The slump in biotechnology and healthcare could present a buying opportunity.
Biotechnology stocks and biotech ETFs tumbled in the back half of March and to start April. For example, the SPDR S&P Biotech ETF (NYSEArca: XBI) came into Monday with a loss of almost 12.6% over the past month. However, there are some compelling catalysts at play for biotechnology investments.
Valuations
Healthcare stocks are showing attractive valuations relative to other sectors. #Biotechnology historically trades at multiples that are elevated relative to broader benchmarks. However, after last year’s struggles for biotechnology, some analysts see value with some big-name biotech stocks.
The Tax Bill
“One reason biotechnology stocks may continue this march higher is the fresh wave of M&A activity that has been spurred in part by the tax bill.” This according to State Street Global Advisors. The tax law cuts the corporate tax rate from 35% to 21%. This encourages companies to repatriate overseas income held as cash at a tax rate of 15.5% instead of 35.5%. It is estimated that biotechnology and #pharmaceutical companies have roughly $228 billion in cash overseas. As a result, they now have extra cash on hand to pursue M&A.”
The President’s Plan
In a much anticipated speech given on Friday, Mr. Trump largely avoided the issues the industry fears the most. These include allowing Medicare to negotiate drug prices directly. Nor would the President’s plan allow Americans to import drugs. Investors noticed: Stocks of major drug companies rose after his speech, as did those of pharmacy benefit managers.
Some criticized what they saw as a much more timid approach than what they had heard on the campaign trail. Nevertheless, the President would give private entities more tools to negotiate better deals on behalf of consumers, insurers and employers.
Despite some reservations, the commentary was by no means all critical. The President’s proposals have won some praise.
“The changes that are already underway are spurring greater competition. This will help further drive down costs without sacrificing new medical innovations, or bringing new treatments to market. Several of the most significant reforms have come from the U.S. Department of Health and Human Services (HHS) the Food and Drug Administration (FDA) and the Centers for Medicare & Medicaid Services (CMS).
They are reforming the regulatory system to expedite reviews and ignite greater competition. Over the past decade, competition from generic drugs has saved the U.S. health care system $1.67 trillion.
In addition, they have prioritized FDA reviews for the first three generic alternatives to any original brand name drug. And these efforts are having an impact. In fact, the FDA approved more than 100 generic drugs in the month of October 2017 – more than ever before.
Summary
Mr. Trump’s “blueprint to lower drug prices” has four main themes: increase competition in drug markets; give private plans more tools to negotiate discounts for Medicare beneficiaries; provide new incentives for drug manufacturers to reduce list prices; and cut consumers’ out-of-pocket costs.”
Meanwhile, few of the steps proposed by the administration would take immediately. HHS Secretary Azar advised patience. “It’s going to be months for the kind of actions that we need to take here.” “It took decades to erect this very complex, interwoven system. I don’t want to over-promise that somehow on Monday there’s radical changes. There’s a deep commitment.”
Biotechnology and healthcare stocks rose following the President’s remarks.
