07 November 2016
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The global healthcare sector has faced several headwinds in 2016 – including competition from generics, the threat of biosimilar drugs, lower returns from R&D, anaemic pipelines and US pricing pressures. Year-to-date, the healthcare sector has underperformed the wider S&P 500 by more than 10%. It is a similar story in Europe, with Swiss giants Roche and Novartis underperforming the market by 17% over the same period. UK healthcare names have held up well, particularly post Brexit, with large-cap companies like GlaxoSmithKline and AstraZeneca benefitting enormously from the sharp decline in sterling versus the US dollar.
As for the upcoming US election, healthcare is clearly a key issue for voters. The US spends over 17% of GDP on healthcare, the highest in the world by some distance. The majority of Americans have some form of health insurance, the highest level of coverage at any time in history. However, millions still remain uninsured, and for those lucky enough to have cover, the quality is questionable and already high costs are trending up. The introduction of the Affordable Care Act, better known as ‘Obamacare’, has been divisive across both parties. Both US presidential candidates have expressed concern over the cost of healthcare, with Clinton being the most aggressive, especially regarding the prices of pharmaceutical drugs.
The US presidential election has been the largest overhang for the sector, with both candidates holding differing views on Obamacare. Clinton wants to maintain and expand access to it, but Trump wants to repeal it. Trump’s seven-point reform proposals – which include replacing Obamacare, reforming Medicaid and use fiscal incentives – is likely to cost hundreds of billions of dollars and leave several tens of millions of people uninsured. The impact will be most acute for those individuals and families on low incomes. The more extreme plan to allow for drug imports to be sold in the US is unlikely to pass both houses of Congress, more so without bringing the FDA onside. However, the one issue both candidates agree on is the opposition to higher drug prices, which can be perceived as a negative for the sector. Despite this, it will be less of an issue for healthcare companies developing innovative drugs able to deliver both patient and health economic benefits.
The questionable pricing strategies hitting headlines in recent months – from the likes of Valeant, Mylan and Turing – have resulted in policy makers and the wider public questioning the exploitation of distortions in supply and demand by company managements. While the majority agree pharmaceutical companies should be compensated for R&D innovation, there is also a need for regulation to ensure patient interests are not overridden in the pursuit of profits by rogue market participants.
Despite the aggressive rhetoric, any major change to the current healthcare framework in the US is unlikely to take place unless the winning candidate wins both houses of Congress. Republicans have a track record of opposing previous attempts to enact drug-price controls. The near-term impact to the sector is likely to be slightly negative as both candidates campaign aggressively at this very late stage, but the sector remains in rude health over the medium to long-term – with large-cap companies showing strong cash flows and rising dividends, supported by robust balance sheets. A Clinton victory next week would mean less uncertainty and could provide the grounds for a re-rating of the sector. However, a Trump presidency would likely bring greater uncertainty, which could lead to further downward pressure on the sector.
Ketan Patel, fund manager at EdenTree Investment Management
