What The...?! It’s Trump!

November 30, 2016
By Karl Thiel for BioSpace.com

Orange Is The New Black: Is the post-election biotech rally a sign of more to come?

Well, I couldn’t have been more wrong with the premise of last month’s column. Like much of America, I listened to pundits and polls, and assumed that Donald Trump wouldn’t be able to overcome the very long odds required to beat Hillary Clinton. The point of that column was really to grapple with what seemed like an inevitability: Clinton, her likely impact on the biotech sector, and her role in escalating prices of drugs. I ignored Trump primarily because I thought he’d soon be irrelevant.

That’s not to say I didn’t have an opinion. I believe Trump’s election—indeed, his mere campaign—has already been tragic for the U.S., in ways that could take decades to unwind even with the best of efforts. But that largely has to do with his racist, xenophobic, homophobic, misogynistic rhetoric and the politics of division. In terms of actual policy, well…he’s left a lot of blank pages.

Naturally, that’s not stopping the markets from reading between the lines. Another big post-election surprise has been a (moderate) rally in the stock markets and a (massive) rally in biotech. Why is that happening?

In terms of biotech, the most common explanation being offered is that Trump’s victory puts an end to worries about new draconian drug price restrictions. As I’ve noted before, this explanation is—at least at face value—nonsensical. Trump’s firm proposals about drug price controls, reimportation and direct Medicare negotiation, are essentially identical to Clinton’s. Under a Clinton presidency, with a Republican Congress, that would have gone nowhere. Under Trump, who knows?

But perhaps that’s being overly simplistic. Clinton made this issue a centerpiece of her campaign and would surely have fought hard to make something happen. Even if she had failed to enact any legislative change, the drumbeat of negative attention would have worn on companies. We’ve already seen that pressure can force companies to cut prices (or at least make the appearance of doing so).

On the other hand, early indications are that Trump didn’t mean what he repeatedly said in the campaign. Trump’s transition website outlines priorities in healthcare, and drug prices aren’t mentioned anywhere. Moreover, VP Mike Pence, an Indianan and the leader of the Trump transition team, has close ties to Eli Lilly . (The company is his third largest all-time contributor).

The website does, however, mention an intention to “reform the Food and Drug Administration, to put greater focus on the need of patients for new and innovative medical products.” That’s neither a specific nor a unique position, but it does make Trump sound more like a standard Republican and less of a wild card.

Another reason for the rally in biotech is repatriation. Trump has proposed a one-time amnesty allowing companies to bring home overseas cash at a tax rate of 10%, with long-term plans to lower the corporate rate to 15%. That could benefit biotech disproportionately—a lot of large biopharma companies have hordes of overseas cash that could suddenly be freed up for new acquisitions (not to mention share buybacks).

Of course, I say Trump would “allow” companies to do this, but in fact the unconventional side of his plan is that he would actually force them to—because he has proposed universal taxation of U.S. corporations’ foreign income. That would mean collecting tax as foreign income is earned, wherever it is earned, rather than allowing it to be deferred indefinitely as it is now. Companies would pay the 10% whether they moved the cash stateside or not.

This is actually a Kennedy-era proposal that is anathema to most Republicans and went nowhere when last floated in the 1960s. But it is a different world now, and certainly a different political environment. It’s possible the GOP will be more receptive to the idea.

But the other thing to consider about repatriation—assuming it happens—is that it may not have the impact the market seems to be anticipating. During the 2004 Bush-era tax amnesty, billions of dollars came flooding onshore. The hope was that this cash would be reinvested domestically, creating more wealth and jobs.

That didn’t happen. Some companies paid larger dividends and bought back shares, while also cutting jobs, reducing R&D, and raising executive pay. Certainly the return of cash was a boon for investors and a legitimate reason for stocks to rally. But a long-lasting benefit to the U.S. economy? Not so much. If history repeats itself, it may well be that the Mercks, Gileads and Amgens of the world will return more money to shareholders, at least in the short term. But those weren’t the stocks that rallied most on November 9; it was smaller biotechs that have no earnings at all, much less billions squirreled away in foreign accounts.

I’m not saying that a massive repatriation of cash couldn’t influence some M&A at the margins. But has lack of ready cash really been a limiting factor on dealmaking up until now? Companies that see truly compelling strategic opportunities are likely to pursue them—even at the cost of raising debt—rather than to wait around saying ‘if only we could bring back more of our cash at a lower tax rate…’

Biotech’s big rally is certainly welcome news, even if the reasons behind it are a bit murky. As to the rest of Trump’s agenda, it’s often said that the market hates uncertainty. Right now the market seems assured and confident. I wish I could say the same thing.

(Look further in the issue for more on the election of Donald Trump.)

-Karl Thiel

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