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Wall Street Journal / Life - Entertain

No FDA Seal of Approval for These Big Biotechs

The Food and Drug Administration’s callout of companies that employ “gaming tactics” to delay generic competition should remind investors how fragile biotech profits are.

The Food and Drug Administration published a list of drug companies that it says may be gaming the system by improperly blocking competition from generics.

Investors got another reminder that profits at large biotech companies are fragile.

The Food and Drug Administration published a list of companies Thursday that it says employ “gaming tactics” to delay generic competition for branded drugs.

The FDA’s list of 52 drugs includes blockbuster treatments for serious diseases. High-profile examples include Celgene ’s cancer drugs Revlimid and Pomalyst as well as Biogen ’s multiple sclerosis drug Tecfidera.

Celgene’s drugs appearing on the list accounted for 75% of its sales in the most recent quarter, while Tecfidera made up nearly a third of Biogen’s top line.

Dependency on a few vulnerable medications is reflected in those companies’ earnings multiples. Celgene and Biogen trade at just nine and 11 times forward earnings, respectively, according to FactSet. The S&P 500, meanwhile, fetches about 17 times.

One saving grace for shareholders is that the FDA has no meaningful legal recourse to curtail this kind of behavior so Thursday’s action doesn’t immediately imperil profits. Even so, the publication of this list underscores the reality that these companies have more uncertain profitability outlooks than headline financial projections suggest.

Analyst consensus calls for Tecfidera  and Revlimid sales to hold steady through at least 2022, according to FactSet. That is a bold assumption since generic developers might eventually have more meaningful legal recourse in response to delay tactics from branded companies. Legislation known as the Creates Act, which would enable developers to sue for access to drug samples needed to get generics approved, has 22 co-sponsors in the Senate.

That peril should keep these companies in the bargain bin for now.

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