Biotechnology has become an area of increasing interest for retail investors over the past decade, not least because stockmarket outperformance has been considerable. The Nasdaq Biotechnology index has gained 588 per cent over the past decade in sterling terms, for example.
The picture has become more complicated of late. Major headwinds, caused by various factors such as talk of the US federal government imposing drug price controls and the general impression that the bull market is on its last legs, weighed on investor sentiment in the healthcare sector, particularly during the second quarter.
Sector concerns for drug stocks were fuelled once more by political rhetoric, policy papers and presidential tweets, variously pointing to potential US government-led price controls, and more likely setting up campaign platforms in anticipation of the mid-term elections later this year.
Investors have been cautious about the risk of drug price control legislation – or, equally, executive orders from the president or actions by federal administrative agencies – and this sentiment has been associated with continuous negative fund flows for the biotech space. These generalist investor reactions are understandable, but there is an argument that some of the strategic ideas being discussed in US healthcare are constructive.
In the complex US healthcare system, improved transparency and the removal of inefficient incentives will ultimately spur innovation. The best innovation will create the best drugs, which, when priced for cost-effectiveness and responsible budget impact, will continue to create huge value for shareholders.
The US Department of Health and Human Services (HHS) has proved to be a steadying influence on the White House so far. As for drugs, the Food and Drug Administration (FDA) is leaning firmly in support of authentic innovation – despite FDA challenges of expert staffing and the need for other resources.
Both the FDA and its parent, the HHS, will play key roles in shaping the US government’s position vis-a-vis the drug industry. We anticipate sensible executive actions to reduce drug development timelines; lower complexity and contain costs; administer intellectual property rights in ways which reward innovation; and call out price gouging. They should also shine a light on some of the US market’s arcane incentives associated with the commercial value chain to reduce out-of-pocket expenses for patients and rebates for intermediaries.
It all adds up to smart evolution, not sizzling revolution in US drug access, pricing and reimbursement, despite leaders who are anxious to score popular votes. Over the foreseeable future, we believe the US healthcare system will restructure, reorganise and reassign capital steadily and successfully to create an increasingly competitive, information-rich, efficient and value-based market. In several ways, such change is already here.
New players such as Alphabet, Apple, Amazon, Berkshire Hathaway and many others are driving novel ways of working to deliver care, with more to come. These ideas are more promising than punishing for smart biotech firms, because although the US government will be tough on the biotech sector, market forces will be more important than government intervention per se.