(Bloomberg Opinion) -- Being an enormously profitable industry leader doesn't mean what it used to.
Johnson & Johnson and UnitedHealthGroup Inc., the world’s biggest health-care company and health insurer, respectively, reported third-quarter earnings results Tuesday morning that should thrill investors. Both managed to beat Wall Street earnings estimates and boosted full-year profit guidance above expectations as they generated a combined $80 billion in sales.
You’d expect shares of well-run blue chips in a defensive sector to be doing well amid recession fears. And yet, even after both J&J and UnitedHealth rose in early trading on their earnings news — with the latter’s stock surging more than 7% — both are substantially trailing the broader market this year as investors focus on policy and legal risks. Making boatloads of cash in today’s environment is the easy part for these companies. The question is their ability to keep doing so in the long run. The performance of lobbyists and, in J&J's case, an armada of lawyers will matter more than the performance of these businesses for some time to come.
A big chunk of the Democratic presidential debate Tuesday evening will be devoted to discussing policies that range from unpleasant for both companies to existentially threatening to UnitedHealth.
The most threatening proposal from the industry’s standpoint is “Medicare for All,” which would eliminate most private insurance in favor of a government plan and create price pressure throughout the health-care sector. It’s likely too ambitious to have much chance at passing anytime soon, but it can’t be ignored. It’s the preferred policy of Massachusetts Senator Elizabeth Warren, at least for now, and she is looking increasingly like the front-runner. Even the comparatively moderate public options proposed by candidates such as former Vice President Joe Biden would take market share from insurers and pressure profits.
While the worst-case scenarios would hurt UnitedHealth more, J&J could very well be more likely to see major policy damage stemming from other initiatives. There's more consensus on drug pricing among Democrats than there is on broader health reform, and that consensus isn’t pharma-friendly.
Many Democratic presidential candidates support something similar to House Speaker Nancy Pelosi’s muscular drug price negotiation bill. The nonpartisan Congressional Budget Office recently reported that the legislation would save Medicare $345 billion over seven years and cost drugmakers as much as $1 trillion in revenue over a decade. Action on drug prices is also possible under a broader range of 2020 electoral outcomes; even traditionally more industry-friendly Republicans are keen to act, and President Donald Trump has sounded off on the issue as well and promised action.
Add in J&J’s uncertain liabilities from thousands of lawsuits targeting all sides of its business, and it’s easy to see why investors can't focus on fundamentals.
Some see this weakness as a buying opportunity, but that bet requires a brave and patient investor. We’re more than a year away from the 2020 election, and J&J’s legal issues will take a long time to resolve. Tangible policy change remains uncertain and distant, but the policy consensus has shifted in an interventionist direction.
Even a run of several fabulous quarters can’t change that.
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Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.
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