What is the impact of the U.S. elections on the healthcare industry?
The unexpected result of the presidential election eased the main political and regulatory concerns that were weighing on the healthcare sector. Donald Trump’s victory brought a genuine sense of relief to pharmaceutical and biotech companies. Furthermore, during his first declarations, the President-elect clearly spoke in favour of medical research and innovation in the field of healthcare.
The unexpected result of the presidential election eased the main political and regulatory concerns that were weighing on the healthcare sector
Beyond the victory of the Republican camp, other events have signalled lower regulatory pressure on drug prices. The proposals put forward by the CMS federal agency (Centers for Medicare & Medicaid Services) with a view to tightening the current pricing model, are now easing. The rejection of the proposed act 61 in California - which prohibits the state from buying any prescription drug from a manufacturer at a price higher than the lowest price paid for the drug by the United States Department of Veterans Affairs - also constituted a positive factor.
Nevertheless, uncertainty remains over the reform of the Affordable Care Act. During the electoral campaign, Donald Trump had vowed to repeal the reform implemented by Barack Obama. Since his election, he has reviewed his programme and now wishes to replace it (“Repeal & Replace”). This reform has already enabled 21 million Americans with no coverage to have access to health insurance. Donald Trump’s main objective seems to focus on the funding of the reform, with a transfer of Federal government funding towards the States.
What are your convictions in this environment?
These new market conditions and the correction of recent months have created a particularly compelling entry point for healthcare stocks. Valuations show a significant discount relative to the market as a whole, despite higher earnings growth, solid fundamentals and the visibility enjoyed by the sector.
We are confident over the rebound potential, in particular for a number of stocks that had particularly suffered in the past few months, namely health insurance companies and large biotechs, which are now trading with a 30% discount or more relative to the market.
With earnings growth expected to reach 13%1 in 2017, we believe that the healthcare theme offers compelling investment opportunities. Furthermore, major innovation is in progress in several areas, such as immunotherapy, orphan diseases, infectious diseases… and many new treatments are expected to be approved within the next couple of years.
These new market conditions and the correction of recent months have created a particularly compelling entry point for healthcare stocks
Finally, several takeovers were blocked during 2016; the Department of Justice undertook to prevent the health insurance industry from consolidating (Anthem / Cigna and Aetna / Humana). Driven by new regulation designed to limit tax evasion, Pfizer also withdrew its takeover bid on the pharmaceutical company Allergan. However, the current valuation levels of many companies, together with the tax advantage that should be granted for the repatriation of cash held off-shore, are creating a positive environment for renewed M&A activity.
What is your positioning in this context?
Against this backdrop, we have significantly strengthened our exposure to biotech companies that have already launched their first products and enjoy visible growth. We have reduced our investments in medical equipment companies that had outperformed in recent months. The health insurance sector has been strengthened in the portfolio. Finally, we have selectively introduced specialty pharmaceuticals that we believe had been excessively hit by the election related turmoil.
We prefer biotech stocks such as Celgene. This company, which specialises in the treatment of multiple myeloma, owns the Revlimid franchise – a drug that generates sales worth 6.7 billion $. Celgene benefits from the solid growth of its existing products and from a pipeline of 9 drugs that are currently at advanced development stages.
Allergan also features among our strongest convictions. The pharmaceutical company addresses several therapeutic categories, including dermatology, aesthetics and eye care. The recent sale of its generics business to Teva for 40 billion dollars has enabled the company to refocus on growing therapeutic areas, to return some cash to its shareholders, and to reinvest in innovative treatments.
1 Growth objective is based on the realization of market assumptions and it is by no means a promise of growth.
December 2016. Non-binding document. This document is for information only.
Disclaimer: Information on stocks may not in any way whatsoever be construed as an opinion of Edmond de Rothschild Asset Management (France) on future price trends in the said companies, nor, where applicable, on the likely price trend of the financial instruments that these companies might issue. Any information herein cannot be interpreted as a solicitation to buy or sell these stocks.
The data, comments and analysis in this bulletin reflect the opinion of Edmond de Rothschild Asset Management (France) and its affiliates with respect to the markets and their trends, their regulation and tax treatment, on the basis of its own expertise, economic analysis and information currently known to it. However, they shall not under any circumstances be construed as comprising any sort of undertaking or guarantee whatsoever on the part of Edmond de Rothschild Asset Management (France). Potential investors should consult their service provider or advisor and exercise their own judgement independently of Edmond de Rothschild Asset Management (France) on the risks inherent to each investment and its suitability to their own personal and financial circumstances. To this end, investors must acquaint themselves with the key investor information document (KIID) that is provided before any subscription and available at http://funds.edram.com or on request from the head offices of Edmond de Rothschild Asset Management (France) and Edmond de Rothschild Asset Management (Luxembourg).