Electing For Poor U.S. Healthcare?
We review the impact of the U.S. election on this sector
As we approach the presidential election in November, rhetoric from Clinton and Trump continues to shape perceptions towards the U.S. healthcare market. Figure 1 below shows the iShares U.S. Healthcare Exchange Traded Fund (ETF) underperforming the S&P 500 by almost 6% since the start of August. This likely reflects the consensual view from the companies we have recently visited, that drug pricing will remain under pressure whichever new administration takes over.
One key problem facing the U.S. is that health expenditure represents 17.5% of Gross Domestic Product (GDP) which is considerably higher than the major developed healthcare markets. By contrast the U.K. sits at around 9% as shown in Figure 2. Arguably, this helps to explain why healthcare is an area of such political focus.
Source: World Health Organization Global Health Expenditure database
Knowing who is responsible for the huge premia that the American consumers are forced to pay on health costs relative to other nations is a challenge made all the more difficult by the lack of visibility in the system. Drug companies are the easy target particularly in an election year and there has been plenty of evidence of this recently. While investor sentiment wavers, attacks on so-called ‘price gougers’ have given rise to selective but substantial share price declines. Mylan Pharmaceuticals, for example, had increased the price of EpiPens by more than 400% after acquiring the autoinjector which helps to calibrate the dosage of adrenaline delivered. Clinton saw the opportunity to make headlines and the shares fell 25% in the 6 weeks* after she tweeted, “EpiPens can be the difference between life and death. There’s no justification for these price hikes. –H”. Valeant Pharmaceuticals is another example of a company that was targeted in a recent Clinton advertising campaign. (Click to read)
Staying out of the spotlight…
Given political rhetoric, questions over fiscal headroom and healthcare spending reaching excessive levels, the sector has been adversely impacted from a market perspective. In meeting a wide range of businesses on our recent trip, there was an overarching agreement that companies must provide innovative drugs supported by strong clinical data in unmet areas of patient demand. Without this genuine differentiation, they will struggle to maintain pricing power. The industry is now waking up to the fact that ‘me-too’ products that replicate existing treatments are not going to get paid for.
Not all doom and gloom…
Despite such negative sentiment on pricing, company fundamentals remain strong; product pipelines are robust and we are likely to see big advances this year in fields such as cardiovascular disease, Muscular Dystrophy and Multiple Myeloma amongst others. It should also not be forgotten that America is unlikely to want to lose its reputation as the global leader in ground-breaking research and development (R&D). R&D is expensive, however, and requires a sufficient level of pricing to justify it suggesting that a balance will have to be found.
When it comes to making investment decisions, these aforementioned trends help to guide our focus. We aim to target reasonably priced businesses that innovate in areas of the market that are not overly competitive. Ideally, they will be well capitalised and run for shareholders – that is to say that if attractive R&D or high returning pipeline expanding opportunities do not exist, management teams are happy to return capital through buybacks or dividends.
By Tommy Faber
*data from FactSet
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