Pharmaceutical Stocks Surge After Republican Victory
Shares of several drugmakers are on the rise this morning after the surprising victory by Donald Trump and as Republicans prepare to take control of both houses of Congress. After months of attacks from the Democratic side of the aisle, with Senator Bernie Sanders as one of the most active voices against some pharma companies and their drug pricing policies, the pharmaceutical sector is seen as one of the biggest winners of last night's election by many Wall Street analysts.
PHARMA WINS: In a post-election note to investors, Wells Fargo said it believes that one of the "big winners" of the election is the pharmaceutical industry, as Trump's victory means that some of the threats to the industry that Hillary Clinton had proposed will not be implemented. While during his campaign Donald Trump had expressed the idea that Medicare should negotiate the price of drugs, the firm noted that most believe this to be a "lower priority item" for the now President-elect, and that is still a much smaller threat than the list of Clinton's proposals, including re-importation and price control. Additionally, Wells Fargo pointed out that, according to reports, Proposition 61, which would have mandated that all California State agencies would pay no more for drugs than the Veteran's Administration, was defeated. Overall, the firm told investors that it expects the election results to provide a boost to pharmaceutical company investor sentiment.
RELIEF RALLY, RISK AHEAD: Commenting on what the election outcome would mean to the sector, Citi analyst Andrew Baum said he expects a "'relief rally" to drive near-term outperformance for names in the space. Longer term, however, the analyst noted he still sees "significant continued legislative risk" for pharma reimbursement. Trump has articulated support for re-importation of drugs and Medicare price negotiation, which have been typically the preserve of the Democratic Party, and a removal of House Speaker Paul Ryan before year-end would increase the probability of adverse healthcare reform proposals, he added. However, Baum pointed out that Trump's intended U.S. tax reform may enable pharmaceutical companies to repatriate substantial offshore cash and earnings without the punitive tax rate and could facilitate a significant wave of M&A. Baum prefers GlaxoSmithKline (GSK), AstraZeneca (AZN), Shire (SHPG) and Roche (RHHBY) among European majors and Bristol-Myers (BMY) and Eli Lilly (LLY) in the U.S.
PRICING PRESSURE, POLITICAL REFORM: Not as bullish on the sector's future is Jefferies analyst Jeffrey Holford, who expects pricing pressure and political reform to remain an overhang for the pharmaceutical sector. Nonetheless, he acknowledged that a Trump victory may "not be particularly negative" for Large Cap pharma as he poses "a limited threat" to the industry. Holford told investors his top picks in Large Cap Pharma are AbbVie (ABBV), Eli Lilly, Novartis (NVS) and AstraZeneca, adding that he believes they can deliver upside regardless of the sector fundamentals, particularly given that some of the potential headwinds have already become priced into the sector.
PRICE ACTION: In morning trading, Pfizer (PFE) and Bristol-Myers have gained about 5%, Merck (MRK) is up about 4.5%, Johnson & Johnson (JNJ) and Perrigo (PRGO) have advanced over 1%, Mallinckrodt (MNK) has jumped 8%, Ariad Pharmaceuticals (ARIA) rose about 15%, Mylan (MYL) is up over 5%, Teva Pharmaceuticals (TEVA) and Roche have advanced about 4%, GlaxoSmithKline and AstraZeneca rose about 2%, Shire has jumped about 8%, Eli Lilly has gained over 4%, AbbVie is up 4.5%, and Novartis has advanced almost 3%.
Disclosure: None.