A wave of austerity has swept across the globe as debt markets no longer want to fund ever increasing government deficits. I believe that the austerity trend is here to stay. One of the first things that every country undergoing austerity has done was to cut the amount they pay for drugs to bio-pharma companies.
Bio-pharma companies are easy targets as there is no love lost between them and the public. The knee jerk reaction is to think "good for them, those crooks deserve it". But looking at the facts might yield a different conclusion.
The bio-pharma industry has been consolidating as the low hanging fruits have been picked and finding new drugs is extremely costly. R&D costs have been rising and new blockbuster drugs have been few and far between. Companies like Pfizer have wasted tens of billions of dollars on R&D with little to show for it. There are far fewer biotech and pharma companies than there were 3, 5 and 10 years ago. If companies are paid less for new drugs than there will be even less R&D and fewer new drugs.
While I believe this is the wrong place to cut costs, I see the writing on the wall. Many bio-pharma companies are cheap enough that further price cuts are more than priced in. But when the time comes that more austerity measures are announced the stocks will likely not react kindly, especially when it happens in the US.
I have drastically cut my exposure to bio-pharma companies for the reasons cited above and because my largest holding, Gilead, had reached my target. I still believe the sector is attractively priced and still hold some positions but the dangers of austerity are large enough that I don't want as large an overweight in the sector.