Biopharma scrambles to patch a wound left by the Shkreli fiasco

The brutal market reaction to today's news that Verastem's lead drug flopped in Phase II provides a handy bookmark to the three-year-old biotech IPO boom. Verastem ($VSTM) was one of the first biotechs to make a splash with an IPO in late 2012, and it's feeling the heat in what is officially now a bear market for biotech stocks.

On Friday, the market ended a bad week by watching the Nasdaq biotech index plunge by 5%. The index was down 22% from its July peak. And once again stocks are responding to the threat that high drug prices may finally push lawmakers to do something to rein in the cost of therapies.

The big news last week centered on Hillary Clinton's tweet about her plan for controlling the cost of therapies, sparked by the public outrage that greeted little Turing Pharma's controversial move to jack up the price of a newly acquired 62-year-old therapy by more than 5000%. 

The industry's response to Turing and its toxic 32-year-old CEO, Martin Shkreli, was to put as much distance between them as possible. BIO kicked Shkreli and Turing out of the organization for conduct unbecoming a biotech exec, and Biogen's ($BIIB) George Scangos, who had to count his own losses last week, noted in an interview with Bloomberg that "Turing is to a research-based company like a loan shark to a legitimate bank."

But no matter what it says about the controversy or Shkreli, the industry can't escape the fallout from the pricing discussion that Shkreli triggered.

In recent days we've seen Tetraphase's ($TTPH) stock collapse, with a greater than 80% drop after its lead antibiotic flopped in the clinic. But that was only one example of a broad retreat. Even Celgene ($CELG) and Alnylam ($ALNY) were dented in the market rout last week. For a company like Valeant, which has built its business to a large extent on acquiring drugs and pushing prices, it's a particularly bad time to pursue an aggressive pricing model.

It's so bad, Valeant ($VRX) CEO Michael Pearson had to deny it was even true. Pearson insists that Valeant's success is all about volume growth and isn't vulnerable to any kind of government price restrictions.

"As we have stated many times, Valeant's core operating principles include a focus on volume growth and a concentration on private and cash pay markets that avoid government reimbursement in the U.S. and across the world," Pearson asserted in a letter to his shareholders.

Just how far that kind of argument can go in calming investors is uncertain at this point. Lawmakers in Congress have never shown an ability to gain any kind of consensus on either allowing Medicare to negotiate drug prices or apply any kind of broader restrictions. But Turing's move and the resulting outrage that followed may test their willingness to keep their hands off drug prices. And having that as a central discussion in the presidential election would make this a difficult new period for the biopharma industry to weather.

The Nasdaq biotech index dropped 6% on Monday.