It’s the end of October. Soon the elections will be history (thank goodness), the mudslinging will stop, and we can get down to assessing how the political situation will influence healthcare, with drug companies and biotech in particular. We are getting some early indications as November 8th nears. YTD October 21st, every sector of the S&P 500 is up for the year except one—healthcare. The healthcare sector ETF (XLV) is down 3.22%. Nothing to worry about, but still a 798 basis point underperformance, relative to the S&P 500 benchmark which is up 4.76% year-to-date but still a very rare event. Healthcare has beaten every other sector for the long term and the intermediate term. This underperformance is a short-term phenomenon as of now. We hope it doesn’t become chronic!
Some of the larger weight stocks in the healthcare sector such as Bristol Myers, Gilead, and Vertex have been hammered. Gilead has several blockbusters for Hep C and HIV treatment. Yet it trades at an exceptionally low valuation that is reserved for mature companies. Why is this? A few reasons:
- Political pressure. Their Hep C treatment is one of the most expensive drugs in the United States. Hillary, Bernie and Trump have been rattling against this now for much of the 2016 campaign. The market is probably adjusting expectations for some of these drugs. The pressure will be immense to help curb rapidly escalating prices. Payers will be negotiating with political tailwinds at their back and will have the support of an angry American population.
- Competition. For a period of time, Gilead had no competition in the Hep C space. There are now at least three companies with Hep C treatments available (Johnson & Johnson, Abbvie and Merck). This will, more than anything, put downside pressure on their product.
- Pipeline. A large percentage of Gilead’s revenues are from their two Hep C drugs. While they are a leader in HIV treatments, those drugs are just getting traction and it will be some time before we see if they have blockbuster potential.
- California Prop 61 – the wildcard for all of big pharma and biotech. We just don’t know the effects of this legislation that is likely to pass.
Other companies too, have posted stock declines of greater than 20% year to date. Some of the declines were due to excessive valuation, but others are discounting the possibility of a seriously adverse political climate. The scenarios:
a) Hillary wins (in itself, not a bad thing)
b) Hillary wins and Democrats regain control of the Senate (adverse)
c) Hillary wins and Dems regain both the Senate and the House (seriously adverse)
d) All of the above, and Prop 61 passes (could lead to underperformance in the near term) We’d consider underweighting (or selling), or possibly hedging any large big pharma/biotech holdings.
But remember, there are other subsectors in healthcare that are doing very well and should continue to do so. We are happy to own many of them.
Now, if Trump wins? We’ll cross that bridge when he builds it…