised figure is released in 2016. The only weak numbers were durable goods orders, down 2 percent, but still in line with estimates.