November 17, 2016
The Republican sweep of Washington has generated a ton of enthusiasm for biotech stocks. They’re up 10% to 15% since the elections. As a result, biotech analysts’ phones are ringing off the hook again after a depressingly bleak October.
“I feel like a rejuvenated man,†says RBC Capital Markets biotech analyst Michael Yee. “Once again, people are coming back to talk about biotech. We are back in gear.â€
But can the Donald Trump biotech rally really last?
In short, yes.
Republican control of the White House and both branches of Congress brings such a fundamental shift for the sector that more gains inevitably lie ahead, with the normal volatility that always comes with biotech stocks, of course.
“My sense is stay long,†says Yee. “Stay the course. The path of least resistance is higher.â€
Here are seven reasons why.
Reason 1: The government drug-price-control threat is gone for now
With Bernie Sanders and Hillary Clinton relegated to the sidelines, the days when they could shave billions in market value off the group with a single tweet against “high†drug prices are over.
Also, California rejected a key initiative, Proposition 61, that would have benchmarked the state’s drug prices to those that the U.S. Department of Veterans Affairs gets, essentially the lowest prices in the U.S.
“If the most liberal state in the country voted against Prop 61, a model for what extreme government drug-pricing controls could look like, it certainly seems to us like Bernie Sanders’ pipe dream isn’t going to materialize,†says Baird biotech analyst Brian Skorney.
He thinks the biggest beneficiaries of this shift will be companies with unique products that face minimal competition, but were hit the most by concerns about price controls.
He cites Vertex Pharmaceuticals VRTX, -0.99% Sarepta Therapeutics SRPT, -2.71% BioMarin Pharmaceutical BMRN, -0.72% Celgene CELG, -0.63% and Alexion Pharmaceuticals ALXN, +0.46%
To be sure, state pushback on drug pricing is not over. A measure similar to Proposition 61 is on the ballot in Ohio next year. But so far, only Vermont has passed a law pushing back on drug prices. In contrast, Prop 61-like legislation has failed in five states, points out Jefferies analyst Brian Abrahams.
Reason 2: An “explosion†of mid-cap biotech buyouts is on the way
“For a year and a half, people have recognized that the big pharmaceutical companies need to replenish their pipelines,†says Brad Loncar, of Loncar Investments, which specializes in biotech companies, particularly those looking for cancer cures.
The toxic political environment and uncertainly about drug-price controls have probably held them back. Now those threats are diminished.
And another huge mergers-and-acquisitions catalyst lies around the corner: Trump wants to change tax laws to make it easier for U.S. companies to repatriate foreign earnings stashed abroad.
Jefferies analyst Steven DeSanctis estimates that