How Biotech Investors Can Survive Election Season

Presidential elections can be rough for biotech investors, but industry fundamentals are strong

Biotech investors, who typically have firm knowledge of disease pathology, tend not to be a squeamish bunch. But a looming presidential election could still cause them some visceral discomfort.

After a public uproar over instances of alleged price gouging, prescription-drug pricesbecame a major campaign issue during the 2016 election cycle. With both leading candidates harshly criticizing pricing practices, it seemed possible that the industry’s favorable economics would face a complete overhaul. That triggered a stock-market beating: The Nasdaq Biotechnology Index fell about 40% between the fall of 2015 and early 2016.

Though drug pricing has taken a back seat so far in the 2020 election cycle, investors shouldn’t dismiss the possibility of another election-related selloff. That same index has rallied more than 40% since March but has drifted lower since July. Democratic nominee Joe Biden has vowed to implement policies that the industry has long resisted. These include creating a government panel to review prices of new drugs without competition and enabling Medicare to directly negotiate drug prices with manufacturers. These policies would be particularly concerning for shareholders in more speculative biotech companies. These tend not to have current sales or profits, and derive their market value from visions of huge payoffs in the distant future. Even a mild form of price controls would cause shareholder value to wilt.

Prediction markets are implying roughly even odds that Democrats sweep the White House, Senate and House of Representatives in November. It isn’t too difficult to imagine a company introducing a price tag on, say, a Covid-19 therapeutic or vaccine that elicits an uproar in the near future.

History suggests that investors should take advantage if stocks go on sale, however. For starters, Mr. Biden is an ardent supporter of the Affordable Care Act, which remains the law of the land and has provided a very good framework for the drug industry—it is easier to sell medication to patients who have health insurance, after all. It would be a mistake to underestimate the political heft of the pharmaceutical industry no matter who is installed in Washington, D.C. And while the last pricing scare was brutal for investors in the short term, no significant policy changes ever materialized.

Meanwhile, President Trump signed an executive order on Sunday to reduce the cost of prescription drugs for U.S. seniors by more closely aligning prices with what pharmaceutical companies charge in other countries. But the order, which depends on federal rule-making to implement, won’t have any effect on pricing before the election, if at all.

In the meantime, other key industry fundamentals are in fine health. Access to capital has hardly ever been easier. That leads to a steady stream of venture-capital fundraising, as well as initial public offerings and fresh stock sales for companies already on the open market. Large pharmaceutical companies tend to have large cash piles and plodding sales growth, which means they generally are willing to pay up for promising assets. Gilead Sciences GILD 0.02% announced a $21 billion deal for Immunomedics IMMU 0.22% on Sunday, which sparked a furious biotech rally on Monday.

Those dynamics will likely outlast any market selloff, no matter much heartburn this election causes.

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