Trump, Clinton & Biotech

I couldn’t link this so here is a good analysis of the biotech big picture from Propthink

The biopharma sector’s 15% decline in the last month is largely a result of investors pricing in a Clinton victory, and subsequently, future federal regulations to reduce the cost of prescription drugs in the U.S.

That’s a scary thought for investors who focus specifically on companies developing and selling drugs.

A Clinton victory is largely expected based on leading polls, though it’s no shoe-in. At this point, healthcare investors are focused more on down-ballot races for the Senate and the House. Republican victories in both would put the White House’s power in check, and reduce the risk that new drug pricing measures are quickly — or ever — passed into law.

Democrats have a small lead in the race for the Senate, but they face a tougher battle for the House. Our unscientific poll of healthcare investors over the weekend (professional and retail), suggests that a House victory for Republicans would be enough for a relief rally among biotech stocks, as investors get more comfortable that pharmaceuticals don’t face a major uphill battle.

But what would a Trump presidency do to drug stocks?

The common assumption on Wall Street is that a Trump victory would be bad for markets simply because it creates uncertainty. Trump’s international policies are just that, foreign, and he’s vowed to shake things up domestically. The gut reaction among Investors would likely be to drop risky assets, where biopharma typically gets lumped.

But, there’s some evidence that biopharma could see some relief.

On Friday October 28, just after FBI directory Comey announced that they agency would be revisiting new Clinton emails, the SPDR S&P Biotech ETF (XBI) rallied 2% in the hours following the announcement. Bad news for Clinton, and thus good news for Trump, appeared to be good news for biotech as well, at least briefly.

It’s a tiny datapoint, but one worth keeping in mind as the election approaches.

Meanwhile, Proposition 61 has a roughly 50/50 chance at passing in California, r. (According to an analysis from RBC Capital Markets in September, similar measures across all 50 states would hit large biopharma earnings by just 2-3%.) The optics would not be great for biopharma stocks, but the reality is that California may then prove a testing ground for government-enforced pricing controls. It’s not a bad way to see how drug companies respond — raising prices at the VA? passing on costs to the rest of consumers? — and thus, prove out whether similar measures at the federal level would actually have a beneficial effect for more people.

Sentiment for healthcare stocks is darker than the inside of a cow, and ETFs that track the sector are meaningfully oversold on technical indicators. Prices for options on SPDR S&P Biotech ETF (XBI) expiring next week suggest a 9% move by Friday.

Whether that’s in the form of a relief rally, or otherwise, we’ll know soon enough.

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