It has been some weeks since Donald Trump's shocking upset win in the U.S. presidential election, and it will remain quite some time before the dust settles. However, business and biotechnology continue apace, and while it may be too early to predict the President-elect's impact on our industry, reading the tea leaves and watching the shifting winds will be a spectator sport going into the New Year.
Before the election, it appeared businesses were worried that Hillary Clinton would be investigating pharma and biotech, especially with the newsworthy excesses reported this past year. Worry about new regulations, price controls, and increased difficulties in drug approvals was part of the general uneasiness that contributed to a slowdown in investment, as was a reluctance on the part of healthcare-related companies to seek financing in 2015–2016.
However, in the run-up to Election Day, stocks strengthened on hopes for a rally. After Election Day, that rally turned into record-shattering highs, with the Dow Jones Industrial Average topping 19,000 for the first time on November 22. The markets reacted to hopes that a Republican White House and Congress would be more friendly to investors and business, to the President-elect's promise to invest in infrastructure, and in particular, to his campaign promise to repeal Obamacare, a.k.a. the Affordable Care Act (ACA).
Biotech also rode that wave, at least initially. In the days following the election, the Nasdaq Biotechnology Index (NBI) gained over 10%. The iShares Nasdaq Biotechnology ETF (IBB), which tracks the NBI, made corresponding gains, reflecting confidence in large- and mega-cap biotech firms. The SPDR S&P Biotech ETF (XBI), which is benchmarked to the S&P Select Biotech Industry Index, containing more small- and mid-cap biotech stocks, jumped 15% from November 8 to November 14.
Yet, by the beginning of December, the IBB sank from the November 14 high of 293.09 to 270.46 on December 1, giving up about two-thirds of the gains made in the November 8–14 period. Similarly, the XBI dropped from a high of 68.13 to 61.14 in the same period, losing more than half the ground won. Let's consider some possible drivers of these movements.
The Affordable Care Act—A signature facet of Trump's campaign promises was the repeal of Obamacare. Yet, since Election Day, Trump has walked back some of those statements, admitting that some parts of the ACA are useful and could be kept. As a practical matter, it may take years to repeal the ACA and develop and implement an alternative plan. During that time, continued uncertainty in the healthcare sector will lead to businesses taking a more conservative view of investing and hiring, which will hurt the economy in general.
Drug price controls—While Clinton and Bernie Sanders were outspoken on controlling and reducing pharmaceutical prices, it would be bold to imagine the populist President-elect would support price increases. On the contrary, Trump on the campaign trail floated two ideas to reduce drug prices: 1) import drugs from countries where prices were lower than in the U.S., and 2) allowing Medicare to negotiate drug prices directly. A majority of Americans believe drug prices are too high and in fact, the demonizing on Capitol Hill of Turing's Martin Shkreli and Mylan's Heather Bresch was decidedly bipartisan. And both the public and insurers will continue to press for lower formulary pricing and greater rebates.
The Medical Device Tax—One particularly unpopular component of the Affordable Care Act was a 2.3% medical device tax, which caused concern across the healthcare spectrum. While medical device companies were understandably fearful of reduced profit margins, lower R&D budgets, and layoffs, prices would have risen across the board, increasing the burden on hospitals and doctors and patients. The election of Trump makes a repeal of the tax more likely than if Clinton had won, but again, the repeal had bipartisan support in the House of Representatives. In addition, the tax was already suspended last December, when President Obama signed a taxation and spending bill, temporarily freezing the tax for 2016 and 2017—thus the tax is not currently being levied and quite possibly will be done for by 2018.
Health and Human Services Secretary—Trump has tapped Congressman Tom Price of Georgia, a conservative Republican and outspoken critic of Obamacare, to head the Department of Health and Human Services (HHS). While Price was once an orthopedic surgeon, his record indicates he would like to cut federal spending by reducing funding for both the National Institutes of Health and for public health initiatives, as well as by developing new federal guidelines. It is presently unclear in what direction he would take HHS, but it has been reported that Price is opposed to embryonic stem cell research and funding for Planned Parenthood.
Similarly, it is not known if Trump will have Robert Califf stay on as the Commissioner of the FDA, a position he has held only since this past February, and one he won with strong bipartisan support. In any case, it would appear that the proposed FDA generic drug-labeling rule regarding “sameness” that would end preemption of generic end users from filing tort actions is doomed. The comment period for that rule was extended multiple times, most recently in May 2016, to after the inauguration next year.
Repatriation of foreign-parked funds—It has been estimated that nearly $100 billion is being held overseas by U.S.-based pharmaceutical companies, and the President-elect has indicated he wants to relax rules to allow that money to flow back into the country. The upside would be more funds available to companies to invest in R&D, acquire promising early-stage drug candidates, and hire talent. Even independent of changes to the tax code for corporations, the end of a contentious election cycle will allow for an uptick in M&A and the refreshment of pipelines.
The Food and Drug Administration—In September, the Trump campaign put out a fact sheet complaining that the “FDA Food Police” rules on farm and food production hygiene, food packaging, food temperatures, and inspections of food facilities were unnecessarily stringent. The campaign did not elaborate on what rules regarding safety and hygiene would be eliminated and it no longer offers a live link to that particular fact sheet. Still, cutting spending by relaxing safety and hygiene regulations that protect the public seems to be a recipe for disaster, for example, if we were to imagine the Chipotle debacle magnified by many times.
In addition, Trump indicated in his First 100 Days Action Plan that cutting red tape at FDA was a priority in order to fast-track new drug approvals. While this should be good news for the industry, there has already been criticism of FDA's September approval of Sarepta's controversial eteplirsen for Duchenne muscular dystrophy. The agency overruled an FDA advisory committee concerned over slim clinical data that showed the new drug, also known as Exondys 51, increased dystrophin (the protein missing in boys with the disease) by a minimal amount. It is apparent that future clashes at the intersection of efficacy, robust clinical data, orphan drug status, and patient advocacy are on the way.
In the interim, we have no idea which campaign promises made by the Trump team will be borne out. We have seen the President-elect suggest a fence rather than a wall in some places along the Mexico-U.S. border; a top advisor signaled that there would be no further probe into Clinton's e-mails; and pundits have suggested that the Trump administration is not draining the swamp, but restocking it with Washington insiders. Even the recent news that Carrier would preserve about half of the roughly 2,000 jobs it planned to send to Mexico went hand-in-hand with $7 million in incentives to Carrier from the state of Indiana. Sanders decried the deal, warning that corporations can threaten to move jobs out of the country to secure tax benefits and incentives.
The biotech indexes have seesawed back and forth this entire year, since the precipitous drop-off at the close of 2015, and there appear no concrete reasons to believe that will stop anytime soon. Yet, we are only at the seminal stages of a new presidency, and while uncertainty rules the roost, there are also many reasons to hope for better times ahead. A prosperous New Year to all!
