BioPharm Executive: What Could Trump's Meltdown Mean for Biotech?
Published: Aug 30, 2017
August 30, 2017
By Karl Thiel for BioSpace.com
Should Big Biotechs Kiss Their Lower Corporate Tax Rates Goodbye?
For a little while, it looked like healthcare reform might really happen. A Senate GOP bill that would have largely repealed and reshaped Obamacare was passed to the Senate floor for debate and came within a hair's breadth of passing. And all the while this bill was taking shape in secret, a funny thing happened: Stocks rallied. The movement of the markets—both during and after the repeal-and-replace effort, and even up to today—says a lot about where things are going for this president and for the life sciences industry.
Healthcare stocks in particular surged forward while the Senate was working on its repeal and replace bill. Broad indices like the Health Care Select Sector SPDR ETF (XLV) and the iShares U.S. Healthcare ETF (IYH) rallied sharply through the month of June, adding to gains from early in the year. The chatter from sources like USA Today, Fox, The Wall Street Journal, CNN, and others was that Wall Street generally liked what it thought would be in the bill. Even if investors didn't know the specifics, it was assumed that reform would mean lower regulation, a friendlier business environment and tax breaks for the wealthy (this last item being pretty well assured). "Health care stocks soar on Senate reform bill!" is a representative headline from late June.
Yet after the failure of the bill, the indices largely stayed put. Each is off by about 1.5% since the bill was voted down on July 27, and both are still up sharply for the year. You can say pretty much the same thing for the iShares Nasdaq Biotechnology ETF (IBB) and the NYSE ARCA Biotech Index (BTK).
While markets can't see the future and are often "wrong," they are not biased or partisan. The movement of these indices is the best weighted opinion available on what investors think the future holds for the healthcare sector. So are we to believe that the market essentially doesn't care how or whether one-sixth of the economy is reshaped?
Not exactly. Outside of a few specific companies, I don't think stocks have really rallied on the prospect of healthcare reform; they have moved on the complete dysfunction of Washington. And the repeal-and-replace debacle says one thing loud and clear: nothing is happening on drug prices anytime soon. Biotech investors like that message well enough, but they also hear a whispered rejoinder: maybe nothing of any kind is going to happen.
On repeal and replace, there was at least general agreement between GOP leaders and the White House, and it still didn't happen. Given Trump's poor relationship with legislators, it's unlikely that anything on drug prices—an issue on which he is more aligned with Democrats—will happen in the foreseeable future.
Of course, that cuts both ways, which explains why healthcare and biotech stocks have been moving more-or-less sideways since the failure of the Senate bill. Something many conservatives and many investors would dearly like to see is tax reform. Cutting the corporate tax rate from 35% to 15%, as Trump has proposed, would be a big boon for any companies that, you know, pay taxes. While that exempts a lot of the biotech sector, companies like Gilead Sciences , Regeneron , and Biogen (all of which expect an adjusted tax rate north of 25% this year) would certainly see a major boost to profits. And they're not alone. (It is notable that the unveiling of his tax plan resulted in the only improvement to his approval ratings Trump has experienced since entering the White House.)
But unfortunately for those hoping to see tax reform, the president seems to have squandered whatever goodwill he may have once had. While tax reform is an area near and dear to the heart of the GOP, the markets right now are seeing that Trump continues to distract from his own policy agenda, and that's keeping a lid on things. A Republican House, Republican Senate, and Republican White House could end up missing a slam dunk. Stay tuned.
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