Trump win sends pharma stocks up, while hospitals plunge; fate of Obamacare far from clear

PeteLinforth / Pixabay

Pharmaceutical stocks and bonds were among the day’s biggest winners Wednesday (November 9, 2016) as the sweeping Republican victory in US elections eased concern that price controls might be imposed in the world’s largest market for prescription medicines.

#Pharmaceutical stocks and bonds were among the biggest winners of U.S. elections Click To Tweet

Even as drug companies rallied, other parts of the health sector plunged. President-elect Donald Trump’s vow to repeal the Affordable Care Act sent shares of hospital chains and insurers tumbling on the possibility that millions of customers could lose coverage, disrupting the industry again just a few years after the landmark law took effect.

Pfizer Inc. (New York City), the biggest US drugmaker, rose 12% to 33.49 by Thursday. On the other hand, health insurers Centene Corp. (St. Louis MO) and Molina Healthcare Inc. (Long Beach CA) tumbled 17%. Community Health Systems Inc. (Franklin TN) led declines by the three largest publicly traded hospital companies, sinking 25%.

“Most biotech and pharma companies might be sighing a sigh of relief because Mrs. Clinton looked like she might do something drastic on drug pricing,” Clive Meanwell, CEO of Medicines Co., said, according to Bloomberg. Trump, he said, may have other priorities. “I suspect he’ll have bigger healthcare topics to take on first.”

Trump has furnished little in the way of detail for his health plans other than to say he would immediately repeal and replace Obamacare. Hillary Clinton made drug prices a key aspect of her campaign, and there were concerns that her administration could put substantial pressure on drug prices.

“For all he’s talked about repealing and replacing Obamacare, he hasn’t ever gotten specific about what he’d replace it with,” said Randy Parrish, a high-yield portfolio manager at Voya Investment Management, which oversees more than $208 billion. “So you’re not quite sure what that’s going to mean, or who benefits and who gets hurt.”

Republicans, who maintained control of the House and Senate, have also promised to repeal the Affordable Care Act. HCA Holdings Inc. (Nashville TN) followed Community Health’s decline, down 13%, while Tenet Healthcare Inc. (Dallas TX) plummeted 25%.

“Stocks are really taking it on the chin, because the market abhors uncertainty,” said Sheryl Skolnick, an analyst at Mizuho Securities who covers hospital companies. “We know this is the worst possible outcome, but we don’t know how bad it is.” She downgraded some hospitals and health services companies she covers, including HCA, according to Bloomberg.

A repeal of the Affordable Care Act would result in “confusion and problems if not accompanied by a clear path to a new plan,” Moody’s Investors Service analysts led by Robard Williams wrote in a report Wednesday (November 9, 2016). Fitch Ratings analysts wrote that they foresee a negative impact on credit for healthcare providers due to a decline in insured patients, which would also cause some pain for the drug industry.

Community Health has $15 billion in debt, with large chunks starting to come due in 2018 and much of it trading at deep discounts after two consecutive quarterly losses. The company has been trying to dig itself out of debt by selling assets, but its poor earnings and distressed debt mean many rivals likely aren’t interested in a takeover.

“A lot of that Ebitda would disappear” if Obamacare is repealed, said Jason McGorman, a Bloomberg Intelligence analyst who covers healthcare. “Less Ebitda means less money available to pay debt. And Community Health has already had a lot of downward pressure on Ebitda.”

Many of the publicly traded health insurers have already pulled back from Obamacare’s individual markets, meaning that the harshest impacts of repeal could be limited to companies that have stayed in the markets or benefited from the expansion of Medicaid.

Along with Centene, Anthem Inc. (Indianapolis INN) and Molina all have large Medicaid businesses.

Among the other large insurers, Humana Inc. (Louisville KY) and UnitedHealth Group Inc. (Minnetonka MN) will likely benefit from a trend toward using the private sector, rather than government programs, to deliver healthcare in a Republican administration. Both firms are big players in the private health program for the elderly known as Medicare Advantage.

Steve’s Take: I want to begin today by saying that actually repealing Obamacare under a Trump administration is going to be a lot harder than just saying it’s going to happen. I’ll elaborate later.

Still, the Republican Party’s triple win means “the worst possible outcome for [healthcare] stocks is a reality,” said Mizuho analyst Sheryl Skolnick, since eliminating the ACA would have tremendous implications across “virtually every sub-sector“ and “we have no idea what will replace it.”

“The unthinkable has happened,” said Leerink analyst Ana Gupte.

An ACA repeal would also leave 20 million people without health insurance, and end popular provisions such as free birth control and young adults’ coverage on their parents’ health insurance plans through age 26.

Despite some hints during the campaign, the effects of a Trump presidency on health care are ultimately anyone’s guess.

“Trump’s candidacy raised more questions about his healthcare proposals than it provided answers,” said a PwC report. “These economic uncertainties place significant cost pressures on industry stakeholders.”

Republican political control does not necessarily mean “that the healthcare regulatory landscape will return to a 2008-like reality,” said a Height Securities report Wednesday. “The burden of governance means that Republicans must replace the ACA with something as it is political suicide to kick 20 million Americans…to the proverbial curb.” In addition, “we believe the ongoing debate in Washington over drug pricing is essentially over,” the Height Securities report said.

Trump has also said that he would allow health insurers to compete across state lines, which he said would keep costs down and allow Americans with pre-existing conditions–who have gained coverage thanks to the ACA–to continue to have health insurance.

Health experts across the aisle have disagreed with his assessment, says Marketwatch.com.

Legalizing interstate competition would have far-reaching implications for the sector, said Mickey Levy, chief economist for the Americas and Asia at Berenberg.

Though healthcare and other sectors are “poised for a sell-off,” Leerink’s Gupte recommended buying “on weakness” stocks such as Humana, UnitedHealth, Cigna and Universal Health.

Anthem, Centene, and Molina should “face uncertainty and policy headwinds…in the years ahead,” Gupte said.

Drug and biotech companies have been under attack on Capitol Hill for the past year due to price increases for live-saving drugs like Mylan’s EpiPen and Daraprim, an HIV treatment owned by the company that was once run by Pharma Bad Boy Martin Shkreli, says CNNMoney.com.

After Trump won, Shkreli even released some previously unreleased tracks from the Wu-Tang Clan album he bought a few years ago. What a guy!

I think Trump won’t focus as much on high drug prices. Instead, in order to begin his administration with some semblance of public credibility, he may have to attempt to undo much of the Affordable Care Act, having promised such repeatedly during the campaign.

“Controlling drug prices won’t be a priority for Trump. So his election is a positive for pharma stocks and biotechs. He’s more likely to look to make changes to Obamacare,” said Amy Kong, senior portfolio manager with Fiduciary Trust Company International.

Kong said that a sell-off of the magnitude seen Wednesday may be unwarranted though. She thinks it is too soon to tell just what changes are made to the ACA.

I also agree with those who think investors may be underestimating the possibility of Trump being critical of drug companies too. Having sidled up to working class Americans and largely winning the election touting his affinity with them, he doesn’t really have much choice.

And one thing that Democrats and Republicans can both agree on is that increasing the price of a drug by more than 5,000% doesn’t pass the straight-face test, even in an extreme capitalist model.

I believe controlling price gouging will still be a major focus under Trump but that talk of the ACA being completely obliterated may be more fantasy than reality.

To begin with, full repeal of Obamacare can’t happen unless 60 U.S. senators vote for it, thanks to the filibuster. And there aren’t 60 GOP votes in the Senate for full repeal; if advocates are lucky, there will be 52.

Steve's Take: Full repeal of #Obamacare can't happen without 60 Senators Click To Tweet

But with those 52 votes, Republicans could, in theory, get rid of the filibuster. However, Senate Majority Leader Mitch McConnell (R-KY) and others have routinely expressed opposition to that idea.

At this very early juncture, it appears that the best that Trump and his Republican Congress can do is pass a partial repeal of Obamacare using the reconciliation process, which only requires 51 votes. Such a move, however, would not erase thousands of pages of insurance regulations that some believe contributed to the harsh increases in insurance premiums on the exchanges, according to Forbes.

Also daunting is the fact that Republicans haven’t reached anything resembling a consensus as to what should replace Obamacare.

Another possibility is that Obamacare is evolves–sooner-than-expected–into the program originally envisioned both by Democrats and the healthcare industry. “Fixes” to the program, such as a stronger mandate (higher fines for nonparticipation by the young healthies) and larger subsidies (to offset premium increases for those who can’t afford them) might quell the public’s current dissatisfaction and make the effort to fully repeal Obamacare politically hazardous.