A year after Democratic presidential candidate Hillary Clinton’s tweet stating her plan to target price increases for older drugs by manufacturers, healthcare stocks have underperformed the wider market.
And according to the experts, this negative sentiment will continue to drive volatility in the sector right up to the US election. But rather than lament the price fluctuations, fund managers investing in healthcare companies said this creates a buying opportunity.
“Valuations in the sector are currently lower than anything we have seen since 2008 and in the early Nineties,” David Pinniger, fund manager of the Polar Capital Biotechnology fund said.
“The global market for pharma and biotech sector is already pricing in a huge amount of uncertainty. My view is that valuations are very interesting and compelling right now, although you are taking volatility risk going into the US election.”
Pinniger’s worries are in line with recent market activity as we get closer to election day in the US. On August 25, falling pharma stocks knocked 20 points off the FTSE 100, after comments from Clinton suggested she would put pressure on drug makers to cut prices.
Prospective policies have scared investors away from the healthcare sector, but the negative sentiment has gone too far, Evan Bauman, manager of Legg Mason ClearBridge US Aggressive Growth fund said.
“Since last summer, the healthcare sector has seen liquidation trades, where buyers strike, with $11 billion pulled out of healthcare related funds, or healthcare dedicated funds in the US,” Bauman said.
Pinniger advised investors who are not prepared to take on risk may be better waiting until the election outcome, but warned they might lose out on the upside from the low level companies are trading at right now.
Carl Harald Janson, lead manager at International Biotechnology Trust (IBT) and Sam Isaly, manager of Silver Rated Worldwide Healthcare Trust (WWH) both agree that pharmaceutical and biotech stocks are trading at low valuations, suggesting a buying opportunity, while James Davidson, fund manager at JP Morgan Global Equity Income fund takes a more cautious approach as he sees more risks coming into the sector.
What Will a Clinton Win Mean for the Healthcare Sector?
Once the US election outcome is revealed, it will lift the sentiment towards the sector over the following 12 months, according to Pinniger.
“It will take two or three months the newly elected President to set out policy objectives. The policy agenda will then become clearer early next year,” he said.
If Clinton was elected as the US president, Pinniger believes there will be a small uptick in healthcare stocks as the market is aware of Clinton’s clearer agenda.
“If Donald Trump wins the election, the market has got bigger issues to deal with. This result could bring in a period of broader market volatility as there will be a lot of uncertainty,” he said.
But the US Congress Composition Matters the Most
However a Trump win is not entirely negative, Davidson argued: “If Trump wins alongside the Republican congress, then it might be positive for the healthcare sector.”
Pinniger agreed, saying that if the Republicans continue to control the House of Representatives, then it is likely that very little will happen on the healthcare legislative front.
In the contrary, if the Democrats gain control of both the House of Representatives and the Senate, Clinton might get the support to go for a more aggressive healthcare reform agenda.
“Interestingly from a healthcare investor perspective, who wins the Presidential race is probably less important than the final composition of Congress,” Pinniger added.
There is a third scenario that would be favourable for healthcare companies: congress remains either spilt, or a contrary party to the administration that wins the election, said Bauman.
Why Does the Pharma Market Fear Clinton?
This is not the first time Clinton has impacted the pharmaceutical sector. Back in the Nineties when her husband Bill Clinton was elected as the US President, Hillary Clinton attempted to introduce a new healthcare system in the US in which the Government could control the drug prices.
“The whole sector fell 50% in value in the two months after they announced their proposal. Two months later the government conceded it would be too difficult to implement. Share prices went back up again but people remember her impact,” Janson explained.
Biotech Offers Investment Growth
Biotech is a sector driven by raw innovation, delivering sustainable growth in the market, both Pinninger and Janson agree. “It is a good sector for the next 20 years,” Janson said.
From the demand side, there is a steady growth due to the demographic shift in the average age of developed market populations.
“Innovation comes from better understanding of how to treat people and how to make those drugs work. There is a dramatic increase in knowledge over the last 20 years,” Janson added.
Pinniger echoed Janson’s views, saying that the huge wave of merger and acquisition activities recently reflects the growth potential in the market.
“The huge amount of M&A at the moment reflects that there are innovation and creativity found continuously on drug developments among small companies in the industry, and large companies continue to look at innovation externally,” said Pinniger.
“We see big pharma companies buying smaller companies that can drive their businesses going through.” he said.
