Pharmaceuticals see their 'defensive' credentials tested again.

Thursday, 29th August 2019 07:52 - by Shant

It is well established that pharmaceutical stocks are the go-to sector when investors are looking to reduce their exposure to riskier assets.  Staples offering more moderate returns suddenly look more attractive, though, in current times, returns seem to be a term used loosely and with a variety of connotations when one considers the growing swell of negative-yielding fixed income paper being bought up. 

However, this key sector was rocked by a landmark ruling against Johnson and Johnson, where the state of Oklahoma said the drugmaker had contributed to a public nuisance in its marketing campaign, described as a deceptive promotion of its highly addictive prescription painkillers.  The state ordered that Johnson and Johnson pay $572mln for its part in the opioid crisis which has claimed some 6000 lives in Oklahoma alone.  

The pharma giant said the state had pursued a 'radical' interpretation of the state's Public Nuisance Law and that its marketed painkillers comprised only a tiny fraction of the opioids prescribed in Oklahoma.  It also claimed that since 2008, its painkillers had accounted for only 1% of the US market.  The company lawyers vehemently denied being the cause of the Opioid crisis in the state, or indeed any other state in the US and that interpretation of the (Public Nuisance) law had been rejected elsewhere.  

In terms of market reaction, Johnson and Johnson's shares actually rose after the result of the ruling, with market pundits forecasting fines in excess of $1.5bln, so the lesser number saw a partial reversal in the sell-off earlier this week.  

Even so, litigation expenses are on the rise and although this is not something new in relation to pharmaceuticals, it does feed into a worrying trend which suggests the state is taking a firmer line on corporate America - perhaps as a byproduct of the broader spread of populism which is a phenomenon the world over.  As such, we are again seeing a greater invasive dynamic from the world of politics and at some stage, this will have a greater impact on investor sentiment in the broader.  These potentially significant shifts in market behaviour can take a period of time to materialise, but developments such as the above can be pivotal in the historical timelines.  

Johnson and Johnson are naturally going to appeal against the decision, with rivals having decided to settle in their respective admission of ignoring the risks to addiction.  Purdue Pharma agreed to a $270mln fine, while Teva Pharmaceuticals settled at $85mln.  Given the many channels the supply of drugs in the US has to pass through, this looks set to be a long drawn-out affair and one which all quarters of society will be keen to keep an eye on.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.