GILD

Investment Analysis Clubs Saul’s Investing Discussions
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My last two posts dealt with ZLTQ and HZNP, both of which made me feel uncomfortable because of a certain sleaze factor.

ZLTQ, simply because it’s a weight loss company.

HZNP’s meds are combinations of cheap non-steroidal anti-inflammatories like ibuprofen, combined with cheap over-the-counter stomach-protectors like ranitidine and omeprazole, all generics. Then they charge huge amounts for the combination medicine (which people could easily take as two cheap generic over-the-counter meds). Their investor stuff is all about how good their marketing is, and how they are convincing doctors to prescribe these overpriced meds, not about how effective they are. With a whole universe of great companies out there, is this really where I want to put my money?

I had the same problem with sleaze factor with GILD, a company that the MF, and a lot of people on this board, love. Is it right to charge $80,000 for pills that cost maybe $1.00 to make, using the justification, basically, that they work? They should work. That’s the whole idea of a medicine. And they cure a chronic and potentially fatal disease. Does that mean that the company that makes an antibiotic that cures your pneumonia, which was going to kill you a lot quicker than hep C, should therefore charge you $200,000 or $300,000 for the antibiotic? Or that the surgeon who removes your appendicitis (which was going to cause a very painful and miserable death), should charge $1,000,000, because he’s got you by the unmentionables? Is that the kind of world you want to live in? Is that the kind of company I want to invest in? Sorry if I’ve kicked your sacred cow, but those are just my feelings.

Saul

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pills that cost maybe $1.00 to make

It is important to keep in mind that is what most of the pills cost to make. The first can cost tens of millions to make. There are costs to cover and R&D costs to make the next drug.

Still, I am inclined to agree with Saul on GILD. It is not that the price for the Hep-C drugs are expensive, it is that they are sleazy expensive. I have given GILD a serious look for the past several months, but have concluded that this is not a business for me to own. I think there is money to be made in GILD, but I’ll leave those profits for someone else.

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Saul,

That’s okay, the cow will probably heal. I want to live in a world that acknowledges the beauty of loving others as you love self and doing to others as you would have done to you. It would be golden!

Just keep sharing your analysis and constructive criticism. You are pushing us all to think with reason and act with conviction.

Now go and have a great day,
KLVanLiew

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I had the same problem with sleaze factor with GILD, a company that the MF, and a lot of people on this board, love. Is it right to charge $80,000 for pills that cost maybe $1.00 to make, using the justification, basically, that they work?

Saul,
I am not sure why you would invest in Celgene then. All of these pharma companies are hoping to get big payouts for their drugs.

I have seen two people in the company I work for that died from Hepatitis and I am sure that they would have gladly paid for the cure. Also my brother in law was a medic in the prison system and picked it up. He went through the treatment program and is now thankfully cured. I understand what you are saying about the price of the drugs but I am not smart enough to know what the right cost is for a cure.

Celgene’s ($CELG) Revlimid not only holds a key spot on the list of priciest drugs, up 6% from last year, it also has underpinned Celgene’s success. It generated $4.28 billion for Celgene last year, up
13.7%, which was 66% of the company’s total take.

http://www.fiercepharma.com/special-reports/top-10-most-expe…

Andy

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I have seen two people in the company I work for that died from Hepatitis and I am sure that they would have gladly paid for the cure. Also my brother in law was a medic in the prison system and picked it up. He went through the treatment program and is now thankfully cured. I understand what you are saying about the price of the drugs but I am not smart enough to know what the right cost is for a cure.

Andy, the reply to your comment is easy. Just because they’ve got you buy the balls, and you are going to die without the treatment, and are desperate, doesn’t justify gouging you for every penny they can get. It’s basic humanity. Look, think about this somewhat expanded enlarged version of what I wrote before:

If GILD is justified in charging $80,000 because its $100 treatment can cure a potentially fatal chronic illness, does that mean that the company that makes an antibiotic that cures your pneumonia, which was going to kill you a lot quicker than hep C, should therefore have the right to charge you $200,000 or $300,000 for the antibiotic because it’s saving your life? Or that the surgeon who removes your appendicitis (which was going to cause a very painful and miserable death), should charge $1,000,000, because he’s got you by the unmentionables? Or that the makers of pain medication for severe pain should be able to charge you $50,000 for the pain medication because you are desperate and will pay anything to get the pain stopped? Is that the kind of world you want to live in? Is that the kind of company I want to invest in? How can you go to sleep at night, knowing that you are invested in a company that gouges the desperately ill in that fashion? This is just my way of looking at it, but it seems a moral way to me. I’m sorry if it makes you uncomfortable, but please give what I wrote some thought.

Best,

Saul

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Saul,

You did not answer the poster’s original question of how you are morally opposed to investing in GILD, but do not feel the same qualms about investing in CELG when CELG (really, any pharma company) would most likely exercise the exact same pricing power that GILD does if CELG is ever in the same position.

Fletch

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This is just my way of looking at it, but it seems a moral way to me. I’m sorry if it makes you uncomfortable, but please give what I wrote some thought.

Not to pick on you, Saul, but I agree with Andy on this. GILD has developed a treatment that cures a potentially fatal disease in around 95% of those who receive treatment. There is a competitive product on the market now that also works. So someone gets the treatment and then GILD loses that customer 100% of the time…95 people cured and 5 people didn’t respond.

One thing that I don’t understand is why you are so concerned about GILD’s pricing of their HepC treatments and not equally concerned about the dozens of cancer treatments that cost even more when you consider that the patients need to stay on the medication for extended periods. And as Andy pointed out Celgene is one of those companies charging a lot for their cancer treatment.

We can do two exercises: The first exercise to do is to compare the GILD treatment to the previous alternative treatment. The previous alternative treatment didn’t cure the disease and would need to be repeated time and time again. It also cause some serious side effects. There were also days missed from work for these patients. So in addition to the cost of the alternative treatment there were other economic hardships placed on the patient such as needing someone to care and console them, forgone wages, a lower quality of life when they were felling like crap…and that doesn’t even consider the extended lifespan. If the new treatment adds 7 years of life then that’s $1000 per month without even subtracting the cost of the previous treatment which was not free! If you think of it this way then $84,000 is damned cheap. Oh and how much does a liver transplant cost?

The second exercise is to compare the $84,000 treatment to cure HepC to a $80k cancer treatment that often doesn’t work and often might extend a patient’s life for 3-5 years. So at $80K per year for 5 years plus all the other costs of care such as doctors’ visits, radiation therapy, all sorts of scans and test, anti nausea pills, a patient might spend $500,000 for 5 years of treatment. GILD’s treatment: pop a few pills and then you’re cured.

Saul, you’re a great investor but to think that GILD should price their product based on their cost goes against every economic principal that has made you so successful at investing. If all the companies that you were invested in charged their customers based on cost then you might still be working (maybe not but I think you get the point).

Chris

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This is a great thread. I’m finding it hard to wait for Saul’s response regarding the dichotomy of not investing in GILD for the reasons posted while being invested in CELG.

I’m long GILD and have been waiting for a better entry into CELG.

Since I’m also a capitalist who feels that both companies are delivering unmet needs to customers, I’m interested to know why one is different than the other.

Certainly, GILD has been in the “spotlight” over pricing, but they are nowhere near alone in this. Look at healthcare as a percentage of GDP over the past two decades.

This is great stuff and just appreciate reading it. Definitely worth the price of admission!

Take care,
A.J.

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This is just my way of looking at it, but it seems a moral way to me. I’m sorry if it makes you uncomfortable, but please give what I wrote some thought.

Saul,
Don’t think you are making me uncomfortable. I really think it is great to discuss our investments, the good, the bad, and the ugly. I really meant it when I said I didn’t know the proper answer for what a cure is worth. I really can’t say what the price should be but I do think that the market will be able to straighten this out. Why shouldn’t a company charge what they can get? This would seem to be the fairest way to look at it. Then, as always happens, other companies will come in with competing products driving down the price. I am not an expert on Medical companies Saul but after the patent runs out can’t other companies come in and create generic versions? This will lower the price down. Pneumonia will never cost anyone 200000 to 300000 dollars because you take antibiotics for it. A lot of antibiotics already have generic formulas.

I can see both sides of the story Saul, believe me, I understand your point and I have thought this out myself. If you go on the boards their are always people objecting to certain investments because they believe they were really immoral. A lot of people were angry with Monsanto, Walmart, Gilead, Tobacco companies, and many others. Some I do not like either, but I find it useless to push my morals on other people. I have found a lot of people on these boards have different views on life and investing then I do. Before coming on these boards I thought I was rather open minded but after listening to so many viewpoints, I found I had a narrow view of the world. But posts like yours Saul, and others have helped to broaden my world. So please do not think that anything you say can make me angry or uncomfortable. I enjoy your posts and only speak up when I feel I need to show a different view point. Not necessarily the correct view point just another way of looking at things.

Thanks,
Andy

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Saul, You did not answer the poster’s original question of how you are morally opposed to investing in GILD, but do not feel the same qualms about investing in CELG when CELG (really, any pharma company) would most likely exercise the exact same pricing power that GILD does if CELG is ever in the same position.

Hi Fletch, Yes all the pharma companies tend to overcharge. I’ve often complained about how I can buy Nasonex in France for 10 Euros, but in the US they stick us for $250 to $300 for the same bottle, and that’s just one of many. But there is something different to me about GILD getting desperate people and hitting them for $80,000 for a few pills to save their lives. Andy said he saw two people who died from Hep C and they would have gladly paid for the cure. I’m sure they would have sold their home and all their belongings. THAT DOESN’T MAKE IT JUSTIFIED TO MAKE THEM DO IT! Just my opinion again.

Saul

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We can do two exercises: The first exercise to do is to compare the GILD treatment to the previous alternative treatment. The previous alternative treatment didn’t cure the disease and would need to be repeated time and time again. It also cause some serious side effects. There were also days missed from work for these patients. So in addition to the cost of the alternative treatment there were other economic hardships placed on the patient such as needing someone to care and console them, forgone wages, a lower quality of life when they were felling like crap…and that doesn’t even consider the extended lifespan. If the new treatment adds 7 years of life then that’s $1000 per month without even subtracting the cost of the previous treatment which was not free! If you think of it this way then $84,000 is damned cheap. Oh and how much does a liver transplant cost?

Sorry Chris, I’m not comparing it with previous treatments which didn’t work well. I’m saying that charging desperate people $84,000 for a few pills really bothers me. As far as other types of companies, no one is forced to buy an iPhone or a Tesla, but this seems to be taking advantage of people who have no choice. Again, my opinion.
Saul

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But posts like yours Saul, and others have helped to broaden my world. So please do not think that anything you say can make me angry or uncomfortable. I enjoy your posts and only speak up when I feel I need to show a different view point. Not necessarily the correct view point just another way of looking at things.

Thanks Andy, It is a difficult problem, and I’m not really sure why I feel so strongly about this. It just really bothers me. I certainly wouldn’t invest in a tobacco company. They are making a product that they know kills people. I mean really!
Saul

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I’ve often complained about how I can buy Nasonex in France for 10 Euros, but in the US they stick us for $250 to $300 for the same bottle, and that’s just one of many.

In my country I fill the tank of my Toyota Corolla for four cents of a US dollar (generous tip included). In the US you pay several dollars per gallon for the same gas. My country is broke and they are importing fingerprint scanners to make sure people don’t buy two loaves of bread on the same day.

Big Government, Little Buns
Posted Under: Government

You’re kidding, right? It’s 2015. How can a populated country run out of bread? It would be understandable if a natural disaster or devastating war caused a shortage, but neither of these is happening in Venezuela – and they seem to be running out of bread. Why? Well, Socialism, of course.

So, what’s Venezuela doing about this? Over the weekend the Associated Press reported that Venezuela will begin installing 20,000 fingerprint scanners at supermarkets nationwide before customers can buy bread and other items. The idea is that in order to stop food shortages the government must limit people’s ability to buy food. Seven large private chains have already “agreed” to install the scanners. The government will give you a smaller slice of the pie, so that more people can have pie and you will have to wait in a longer line to get it. One of our favorite definitions of socialism is “Ideas so good that they have to be mandatory.”

http://www.ftportfolios.com/blogs/EconBlog/2015/3/12/big-gov…

Socialism is based on the idea of fairness – with catastrophic results. In 1985 my business in Venezuela was bankrupted by similar social policies, all in fairness to the consumer. But without producers there is nothing to consume. The market’s job is to eliminate excessive prices, excessive profits but it does not happen overnight. Specially not when producers have protections like copyright, trademarks, patents and trade secrets. In the name of fairness you could eliminate these protections which are not “human rights” but matters of policy to promote abundance. Of course, you also would run the risk of running out of bread.

Denny Schlesinger

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Saul, it’s a curious coincidence that you should have used French prices to bolster your argument because it was a Frenchman who demonstrated the flaw in your reasoning.

The following is also know as the Parable of the Broken Window

What Is Seen and What Is Not Seen
1.1
In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

1.2
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

1.3
Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

1.4
The same thing, of course, is true of health and morals. Often, the sweeter the first fruit of a habit, the more bitter are its later fruits: for example, debauchery, sloth, prodigality. When a man is impressed by the effect that is seen and has not yet learned to discern the effects that are not seen, he indulges in deplorable habits, not only through natural inclination, but deliberately.

1.5
This explains man’s necessarily painful evolution. Ignorance surrounds him at his cradle; therefore, he regulates his acts according to their first consequences, the only ones that, in his infancy, he can see. It is only after a long time that he learns to take account of the others.**2 Two very different masters teach him this lesson: experience and foresight. Experience teaches efficaciously but brutally. It instructs us in all the effects of an act by making us feel them, and we cannot fail to learn eventually, from having been burned ourselves, that fire burns. I should prefer, in so far as possible, to replace this rude teacher with one more gentle: foresight. For that reason I shall investigate the consequences of several economic phenomena, contrasting those that are seen with those that are not seen.

http://www.econlib.org/library/Bastiat/basEss1.html

Denny Schlesinger

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One thing that I don’t understand is why you are so concerned about GILD’s pricing of their HepC treatments and not equally concerned about the dozens of cancer treatments that cost even more when you consider that the patients need to stay on the medication for extended periods.

As someone who has the dubious honor of being treated for both Hep C and cancer I think I’m qualified to answer that question.

With cancer, most of them anyway, it’s cure it or die, whereas with Hep C your telling people who in many cases have had it 30/40 years that something bad might happen to them.

My Hep C treatment (Sovaldi/Olysio) dwarfs the cost of my Chemo drugs (Cemzar/Cisplatin with frequent Neupogen kickers)and there is no doubt which one I would do without if I was forced to choose.

Truth be told if it were not for insurance paying they would be lucky to get one fifth the price they are charging for the Hep C.

B

PS If the 95% cure rate justifies the price then maybe they should start issuing refunds to the folks it doesn’t cure.

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As someone who has the dubious honor of being treated for both Hep C and cancer I think I’m qualified to answer that question.

Thanks rjf for your personal report. I hope your health holds out. You have a lot of courage to talk about it on the board.

Saul

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You have a lot of courage to talk about it on the board.

LOL, many, maybe most, would say I just enjoy running my mouth. :<)

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rjf,

You are one tough cookie to survive both Hep C and cancer.

Pretty obvious God is not through with you yet.

Thanks for sharing!

Jim

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Saul - You are a retired physician, yes? The whole question of cost justification, efficacy and healthcare in general is a can of worms. It goes far deeper than what a pharmaceutical company might charge for pills. Here is the first paragraph of the Commonwealth Fund report on healthcare in the world’s leading industrialized nations:

New York, NY, June 16, 2014—Despite having the most expensive health care system, the United States ranks last overall among 11 industrialized countries on measures of health system quality, efficiency, access to care, equity, and healthy lives, according to a new Commonwealth Fund report. The other countries included in the study were Australia, Canada, France, Germany, the Netherlands, New Zealand Norway, Sweden Switzerland, and the United Kingdom. While there is room for improvement in every country, the U.S. stands out for having the highest costs and lowest performance—the U.S. spent $8,508 per person on health care in 2011, compared with $3,406 in the United Kingdom, which ranked first overall.

The key observation here is: the U.S. stands out for having the highest costs and lowest performance

Lest you think this is a biased report which started with a conclusion and then set out to demonstrate its veracity, this same conclusion has been born out by studies by the World Health Organization (WHO), the Organization of Economic Cooperation and Development (OECD) as well as private organizations such as John Hopkins, Virginia Mason and others.

There are a number of contributing factors to this dubious distinction. But one can’t help to be struck by the fact that all other countries in this study provide universal, single-payer healthcare. Only the US has deep involvement of a for-profit, non-value added insurance industry siphoning off large amounts of money while delivering no health benefits.

Like you, I’m an investor. It should go without saying that I am largely in support of free enterprise capitalism. But I think there are certain services where the lives of all citizens are improved if the profit motive is removed from the system. Denny pointed out the devastating economic effects of socialism in Venezuela. I am not an advocate of socialism in all aspects of economic activity. Every widespread experiment with it (of which I am aware) has ended in abysmal failure. For this reason, and maybe just a philosophical perspective, I’m sure there are contributors to this board who take issue with the assertion that we all would benefit by removing the profit motive for certain services. We all have a right to our opinion. But opinions should be influenced by facts. The fact is that the US is doing it badly when it comes to healthcare cost (highest) and outcomes (lowest).

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BrittleRock, I am torn about this. In the US, the costs have gone crazy. The pharma companies raise the cost of old medicines, that have long been paid for, every year. And not just raise the prices for inflation. They raise them 10%-20% annually. Compounded. And Doctors raise their prices every year too. And insurance companies do the same. It’s insane.

On the other hand, in France, with government as the single payer, while the costs are pleasantly much less, the government holds down their costs by reducing the number of specialists each year (specialists are more expensive), so that it takes months to get to see a rheumatologist, or a dermatologist. There just aren’t enough doctors of any kind, and it gets worse as more retire each year than are trained. And facilities are the same: If you need an MRI it can take weeks, etc. I think what’s needed is something in between. In US there’s reduced access because of cost, in France it’s because of not enough doctors and facilities.

Saul