Would Hillary Clinton Be Bad for Biotech Stocks?
Nate Silver's website, FiveThirtyEight, thinks there's an 86 percent chance that Hillary Clinton will become the next president. It's time to start pondering what that could mean for investors.
Health care investors -- especially those with heavy concentration in pharma and biotech stocks -- should pay close attention to what Clinton says; there's a general feeling that Hillary could be bad for business. Clinton has made no secret she wants to curb excessive profits some companies make by dramatically increasing prices to long-available, often life-or-death drugs overnight.
"There is no doubt in my mind that the biotech sector will be one of the perceived biggest losers with a Clinton presidency," says Matthew Carbray, certified financial planner and managing partner at Ridgeline Financial Partners.
[Read: 3 Trends Affecting Future Share Prices in the Health Care Industry.]
In just over a year, Clinton has twice sent tweets that sent biotech stocks tumbling. Even Tesla Motors ( TSLA) CEO Elon Musk can't move markets that dramatically with 140 characters.
On Sep. 21, 2015, Clinton tweeted that "price gouging like this in the specialty drug market is outrageous," in reference to Turing Pharmaceuticals, which had recently raised the price of a newly acquired drug -- used out of necessity by many HIV/AIDS patients -- from $13.50 to $750 per pill. Turing's CEO, Martin Shkreli, vehemently defended the move in media appearances during the ensuing public uproar.
Clinton's September 2015 tweet "is an example of her disdain with excessive profits," Carbray says. "Most recently she attacked Mylan ( MYL) for the sharp increase in pricing in their EpiPen product and was instrumental in asking for a congressional hearing."
Mylan stock fell about 25 percent from its August highs after public pressure forced the company to pay $465 million to the Department of Justice to settle claims that it overcharged Medicaid for EpiPens. Mylan also pledged to cover $300 in out-of-pocket costs for a $600 EpiPen two-pack. The same amount of the severe allergy medication cost $100 in 2009.
But Mylan and Turing are extreme examples of price-gougers. Why does the entire biotech industry seem to fall when Clinton talks tough on these practices? The iShares NASDAQ Biotechnology Index ETF ( IBB) fell 4.6 percent on the day of Clinton's Turing tweet. On Aug. 24, when she tweeted about Mylan, IBB shed 3.3 percent. The ETF is down about 20 percent this year.
On Wall Street, in the short term, perception is reality. And the perception that Clinton will be bad for pharma and biotech stocks has some rationale behind it. The president, after all, can wield enormous influence over the fates of industries.
"When Kennedy came after the steel companies, all steel companies got hurt," says Jordan Kimmel, co-founder and portfolio manager of FACTS Asset Management. Markets clearly fear Clinton might "come after" drug makers as president.
After the Mylan scandal, Clinton outlined a plan on her website to deal with price-gouging in health care. The plan specifically addresses "lifesaving treatments that have long been on the market."
Her plan will "establish dedicated consumer oversight at our public health and competition agencies," which will determine an outlier price increase based on specific criteria including trajectory of the price increase, production cost and "the relative value to patients."
If an "outlier price increase" is detected, Clinton will address it with "new enforcement rules," including: importing cheaper similar treatments, bringing alternative treatments to market by subsidizing competitors and issuing fines that will be used to "expand access and competition."
The plan demands that health care execs begin prioritizing their stakeholders -- customers, Americans' health insurance costs, Medicare, etc. -- ahead of making a quick buck for their shareholders.
[Read: Hillary Clinton vs. Donald Trump: Here's How Wall Street Sees It.]
It's understandable that Clinton's proposals might raise a few questions for health care investors. Will health care become regulated like utilities? Will companies need to seek the government's permission to raise a drug's price 3 percent? Who sets that maximum price increase? How? Doesn't this skew the risk/reward proposition for pharma and biotech stocks? Won't that lead to less investment and result in lower research spending and less innovation?
Kimmel is skeptical that Clinton will enact such sweeping changes -- or that she'll even change the status quo much.
"I think Hillary is simply jumping on a very populist bandwagon right now," he says. Pharma and biotech will face increased exposure and public pressure in the short-term, "but I think a lot of it goes away after the election," Kimmel says, largely because of industry lobbyists. "K Street is way more powerful than it should be."
Still, he doesn't envision total laissez-faire capitalism.
Companies "that are prone to serial acquisition with the intent of slashing employees, raising prices and developing monopolies" can expect more regulation, Kimmel says. This includes companies like Valeant Pharmaceuticals ( VRX), which has already faced intense congressional scrutiny and has seen its stock price plunge more than 90 percent from its 2015 highs.
Jonathan Gertler, CEO and managing partner of Back Bay Life Science Advisors, agrees with Kimmel that a Clinton administration would not needlessly regulate the pharma and biotech industries or damage either's overall investability. But it's not the sway of K Street that has him convinced. Dramatic overregulation, simply put, would be downright irrational.
"Those novel drugs that really have an impact on society have expenses associated with them, and I think any oversight agency will recognize the need to support return on investment for that type of contribution," he says.
Gertler feels that Clinton's support for science and education shows her policies will be a boon to the health care sector. "Hillary has long been an advocate of data-driven approaches to how science fits in our society," he says. "That's going to be beneficial for our country and our industry."
The public and private sectors have increasingly teamed up to work on unmet needs in health care, a trend Gertler sees continuing under Clinton.
[Read: 10 Ways You Can Invest Like Donald Trump.]
"Investing in innovation and our scientific sector, which translates -- whether it's five or 20 years later -- into benefits on a clinical and therefore commercial level, I don't think that's at all what's under attack by her statements," he says.
More From US News & World Report