27 October 2016
Investors should sell biotechnology stocks and related shares and funds if Hillary Clinton wins the presidency. Photo: Bloomberg
Investors should sell biotechnology stocks and related shares and funds if Hillary Clinton wins the presidency. Photo: Bloomberg

Why US presidential election may affect biotech stocks

The average life expectancy has kept rising over the last decade thanks to fast developments in healthcare and technology. Currently, Hong Kong has the world’s longest-living women.

However, many people have been diagnosed with “three-hypers” before they reach 40, and they have to rely on medications to extend their life expectancy. Market demand for drugs and supplements have risen rapidly.

I’ve pointed out in previous columns that I’m bullish on healthcare and biotechnology sectors in the long run, as these firms have strong cash flow, and low capital costs will encourage pharmaceutical firms to acquire rivals, which would boost share prices.

Drug prices may surge as much as several dozen times after the acquisition. That would bolster company earnings and share prices as well.

I have a friend who is a stem cell expert in the United States. He has received donations from billionaires around the world, and some even donate all or majority of their wealth to him for medical research.

They hope advanced stem cell technology could save their lives and those of their loved ones. They are willing to pay any cost for even just a ray of hope.

Drug prices have increased much faster than other goods every year.

Former US president Bill Clinton had pledged to crack down on drug price increases when he ran for president. Drug-related shares plunged after he took office, and provided a good buying opportunity for long-term investors. Healthcare stocks started to rebound thereafter.

His wife Hillary recently unveiled plans to rein in prescription drug costs in a bid to win back voters’ trust after her reputation has been tainted by the email scandal. She also intends to target pharmaceutical and biotech industries.

Some commonly-used drugs have witnessed price increases of several dozen times overnight.

Last year Canadian pharmaceutical group Valeant acquired two drugs for heart diseases. It later hiked the price of Vial of Inuprel six times to US$1,346.62 and Nitropress three times to US$805.61.

Daraprim, a drug with a 62-year history, saw an overnight price increase of 50 times after it was acquired by startup Turing Pharmaceuticals in August. The company explained “it’s only a market move to close the price gap with other drugs”.

Hillary Clinton said Obamacare, President Barack Obama’s signature health law, has already made some progress in pushing healthcare reform.

However, steep price increases show that patients have developed strong dependence on certain drugs even if their prices have become so expensive — unless they find a better substitute.

Hillary’s pledge to lower drug prices has caused the Nasdaq biotechnology index to drop by 5 percent.

Investors should sell all related stocks or funds if she wins the presidency. The sector would see more volatility in the short term.

Also, investors could adopt a hedging strategy. They could short biotech stocks or the sector at first and buy pharmaceutical stocks as a hedge.

Biotech stocks usually see dramatic falls and could generate huge profits even if pharmaceutical stocks also fall modestly.

Once Hillary wins the presidency and revives her husband’s action, the whole sector could suffer a huge correction, as we can see from the sharp falls of two healthcare funds after Clinton took office in 1993.

This article appeared in the Hong Kong Economic Journal on Sept. 24.

Translation by Julie Zhu

[Chinese version中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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