NEW YORK (Reuters) - U.S. President-elect Donald Trump on Wednesday said pharmaceutical companies are "getting away with murder" in what they charge the government for medicines, and promised that would change, sending drugs stocks sharply lower.
The benchmark S&P 500 index slipped into negative territory after his remarks at a news conference spooked investors. The Ishares Nasdaq Biotech ETF <IBB.O> dropped 4 percent at its session low and was on track for its largest daily percentage drop since late June. [nL4N1F14CH]
"When the president-elect says we're going to negotiate drug pricing, you have to take that seriously, but at the same this is a complicated issue because there's not going to be clarity on drug pricing reform anytime soon," said Brad Loncar, manager of the Loncar Cancer Immunotherapy ETF <CNCR.O>. "When somebody that high profile says something that negative, people do not want to invest in it."
Trump has blasted other industries for charging the government too much, particularly defence companies, but has made only a few public statements about drug pricing since being elected. He briefly mentioned Lockheed Martin Corp <LMT.N> and Ford & Co <F.N>, and United Technologies Corp <UTX.N> during the Wednesday news conference and promised a border tax for companies producing products for U.S. consumers outside the United States.
After his promise to bring down drug spending, the ARCA pharmaceutical index fell 2 percent as Pfizer Inc <PFE.N> gave up 2.6 percent and Johnson & Johnson <JNJ.N> fell 1 percent. Biotech Gilead Sciences Inc <GILD.O> fell 2.3 percent.
The drug industry has been on edge for two years about the potential for more government pressure on pricing after sharp increases in the costs of some life-saving drugs drew scrutiny in the press and among lawmakers. The government is investigating Medicaid and Medicare overspending on Mylan NV's <MYL.O> allergy treatment EpiPen, for instance.
David Katz, chief investment officer at Matrix Asset Advisors in New York, said negative comments on drug pricing trigger selling both from algorithms and investors who suffered from share drops when Democrat Hillary Clinton campaigned against healthcare cost increases.
Options traders' expectation for near-term volatility in shares of Health Care Select Sector SPDR Fund <XLV.P> jumped to a one-month high.
Trading volume in the healthcare fund's options jumped to 52,000 contracts, more than twice the average daily volume, with bearish/defensive bets dominating, according to options analytics firm Trade Alert data.
Trump's campaign platform included allowing the Medicare healthcare program to negotiate with pharmaceutical companies, which the law currently prohibits. He has also discussed making it easier to import drugs at cheaper prices.
"We are going to start bidding. We are going to save billions of dollars over time," Trump said.
Medicare, which covers more than 55 million elderly or disabled Americans, spent $325 billion on medicines in 2015.
Industry trade group Pharmaceutical Research and Manufacturers of America, or PhRMA President Stephen Ubl said "Medicines are purchased in a competitive marketplace where large, sophisticated purchasers aggressively negotiate lower prices."
He said the industry is "committed to working with President-elect Trump and Congress to improve American competitiveness and protect American jobs."
Daniel O’Day, CEO of Roche Pharmaceuticals, a division of Roche Holding AG<ROG.S>, said in an interview on the sidelines of the JP Morgan conference that the company focuses on innovation and investing in research.
Price increases over the past several years have been "responsible" and in the range of low to mid single digits, he said.
Mylan CEO Heather Bresch said it was premature to respond to Trump's comments, when she was asked during an investor presentation at the JP Morgan Healthcare conference in San Francisco. She said the industry should relook at how healthcare is set up as the government repeals the Affordable Care Act.
Trump said he plans to repeal the Affordable Care Act, or Obamacare, and replace it at about the same time. The news helped shares of hospitals, which are nervous about losing government payments for medical services. It hurt some health insurers, like Anthem Inc. <ANTM.N>, which sell plans on the government-run health insurance exchanges.
Healthcare ETFs including the Health Care Select Sector SPDR Fund (XLV) <XLV.P> and the iShares Nasdaq Biotechnology ETF (IBB) drew their highest trading volume since Nov. 10, after the election. (GRAPHIC link here: http://tmsnrt.rs/2jEkkJH)
The healthcare sector <.SPXHC> was the largest drag on the S&P 500 <.SPX> and the Nasdaq 100 <.NDX> while all major U.S. stock indexes were lower in mid-afternoon trading on Wall Street.
(Reporting by Caroline Humer, Rodrigo Campos and Lewis Krauskopf in New York, Deena Beasley in San Francisco and Ankur Banerjee and Natalie Grover in Bengaluru; Editing by Chizu Nomiyama and David Gregorio)