Why US pharma and biotech valuations look appealing

January 12, 2017

Share prices of stocks in the pharmaceutical and biotechnology industries recovered strongly in the wake of Donald Trump's unexpected victory in the US presidential election. This re-rating was driven in large part by the threat of Hillary Clinton's plans to curtail drug prices receding.

In addition, an important vote was lost in California (Proposition 61), which would have restricted pricing power of drug companies. This had a further positive impact on share prices.

But despite this vote in California and Trump's win, investors would be wrong to assume the Republicans will take a diametrically opposed attitude to drug pricing going forward, as concerns cut across party lines.

Biotech, banks and roads: rosy prospects for 2017

HOW REPUBLICANS CAN BOOST BIOTECH

Certain drug manufacturers can expect continued pressure, from politicians as well as market forces, to push down prices. But these pressures will be focused on those companies that provide generic compounds and those with a number of 'me-too' competitors.

Smaller and mid-cap pharmaceutical companies will be the most affected. Innovative products that meet real, unmet medical need will be exempt from this pricing compression.

The Republicans have plans to radically restructure Obama's Affordable Healthcare Act.

But their ambitions for an overhaul do not end there: the speaker of the House of Representatives, Republican Paul Ryan, has laid out a detailed scheme entitled 'A Better Way' to reorganise the entire healthcare system.

biotechnology-sector-may-be-helped-by-republican-policies

The central thrust of these plans is to make Medicare more efficient, to reduce the cost of the system and to provide better healthcare for the elderly. The Republicans plan to improve its efficacy by making the system less complex and giving the patient more choice.

By introducing a single 'co-pay' level for patients, where the individual pays a flat fee in exchange for a medical service or medication and the remainder of the cost is covered by the insurance provider, the Republicans hope to harness consumer power to make the system cheaper, because it will encourage the patient to take the most cost-effective option.

ENCOURAGING NEWS FOR BIOTECH FIRMS

Companies that provide the infrastructure for the US healthcare system will bear the brunt of these policy changes.

The Republicans' healthcare reform plans also contain encouraging news for biotechnology companies, with financial analysts saying the plan to streamline drug approvals will benefit innovative drug companies.

While there is a roadmap for Republicans' healthcare policy, much is still up in the air as we head into 2017.

The best way for investors to protect themselves from this political uncertainty is to invest in those companies that have the best chance of successfully targeting unmet medical need. That means focusing on areas such as cancer, Alzheimer's and rare diseases.

It's even more effective, however, to select those companies that not only have truly innovative compounds but are unlikely to face competition.

That's why the International Biotechnology Trust has a third of its portfolio invested in companies developing drugs to treat cancer, and a quarter of the portfolio in those targeting rare diseases - and why we avoid those areas facing pricing pressure, for example diabetes.

The biotech sector's current favourable valuation makes it an appealing investment. In addition, the Republicans' plans for the sector will have little impact on innovative companies.

The long-term growth drivers for this sector remain intact: scientific advancements have created a wealth of new products, which will improve both sales and profits of biotech companies.

Carl Harald Janson is lead manager on the International Biotechnology Trust.

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