“Price gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on”. @HillaryClinton, Twitter, 21 September 2015
“Every politician has a promising career. Unfortunately, most of them do not keep those promises”. Jarod Kintz, This Book is Not FOR SALE, 2011.
Tens of billions of dollars were knocked off the market value of the healthcare sector in recent days after Hillary Clinton’s interventions on prescription drug pricing highlighted aggressive price hikes on some older specialty drugs.
Her plan, which is summarised on HillaryClinton.com, recommends, among other proposals, parallel importing from cheaper ‘safe’ markets outside the US and allowing Medicare to negotiate directly with drug companies. It is these two proposals that could have the biggest impact on drug pricing, although previous attempts to legislate them have failed.
Overview of the Clinton proposals
- a stop to excessive profiteering and marketing by denying tax breaks for direct-to-consumer advertising
- a demand that drug companies invest in R&D in exchange for taxpayer support
- encouraging competition to get more generics on the market
- create a Federal backstop for when there are excessively high-priced drugs that face no competition
- cap what insurers can charge consumers in out-of-pocket costs
- parallel importing from cheaper ‘safe’ markets outside the US
- allowing Medicare to negotiate directly with drug companies
On the face of it though, Mrs Clinton’s plan is credible, and it’s not hard to understand the depth of feeling many voters will have in the week that Turing Pharmaceuticals raised the price of one of its newly acquired drugs from $13.50 to $750 for a single pill, leading to widespread criticism and outrage.
However, do the proposals in themselves merit such a negative impact on share prices? The answer must lie in considering how likely it is that Mrs Clinton wins power, and how likely it is that she would be successful in passing such measures once in power.
On the former, looking at the betting odds available on the US Presidential Election 2016, Mrs Clinton is clear favourite (6-4), with Donald Trump available at 12-1, and the slightly less likely Kim Kardashian priced at 1000-1.
US Presidential Election 2016 – selected odds
Hillary Clinton 6-4
Jeb Bush 5-1
Donald Trump 12-1
George Clooney 500-1
Kim Kardashian 1000-1
However, one has to question how accurate these implied forecasts are likely to be. Prior to the recent UK general election, a Conservative majority was implied at a roughly 9% chance of happening, while a renewed Conservative-Liberal Democrat coalition had around a 27% chance – both extremely wrong with the benefit of hindsight. Kim Kardashian didn’t get a look in…
On the likelihood that Mrs Clinton would pass such measures were she to gain power, she would not only need to win the election, but also have the Democrats take control of Congress and the Senate, and crucially she would need to follow through on her pre-election promises.
The latter point is not a given – www.politifact.com tracks Barack Obama’s pre-election promises via their ‘Obameter’ – currently they estimate he has kept just 45% of over 500 promises made during the 2008 and 2012 electoral campaigns. Other commentators point to Mrs Clinton’s failure to introduce significant healthcare reform in the early 1990s when her husband was president and she was tasked with doing so.
So it could be that with a refined view of probabilities the negative impact on biotech/pharma companies has been overdone – although others have argued that with the fantastic run they’d been on, and with valuations stretched, they were ripe for a pull-back, irrespective of Mrs Clinton’s interventions. At the very least then, between now and the election date of 8 November 2016, when politicians speak and markets move, it would be wise for investors to question the probabilities behind the politicians’ utterances, as the subsequent market reaction may throw up investment opportunities for the long-term investor.
As Brent Saunders, chief executive of Allergan said regarding Mrs Clinton’s proposals – “she’s a candidate, a presumptive leader in a primary race — you have to put things in context.”
I couldn’t agree more – investors would do well to remember this as politicians propose new policies in the coming months.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.