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Deja Vu for Drug Stocks as Trump Slams Drug Pricing Again

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It was déjà vu for the healthcare sector with pharma and biotech stocks once again being hit by President-elect Donald Trump’s comments regarding drug pricing. Although drug stocks had rallied following Trump’s surprise win in November reflecting relief that the price controls that Hillary Clinton was planning to implement would not happen, the relief rally turned out to be short-lived with Trump saying in a December interview to TIME magazine that he does not like price increases.

Meanwhile, the latest comments were made yesterday at Trump’s first news conference since his election in November.

Bring Back the Industry

While speaking on bringing back companies to the U.S., Trump spoke extensively about the drug industry and said that the industry has been “disastrous” with drugs being supplied in the U.S. but not being made here to a large extent. While additional details were not provided, Trump was likely referring to several companies that manufacture their drugs or the active pharmaceutical ingredients for their drugs outside the U.S. as well as companies that went for tax inversion deals and changed their domiciles to avail lower taxes.

Getting Away with Murder?

Trump also spoke about creating new bidding procedures for the drug industry, which he claims has been “getting away with murder”. He referred to pharma companies having a lot of lobbyists and power, with there being very little bidding on drugs despite the U.S. being the largest buyer of drugs in the world.

Once again, details regarding how prices will be lowered were not given though during the election campaign, Trump had talked about drug re-importation and allowing Medicare to negotiate prices.

Impact on Drug Stocks

Both pharma and biotech stocks were impacted by Trump’s comments with the iShares Nasdaq Biotechnology ETF and the NASDAQ Biotechnology index declining almost 3% each and the NYSE ARCA Pharmaceutical index dropping 1.7%.

Medical - Biomedical and Genetics Industry 5YR % Return

Almost all major pharma stocks recorded a decline in share price yesterday though Merck & Co., Inc. (MRK - Free Report) was an exception -- Merck’s shares were up 2.9% yesterday on news that the FDA has granted priority review to the company’s regulatory application seeking label expansion of Keytruda for use in combination with chemotherapy for the first line treatment of a certain type of lung cancer. Timely approval would give Merck a head start in this patient population which represents huge commercial potential. While Merck currently holds a Zacks Rank #3 (Hold), you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Meanwhile, some of the big names that saw quite a dip in their share prices yesterday include companies like Biogen Inc. (BIIB - Free Report) , Valeant Pharmaceuticals International, Inc. , Mylan N.V. , Alexion Pharmaceuticals, Inc. , and Endo International plc among others.

Companies like Valeant and Mylan have been very much in the center of the drug pricing controversy with Valeant being criticized for its pricing policy and Mylan for the pricing of its life-saving combination drug, EpiPen. In fact, Valeant lost a major part of its market cap with its share price dropping 82.5% over the last one year compared to the Zacks categorized Medical-Drugs industry decline of 10.2% during this period.

What Next?

Given the latest commentary on drug prices and the drug industry, it is pretty obvious that this issue will remain an overhang on the sector till more details regarding the new administration’s plans are available. Allergan’s CEO Brent Saunders has long been warning of such a scenario. At a conference last year, he had said that Trump’s election as the next President does not mean that the focus will be off drug prices. He pointed out that affordability would remain a key area of discussion as many Americans are angry about the rising cost of healthcare and their medicines. Saunders has been an advocate of self-regulation and has been urging other companies to limit price increases before the entire industry faces the impact of government regulation that stifles innovation and patient care.

We expect the sector to remain volatile in the coming weeks as the drug pricing scenario plays out.

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