Originally published in partnership with INO.com
Donald Trump is back at it again via Twitter and once again he has ignited the political tug-of-war between potential policy changes and Wall Street. The overall healthcare sector has become volatile on the heels of any statement or tweet from Donald Trump. Shortly after inauguration, Trump held a press conference and stated that drug companies are “getting away with murder” when speaking to the drug pricing debate. Now he’s come out and stated that he’s working on a “new system where there will be competition in the drug industry.” Every time any of these remarks are tweeted, they immediately result in a downtrend across the entire biotech cohort, this time was no exception. The iShares Nasdaq Biotechnology ETF (IBB) traded down 1.7% or $5 per share once tweeted. The healthcare sector has been faced with an uncertain and volatile political backdrop. The overall healthcare umbrella has become sensitive to any tweet from President Trump as he vows to bring down drug prices. Although he’s pursuing his agenda against drug pricing, IBB has become resilient as many of these threats may have already been priced-in as seen in many healthcare related stocks that have seen sharp and sustained sell-offs. Ostensibly, many of these stocks are trading at multiyear low P/E ratios and as a cohort (gauged via the IBB proxy) looks to be less sensitive to tweets/threats and continues to test the $300 barrier.
Figure 1 – IBB price activity and resilience over the previous 6 months with pronounced volatility that coincide with political rhetoric against drug pricing
The Drug Pricing Transparency Coalition
Many large-cap pharma companies have created an unofficial drug pricing coalition to provide transparency in an effort to separate themselves from a handful of egregious price increasers to contend with Trump’s aim at the drug companies. This seems to be a checkmate to the new administration and its efforts towards lowering drug prices and erroneously accusing companies and labeling them as price gougers. A group of big pharma companies (domestic and foreign) are unofficially banding together to address the price increases that the public and governmental officials have been angered over. Allergan (AGN), J&J (JNJ), Novo Nordisk (NVO) and AbbVie (ABBV) have committed to limiting any annual drug pricing increases to less than 10%. J&J went further and published an annual report regarding its portfolio and the price increases they’ve implemented (Figure 2). Merck (MRK) becomes the latest pharma to join this drug pricing transparency coalition.
Figure 2 – J&J’s high-level summary report on its portfolio of products and price increases
M&A and Repatriation Catalysts
The M&A catalyst is very much in-play as the broader biotech cohort still remains at depressed valuations compared to 2015 highs. Some notable acquisitions include J&J’s acquisition of Actelion ion an all-cash offer of $30 billion to acquire the Swiss drug maker. McKesson acquired privately-held healthcare information technology company CoverMyMeds for $1.1 billion. Pfizer acquired Medivation for $14 billion, Allergan acquired Tobira for $1.7 billion and J&J’s acquired Abbott’s Medical Optics unit for $4.3 billion. Ariad (ARIA) Pharmaceuticals was acquired by Takeda Pharmaceuticals for $5.2 billion. Rumors have swirled over potential takeover targets such as Vertex (VRTX), Incyte (INCY) and Achillion (ACHN) to name a few.
Repatriation of overseas assets and decreases in corporate taxes are very much in-play as well and if these come to fruition, it could serve as a catalyst for M&A and a tailwind for the industry. These events taken in conjunction with chronically depressed valuations of many companies may accelerate M&A within the sector. The governmental stance on M&A activity may loosen up with the new administration. Potential repatriation of overseas assets, decreases in corporate taxes and the loosening of M&A pushback may bode well for the industry in the intermediate term. As the cohort remains suppressed, many prospective buyout candidates become more financially appealing to the acquirer due to beaten down valuations in concert with the maturity of pipelines coming into play. As this acquisition activity heats up, be on the lookout for stocks that have been rumored as takeover targets to heat up and possibly take IBB along for the ride.
IBB has shown its resilience in the face of Donald Trump as he pursues his crusade against drug pricing. Considering many of these stocks that comprise this cohort are at multiyear lows, it appears that these threats may be priced-in considering the sharp and sustained sell-offs that have now leveled off. The new unofficial coalition on drug pricing transparency may serve as a potential checkmate to the attempts of the new administration. As empirical data on drug pricing is articulated to the general public, reigning in these costs may be more challenging when countered with this coalition and its vow to limit drug price increases. If the drug pricing debate can be put to rest by the coalition then this cohort will likely rise as measured via IBB. Potential M&A activity and a favorable repatriation environment can further support this sector. Collectively, all these potential events bode well for the sector as IBB attempts to break through the $300 barrier once and for all.
Disclosure: The author currently holds shares of IBB and the author is long IBB. The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses. The author is the founder of www.stockoptionsdad.com a venue created to share investing ideas and strategies with an emphasis on options trading.