Many major pharmaceutical and biotech stocks are highly affected by political pressure, which can hold stocks back from reaching their full market potential and increasing unpredictability in the market.
Many major pharmaceutical and biotech stocks are highly affected by political pressure, a recent analysis by investment research firm Morningstar found. That is, political pressure on drug prices often holds pharmaceutical stocks back from reaching their full market potential.
Political influence on pharma stocks is not a new idea: politicians have targeted high drug prices since before the healthcare reform period of the ’90s. A 2006 investigative study published in The RAND Journal of Economics stated that pharmaceutical companies reduce growth in drug prices in response to political pressure.
Today, industry vulnerability to politics is still prevalent. A single tweet by presidential hopeful Hillary Clinton in September about “outrageous” price gouging in the specialty drug market sent biotechnology stocks plummeting 4.7% immediately after. After Congress questioned large price increases in drugs by Valeant Pharmaceuticals, its stock price fell 16.5%.
The political rhetoric usually presents on the heels of high-profile cases of pharmaceutical spending or price hikes, such as in the recent story of Martin Shkreli, the ex-CEO of Turing Pharmaceuticals who hiked the price of his company’s AIDS drug by 5000%. But Morningstar analysts said this kind of rhetoric only increases unpredictability in the markets. Without major reform, no significant changes in drug prices should be expected in the near future.
Morningstar analysts also zoned in on 3 companies that they say are particularly undervalued: Amgen, Biogen, and BioMarin Pharmaceuticals.
Amgen, the world's largest independent biotechnology firm, is labeled with a competitive advantage that is strong enough to keep competitors at bay for 20 years.
"Amgen has several innovative biologic therapies that have turned into blockbuster products and generated consistently high returns on invested capital," Morningstar said. The company's fast-growing approved drugs should help it rise above biosimilar competition.
Biogen, a player in the multiple sclerosis market, offers injectable, oral and high-efficacy treatments. Even in a competitive MS market, Morningstar said they still think Biogen has a dominant portfolio that can withstand this pressure. Even BioMarin, a company focusing on ultra-rare diseases and facing high research expenses, is expected to increase in number of key products. That, combined with BioMarin's lack of competition, should bode well, Morningstar said.
Other firms were also identified as being undervalued due to minor events in their past that created concern for stock. But the Morningstar analysis expects that the firms’ competitive advantages will keep them from folding.
"In general, it's becoming more of a stock picker's environment," said Damien Conover, director of healthcare equity research and equity strategy for Morningstar. "The stocks should do well, despite the political rhetoric coming out of Washington."