President Donald Trump’s 2016 election win sent healthcare stocks on a rollercoaster ride, and “we’ve looked to take advantage of that,” says Ann Gallo, a senior vice-president and partner at Wellington Management Company in Boston, Massachusetts.
“Immediately after the election, the hospital stocks, the hospital outsourcing stocks [and] the managed care stocks fell sharply because people believed there was going to be a full repeal of the [Affordable Care Act, or ACA],” says Gallo, whose firm manages the Renaissance Global Health Care Fund.
As well, “you saw biopharma stocks increase sharply,” she adds. “The market was making the assumption that Republicans don’t like regulation – and [that] regulation is bad.”
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But efforts to repeal or replace the Act have failed so far. As a result, part of the subsequent rebound in some of the stocks “is because of the recognition, by some, that [repeal] is not going to happen,” she explains.
What’s more, the view that regulation is harmful in the healthcare space is misguided, says Gallo. The reality, she explains, is “regulations provide tax incentives for these [biopharma] companies.” Regulations also help fund research and give “companies monopolies — patents — once they get approval from the FDA.”
Also, Gallo asks, “without regulation that creates Medicare [and] Medicaid, or [that] mandates insurance coverage, how many people could realistically afford a drug that costs $100,000 a year?” Of course, drug pricing in the U.S. has also seen its share of criticism, as companies exploit loopholes in reimbursement rules.
“While we expect Congress […] to put through measures that seek to address high drug prices, we don’t expect meaningful structural change,” she says, such as government price controls.
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Gallo finds removing uncertainty around pricing would be an improvement. “Once we get clarity on exactly what will happen in this very important area, there’s upside for biopharma stocks.”
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Regulation going forward
Healthcare stocks will also benefit when the future of the ACA becomes clear. But as the Act evolves, not all changes will be positive, Gallo predicts.
“The system that we have was put in place because, unlike virtually every other developed country, we did not have a catch-all system to provide healthcare insurance and coverage to Americans [who] didn’t get healthcare through their employer, or Medicare or Medicaid,” says Gallo.
Nonetheless, she adds, “We will see changes to this program that […] probably will chip away at the generosity of the program. You will probably see the state exchanges not grow meaningfully going forward. You will probably see changes to Medicaid that slow the growth.”
At the end of August, the Trump administration revealed plans to slash the ACA’s advertising budget as well as reduce spending on experts who are trained to help Americans choose appropriate insurance plans.
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Still, with the threat of repeal gone, Gallo expects legislation will be introduced to shore up the weaker parts of the act — especially since a 2018 congressional election approaches. “No one wants to see these state-based [health insurance] exchanges implode, to the extent that you see […] millions of Americans not able to get insurance.”
As the Act becomes clearer, you’ll see multiples for hard-hit stocks (e.g., hospital-related stocks) tick upward, Gallo says. Of course, predicting the timing of regulatory developments is impossible, she adds, so she suggests investors choose companies on the leading edge.
“There’s going to be volatility when something changes in D.C.,” she adds. As that occurs, investors will be best served if they focus on opportunity: “Over the long term it’s our view that real innovation and value will be rewarded. That is what we as […] consumers ultimately want,” Gallo concludes.
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