In a historic vote Thursday, Britain has decided to leave the European Union. And, swallowing hard, financial markets around the world are not taking the news very well.
Stateside, the Dow Jones Industrial Average dropped 610.32 points Friday, and the S&P 500 Index plummeted by 4%. High-beta growth stocks like those in the biotechnology sector were getting hit even harder.
The iShares Biotechnology Nasdaq Exchange Traded Fund (ETF) closed down 5%, which is a sizable move when added to the huge hit that this ETF has taken year to date.
Exposure to the U.K. is low among big U.S. biotechs, but the dangers may lie elsewhere, say analysts. Biotech stock analysts pondered the potential impact of the Brexit Friday morning, finding that most big U.S. biotechs have low exposure in the U.K. but could run into other headaches.
Exposure to the European Union in general ranged from 9% for Regeneron Pharmaceuticals Inc. (Tarrytown NY)to 37% for Celgene Corp. (Summit NJ), according to Jefferies. Celgene nevertheless told Evercore ISI that less than 1% of its revenue comes from the U.K. Gilead Sciences Inc.’s (Foster City CA) EU exposure is 19%, while its U.K. exposure is 2.9%, according to Evercore’s calculations.
Elsewhere in the markets, pharmaceutical stocks were one of the few risers on the the FTSE 100 (Financial Times Stock Exchange 100 Index, or, informally, the “Footsie”–a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization), as investors ditched risky assets and fled into what is seen as a safe-haven sector.
Some analysts think pharmaceutical firms will remain largely unscathed from a Brexit, given that most make the lion’s share of sales and profits outside of the U.K. and many even report in U.S. dollars. They’re also largely de-coupled from macroeconomic and political events because, whatever the wider economy is doing, people aren’t going to stop needing drugs, according to analysts.
Edison Investment analyst Maxim Jacobs said in a research note that the foregoing measurements of exposure for biotech and big pharma were “looking at the wrong kind of risk. The risk is if a global bear market kills biotech (and research) funding.”
Needham analyst Alan Carr wrote that Britain’s separation from the EU will also bring regulatory complications down the road.
“The European Medicines Agency (EMA), which conducts a centralized drug review process for Europe, is based in London,” Carr wrote in a research note. “If Article 50 (the withdrawal clause) is invoked, the EMA will need to move, and the U.K. will need to establish a new, separate regulatory organization. “Although we do not expect a meaningful impact on companies with drugs now under review by the EMA, Brexit will lead to a less efficient, more expensive, and potentially lengthier regulatory process for companies seeking approval in the EU and U.K.”
Steve’s Take: Although Brexit does create economic uncertainty, and there will be some near-term volatility in the healthcare sector, I believe that Brexit’s impact on drug stocks, for example, will be limited.
Yes, I was among those completely surprised by the way the vote went, but the key to me is that such vote doesn’t affect whether people are now or will be sick in the future.
Of course, pharmaceutical and biotech companies may see some affect, but they could also benefit from a falling pound and stronger U.S. dollar. Most of these companies generate a major portion of their revenues from America.
Other healthcare players such as hospital operators HCA Holdings Inc. and Tenet Healthcare Corp., and insurers such as Aetna Inc. and Anthem Inc.—all even less global in nature–would feel even less of a negative impact.
That would make them a good defensive play, some say. But given the fact that the “Leave” side has no action plan ready to kick in anytime soon, it’s clear to me the whole process of disconnecting from the EU will take at least a couple of years to implement.
A lot can happen in two years. Perhaps better to just take a deep breath and do nothing right now.