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Impeachment Won't Scare off Drug Pricing Boogeyman for Health Sector

Cristin Flanagan and Felice Maranz

(Bloomberg) -- As the focus in Washington turns to congressional Democrats’ move to impeach the president, Wall Street and policy analysts say the biotech and health-care stocks that have been pressured by drug-pricing reform are unlikely to find much respite amid the distraction.

The Nasdaq Biotech Index fell 0.2% Wednesday following a 2.1% drop a day earlier after House Speaker Nancy Pelosi said there would be a formal impeachment inquiry looking at President Donald Trump’s controversial July phone call with his Ukrainian counterpart. The S&P 500 Health Care Index was down 0.5%, falling for a second day in a row.

Biotech and health-care stocks have been underperforming the broader market, with large funds exiting their positions as policy proposals aimed at curbing drug prices have gained traction in Washington. While the impeachment push may have been seen by some as good news because it draws attention away from the drug-pricing issue, Pangaea Policy founder Terry Haines said it’s unlikely to relieve the pressure.

“Pharma should not breathe a sigh of relief,” Haines told clients in a research note Wednesday. “Drug pricing reform could be added to the spending bills (Trump could insist on it), and it would be in both parties’ political interests to do so.”

Democrats may be motivated to show voters and Wall Street they can address major issues with bipartisan support, Haines said.

Goldman Sachs analysts led by Terence Flynn also predicted drug pricing would continue to pressure the sector. In a research note Wednesday they said the biopharma group is trading at 11.5 times 2020 estimated earnings, compared to 16-17 times for the S&P 500, which shows policy risk may already be reflected in the share prices.

For context, they pointed out that drugmakers in the 1990s like Bristol-Myers Squibb Co., Pfizer Inc., Eli Lilly & Co., Merck & Co. and Johnson & Johnson sold off and traded at multiples of around 12 to 13 on concerns about President Bill Clinton’s plan to curb drug prices via the Health Security Act also known as “Hillarycare.”

A Senate Finance bill, House Speaker Nancy Pelosi’s drug pricing bill, Trump’s plans for an international drug pricing index and proposed changes to Medicare’s Part B will all continue to pressure the sector, according to Goldman.

“Pelosi’s bill has no chance in the Senate, impeachment proceedings or not,” Bloomberg Intelligence analyst Brian Rye said in an email. But that doesn’t mean drugmakers are out of the woods. “There are areas of agreement that can lead to a bill on Trump’s desk that he would sign late this year, if leaders want that to happen,” Rye said.

The move to impeach Trump “adds to an already nebulous environment around broader health-care policy changes,” Jefferies strategist Jared Holz said in an email. “We do not foresee meaningful inflows into pharma or biotech until the coast is clearer, which could take additional time now.”

More than $2 billion worth of biotech stocks flowed out of funds in just over a month, while at the same time there was an increase in fund flows across all equities, Piper Jaffray analyst Christopher Raymond said in a Sept. 19 research note. He tracks fund flows from data compiled by Lipper/AMG Data Services on a weekly basis and said the breadth ratio has not yet reached trough levels for biotechs.

RBC biotech analyst Brian Abrahams was more positive on the sector he covers. “Expect more noise but little action on drug price reform,” he said in a research note Wednesday. There’s a low likelihood of “draconian price cuts” that may over time “improve investor confidence returning to the biotech space,” he said.

To contact the reporters on this story: Cristin Flanagan in New York at cflanagan1@bloomberg.net;Felice Maranz in New York at fmaranz@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Richard Richtmyer, Jennifer Bissell-Linsk

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