All eyes were on the global healthcare sector throughout 2016, as its prospects seemed inextricably linked to the outcome of the US presidential campaign.
Hillary Clinton – the frontrunner for much of the race – had threatened to cap the price of some drugs, and markets responded accordingly. The Morningstar Sector Equity Healthcare funds saw significant outflows compared with previous years, with more than £51 million leaving UK-domiciled funds, versus net inflows of almost £64 million in 2015.
So as the news broke that Clinton has lost the race to Donald Trump, the global healthcare sector was immediately one of the main winners; the US biotechnology sector alone was up almost 9% the day after the election result.
Almost three weeks after his inauguration, President Trump appears to be doing his best to keep the US pharmaceutical sector in the spotlight. He signed an executive order to “repeal and replace” the Affordable Care Act (ACA) - affectionately known as Obamacare – within hours of taking office, and has also criticised the “astronomical” drug prices and the lengthy approval processes of the Food and Drug Administration (FDA), which licenses treatments in the US.
Uncertainly Remains Over Repeal Of ‘Obamacare’
Dan Mahony, portfolio manager of the $1bn four-star Polar Capital Healthcare Opportunities fund said the issue is that Obamacare is an enormous piece of legislation that took two and a half years to write, and could take as long to rewrite. He doesn’t feel that Trump stands much of a chance to ‘repeal’ without a solid ‘replace’ plan on the table.
“Politically, the issue is that even though the Republicans have control of Congress, they do not have congressional support just to repeal.”
With 20 million people gaining access to health insurance they would have been denied prior to the ACA, he says any Republicans hoping to be voted in again would have to be mindful of the masses of people affected in their constituencies.
“They would never vote for them again. So I think Congress will be happy to repeal, providing there is a replace but there are over 1,000 pages of rules and regulations to contend with,” he says.
At a White House meeting last week with leading pharmaceutical executives, Trump promised to streamline FDA approvals, reduce onerous regulation around manufacturing as well as increase domestic drug production, all while bringing costs down.
Undoubtedly, as with any major political hot potato, there will be winners and losers.
The longer-term fundamentals continue to stand up, and over five years Biotechnology and Healthcare were the top two best performing broad equity sectors (excluding single country categories) according to Morningstar data, gaining 22.49% and 17.72% respectively.
Attractive Valuations On Healthcare Stocks
In a recent report focusing on healthcare, Woodford Investment Management pointed out the valuation opportunity in the sector, which it called the “most attractively priced since the early 1990s”.
With such valuations suggesting a sector in decline, the team feels they belie the longer-term commercial prospects.
In a recent video, head of investments Neil Woodford called the demographic challenge a ticking “time bomb” that needed to be addressed.
“You are not going to be able to unwind the demographic time bomb that is ticking and you’re not going to be able to unwind quickly the demands on the healthcare system, that will grow inexorably.”
He adds the way to control healthcare inflation is to develop better therapeutics and points to the responsibility of the pharmaceutical sector to address not just the healthcare concerns for the public, but also the economic concerns associated with rising healthcare inflation.
Price Controls Risk Growth Prospects
Trump’s commentary to the market is something of a double-edged sword, according to Anne Marden, research analyst and co-portfolio manager of the triple-star JPMorgan Global Healthcare fund.
She anticipates some promising growth opportunities following Trump’s presidential win with a very pro-business slant.
“There are some good ideas coming out of his administration but there is still an undercurrent of concern over regulation price control that sound negative for the industry,” she says.
Politics aside, she says having the spotlight on the US sector has highlighted the problematic way in which it is structured, with too many agencies and operators all taking their piece of the pie.
Because the system is structured around rebates, some of those discounts need to be pushed back to the consumer, reducing overall costs to the individual.
The Healthcare Stocks With ‘Best In Class’ Products
In such a tough market, Marden is looking for companies that demonstrate innovation, led by a chief executive who is mindful of the environment and confident they can drive the business forward even while being conservative in the face of political and regulatory upheaval.
One company well positioned for the current environment through its combination of a strong portfolio of new drugs balanced with older, more established names – is Eli Lilly.
Despite its recent setback when Alzheimer’s drug Solanezumab, or Sola, failed its stage three critical trial in November, causing the stock to plummet 14% in the aftermath, Marden is confident in the company’s overall portfolio and says it offers some “best in class” products.
