NEW YORK �� Investors may pile back into pharmaceutical and biotechnology stocks if the midterm elections result in a stalemate in Congress over how to deal with escalating drug prices.
Such a stalemate would for at least the next two years lessen the chance of government-dictated pricing changes, analysts say. A Democratic sweep would be likely to shift the focus to drug manufacturers and away from the rebates that drug companies collect from selling their products to federal health plans.
"The best outcome is a split legislative branch so you get more of a stalemate for the next couple of years," William Blair analyst Matt Phipps said. "Removing the uncertainty of election outcomes is likely a clearing event so investors can focus on companies' drugs again."
Large-cap pharma stocks have rallied since the summer. Analysts see further gains for the sector with either a split Congress or a Republican sweep. In those scenarios, legislative action on drug pricing would probably be put off until after the 2020 presidential election, Morgan Stanley's David Risinger said.
Jared Holz, a health specialist at Jefferies, expects the Health Care Select Sector SPDR Fund to outperform the Standard and Poor's 500-stock index with a split Congress. Holz also sees an attractive entry point in biotech at current levels, barring another major market sell-off.
However, he said, a Democratic sweep would trigger a "fear trade" out of drug stocks as pricing of high-profile medicines is likely to come under close scrutiny. With full control of Congress, Democrats could push for Medicare-negotiated pricing, which is one of the industry's biggest fears. Goldman Sachs said there's a chance Trump wouldn't veto such legislation before the 2020 election.
Revenue for some of the most widely-used medicines has been largely dependent on price increases over the past three years, according to an analysis from Leerink. Amgen's top-selling Neulasta and Enbrel, and blockbuster drugs from Biogen and Johnson & Johnson ranked near the top of Leerink's list of drugs that derived sales growth from price increases.
