Actavis Inc (ACT), AbbVie Inc (ABBV): “Pay-For Delay” Was Fun While It Lasted

FTC v. Pharma

The FTC is going to come down hard on Actavis, and AbbVie Inc (NYSE:ABBV), and who knows how much it will cost the companies or what we will learn. Supposedly, these deals stretch so far that it could take many years to uncover. The FTC has some heavy hitters in its corner, including Obamacare and the nation’s largest doctor group, the AMA.

This group is claiming that Pfizer Inc. (NYSE:PFE) and Actavis had a similar deal. The AMA claims that Pfizer made $10.7 billion a year with Lipitor and maintained its exclusiveness by paying off generic drug companies, including Actavis. Therefore, we must ask the question, how much was Actavis paid from Pfizer Inc. (NYSE:PFE) (among the others), and how much did it affect fundamentals?

We’d be crazy to think that Actavis Inc (NYSE:ACT), AbbVie Inc (NYSE:ABBV), and possibly Pfizer Inc. (NYSE:PFE), are the only culprits in this large scheme. Yet, these are the companies that are making the headlines, with Actavis trading lower by 1.25% and AbbVie Inc (NYSE:ABBV) lower by 0.8% on Monday. My impression is that this whole ordeal is going to get ugly, now that the FTC has been granted permission to go to war with the pharmaceutical industry.

Conclusion

In my opinion, this practice has profoundly distorted the true value of generic companies. Those generic companies have enjoyed operating margins that most likely don’t reflect the true margins of their business. Therefore, the market might be valuing these companies incorrectly.

While I don’t know how much these valuations may be off by, I’ll use a rule of thumb: if the FTC has evidence that this practice has cost the consumer $3.5 billion annually and the U.S. government more than $5 billion over a three year period, then that money has to be made up. This is money that will be given back in fees and lawsuits, and in time, might create laws where this income won’t be created. Thus, certain companies will be significantly affected. The big question is which ones? Obviously, we don’t know all of them, but we do know Actavis Inc (NYSE:ACT) and AbbVie Inc (NYSE:ABBV), and these two might very well pay the price.

The article “Pay-For Delay” Was Fun While It Lasted originally appeared on Fool.com and is written by Sherrie Stone.

Sherrie Stone has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Sherrie is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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