Hydrocodone Limitations: Which Pharma Is Hurt?

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An interesting thing happened Friday, which I think, is flying under the radar. An advisory panel for the U.S. Food and Drug Administration recommended stricter controls on hydrocodone-based painkillers. That would include such powerful drugs as Vicodin, Lortab and Norco as well as many, many others. The drug was first allowed in the U.S. during WWII, and generics have been around for a long time. It's the most dispensed drug in the U.S. and limiting its market presence will be disruptive.

A move from Schedule III to Schedule II controlled would limit the amount of the drug prescribed and the number of refills that could be authorized by doctors. That would have the effect of limiting the amount of the medicine that's sold as a means of trying to control the drug's addictive impact. The panel even recommends that dentists, nurse practitioners and physicians assistants not be allowed to prescribe it at all. The Drug Enforcement Agency agrees with the panel's recommendation.

Now, the panel's decision is just advisory. It remains to be seen how the FDA will take it. On the other hand,  we should see one quiet, but king-sized, lobbying fight, here. I'm not going to address the medical issues, that's not my role. But I will address some firms I think might be impacted by the increased control of hydrocodone.

Abbott Laboratories (NYSE: ABT)

Abbott is a monster, of course. They do a lot more business than just hydrocodone. Still, it won't be helped by any limitation of the availability of the drug. I'd expect the firm to perform as normal, though it's profit fell this quarter following the spin off on one of its subsidiaries. If hydrocodone is switched to schedule II, I'd expect sales for Abbott to weaken in the short term and then see the firm concentrate on other lines to make up the shortfall. The firm's stock has been shaken lately by a series of bad news items. Still, I have faith the firm knows what it's doing and that it has the muscle to take care of itself. Reducing its dividend doesn't help perception, though. Be wary, but it's still an investable stock.

Zogenix (NASDAQ: ZGNX)

Oooh, bad timing for Zogenix. Just a year ago Zogenix said it planned to apply for permission to begin marketing a new, stronger version of hydrocodone. The timing couldn't be worse for the firm. To see hydrocodone suddenly in the news as overprescribed and very addictive isn't one of those happy coincidences they want. Still, the news hasn't been all bad for the firm.  It's Relday drug tests seem to be going well. The firm's stock traded between $2 and $2.50 until December when it plummeted to $1.50 or so. Stay away.

Actavis (NYSE: ACT)

Another firm that makes its own line of hydrocodone painkillers, Actavis used to be known at Watson Pharmaceuticals and changed the name and ticker in January, 2013. Actavis is another firm with a long history of knowing what it's doing. It will be hurt by limitations on hydrocodone, but not killed. I'd expect the firm will be scrambling to find a replacement product for its painkillers, and there's a good chance it'll find something to fill the hole in its cash flow. Still, what that will be I don't know. The firm did announce that it intends to expand its product line and, therefore, will have weaker profits in 2013. However, Morgan Stanley did just set a target for it of $98. That's a significant step up from its current $84 level. So someone thinks it'll do fine. I'd be comfortable with a position in Actavis, so long as it wasn't too much.

Look, this is really going to be one of those towering lobbyist fights that legends are made from. In one corner,  you've got a panel of expects, and the DEA, arguing that hydrocodone is a trouble making drug that's addictive and overprescribed. On the other,  you've got entrenched business interests with a strong industry influence on Capitol Hill. It'll be interesting to see how this one plays out. It could easily be that Congress steps in and forbids the change, if it can be done quietly. If not, there'll be hearings galore as things go down the path to a decision. For now, be wary of how things play out and don't overcommit to any firm that has a big stake in hydrocodone.

Good luck!

Follow Nate on Twitter: @natewooley

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