Big pharma mandate

January 20, 2017 09:00 AM
Crowd-sourced earnings estimates from Estimize consistently outperform Wall Street.

In the post 2016 U.S. election environment, the healthcare sector has seen some of the biggest gains. With healthcare reform high up on President-elect Donald Trump’s priority list, insurers such as Aetna (AET) and UnitedHealth Group (UNH) saw shares increase around 10% in the weeks following the election. 

Pharmaceutical and biotechnology stocks have also been strong, breathing a collective sigh of relief as Hillary Clinton made an issue of going after what many people saw as price gouging in drug pricing. 

One of the biggest beneficiaries thus far has been the typically volatile, but high-growth small cap (between $300 million and $2 billion in market cap), healthcare names. The PowerShares S&P SmallCap Health Care ETF (PSCH) rose 9% in the 30 days following the election. This is a welcomed change after a rough October, when many major biotech indices dropped more than 10%. These more recent declines only further deepened the losses that started last year, with many names down more than 30% from their 2015 peaks. As sentiment went negative in the space, the small caps were hit disproportionately. 

Perhaps more beneficial than a Trump presidency is the fact that the Republicans held onto both houses of Congress. This removes any concerns that major legislative changes will be brought about that could have a negative impact on pharma and biotech, and hence the significant rally during the last week. 

Names that benefitted in the post-election month include Enanta Pharmaceuticals (ENTA), Halozyme Therapeutics (HALO), Ziopharm Oncology (ZIOP), Acceleron Pharma (XLRN) and Bluebird Bio (BLUE), with prices soaring 10% or higher (see “Election winners” below). The latter four have very deep oncology pipelines and are coming after the behemoths in that space. Currently, Roche (RHHBY), Novartis (NVS) and Amgen (AMGN) control nearly half of all cancer drug sales in the world, but the smaller guys are slowly but surely making inroads.

Many of these names had just reported third quarter earnings results in the few weeks prior, and rather disappointing ones at that. Omeros, Spark, Acceleron and Bluebird Bio all missed the Estimize consensus on the top and bottom line. Only Halozyme and Enanta saw an earnings-per-share beat, with Ziopharm reporting inline results, but all missed revenue expectations. Many of these names have seen upward revisions to future quarters, however, in the wake of the election. 

Also giving the big guys a run for their money in the Alzheimer space is Axovant (AXON). The Alzheimer’s market is huge right now, with some of the biggest names in the sector competing. Biotech darling Gilead Sciences (GILD) is pivoting in the wake of its maturing Hep C franchise, and it certainly has the capital to take a big bite out of the business. Others, such as Celgene (CELG), Biogen (BIIB) and Eli Lilly (LLY), are all looking to take their share as well.

After enjoying an unprecedented run up in 2015, 2016 was rough on biotech, but it seems the industry could be on its way back. Fundamentals are looking stronger and P/Es that had been collapsing are on the road to recovery. 

This is a very volatile industry and one that warrants caution, but there is plenty of capital flowing, and with Republican control of Congress and the White House, it’s only expected to get better. That is, of course, unless president-elect Trump changes his tune on the sector, which his December comments regarding a crackdown on drug price gouging may suggest.

About the Author

Christine Short is a senior vice president at Estimize. An expert in corporate earnings, she produces content highlighting Estimize data. Prior to Estimize, Christine held positions at Thomson Reuters and S&P Capital IQ. @Estimize