Shares in UK pharmaceutical companies have come under pressure this week after US President Donald Trump signed an order scaling back parts of Obamacare.
President Trump signed an executive order last month to prepare “to seek the prompt repeal” of the Affordable Care Act, also known as Obamacare, and during a meeting with pharmaceutical executives at the White House this week, he commented on the high cost of drugs.
“The pricing has been astronomical. You folks have done a very great job over the years but we have to get the prices down,” Trump said
“I'll oppose anything that makes it harder for smaller, younger companies to take the risk of bringing their product to a vibrantly competitive market. But we can increase competition and bidding wars, big time.”
UK Healthcare Stocks Impacted
Major UK-listed pharmaceutical stocks have been falling since Trump signed the executive order. Shares of Hikma Pharmaceuticals (HIK) have dropped 3% since the meeting on January 20, while biotech firm AstraZeneca (AZN) fell 1.7%. Medical devices provider Smith & Nephew (SN.) and mega pharma firm GlaxoSmithKline (GSK) were also down 1.4% and 0.8% respectively.
Shares of pharma stocks have fallen since the day Donald Trump was elected President on November 8, with AstraZeneca and GlaxoSmithKline down 4.6% and 1.4%, while Smith & Nephew has dropped 4.7%.
AstraZeneca and GlaxoSmithKline have retained their four-star valuation ratings since November, meaning Morningstar equity analysts believe that they are trading below the shares’ fair estimate. Meanwhile, Hikma Pharmaceuticals and Smith & Nephew are rated as fairly-valued by Morningstar analysts.
What Does the Future Hold?
Trump’s pledge to relax regulations will bring greater risk for both patients, pharmaceutical companies and the wider healthcare system, said Ketan Patel, fund manager with EdenTree Investment Management. The President wants drug manufacturing to return to the US and for the US Food and Drug Administration to accelerate approvals for new drugs.
“From a patient perspective, it is worrying that Trump is calling for the elimination of 75-80% of all FDA regulations, which are in place to protect patients. The sector has been littered with drugs that have been approved and have been recalled on safety grounds, resulting in patient deaths and tens of billions of dollars in settlement payments,” said Patel.
Morningstar equity analysts believe repealing the Obamacare could be challenging, since Trump would need 60 votes to overcome the Senate filibuster, and the healthcare industry lobbies are likely to oppose such a move.
“While it might seem counterintuitive that Trump's plan for rolling back coverage would lead to an increase in the deficit, keep in mind that the Obamacare specifically included measures to raise revenue and reduce federal spending, including taxes on branded drugs, medical devices, high-end "Cadillac" health plans, and altering Medicare Advantage payments,” analysts wrote in a published note.
David Docherty, UK equities fund manager of Schroders agreed, saying that the replacement of Obamacare would be complicated, a far more challenging task given numerous cost and coverage issues.
“We would therefore be mindful of the risks to drug pricing for ‘big pharma’ in the eventual legislation,” said Docherty.
In the case of a successful repeal, the drug and biotech industries would likely lose some volume gains as the 20 million newly insured patients from the Obamacare will likely lose some insurance coverage and spend less, but the mandated costs of Obamacare would likely more than offset the lost revenue, said Morningstar equity analysts.
Focus on the Long Term
Edentree’s Patel reminded investors that in the long run, those pharmaceutical companies focused on innovative research and development will be able to command a premium, due to the health and economic benefits they deliver to both patients and those who foot the bill.
Looking at UK pharma companies, GlaxoSmithKline has shifted from its historical strategies of targeting slight enhancements toward true innovation, said Damien Conover, director of healthcare equity research and equity strategy at Morningstar. Benefits of this strategy are showing up in Glaxo's early-stage drugs. Analysts expect this focus will improve both approval rates and pricing power of the company.
Smith & Nephew's impressive innovation has allowed the firm to carve out a slice of the orthopedic and wound-care markets, said Debbie Wang, senior analyst at Morningstar. Though Smith & Nephew is smaller than the dominant orthopaedic competitors, it has been a strong contributor in terms of introducing meaningful innovation, which translated into a mere 2% gain in share over the past seven years, said Wang.
