Trump drug-pricing speech adds dose of uncertainty for healthcare investors

Investors are bracing for widespread volatility in healthcare stocks on Friday, when U.S. President Donald Trump is expected to give a highly anticipated speech about controlling prescription drug prices.

The S&P 500 healthcare sector has declined about 1 percent in 2018, underperforming the broader S&P 500 by more than two percentage points. Investors say concerns about drug pricing regulations have contributed to pressure on group.

Trump’s speech, delayed from earlier in the year, has injected added anxiety. He has addressed the issue of lowering prices in the past, saying as president-elect in January 2017, for example, that drugmakers were “getting away with murder” in what they charge the government for medicines.

“Investors don’t like uncertainty and this speech has created a fair amount of uncertainty,” said Les Funtleyder, healthcare portfolio manager at E Squared Capital Management. “We don’t really know what is necessarily priced in, what level of detriment to all these industries is priced in.”

Healthcare policy speeches by senior government officials in recent weeks also may have changed the thinking of investors.

“The sense is that the proposals could go a little further than what we have seen in the budget and other places,” said Ipsita Smolinski, managing director at healthcare research and consulting firm Capitol Street.

The speech could affect a broad group of stocks in the healthcare sector, which makes up 13.6 percent of the S&P 500.

“The president never shies away from fiery rhetoric, and we expect that in his speech he will finger manufacturers, pharmacy benefit managers (PBMs), insurers, hospitals, and foreign countries as responsible for high drug costs,” Height Capital Markets analyst Andrea Harris said in a note.

Harris said she expects “material headline risk” to the stocks but that the administration “will not implement the most material policies that Trump will suggest in the speech in the next two years, if ever.”

The healthcare sector was rallying on Thursday, up 1 percent in afternoon trading against a 0.7 percent gain by the S&P 500. Shares of companies potentially in the cross-hairs of Trump’s speech were higher, including pharmaceutical wholesaler Cardinal Health Inc and drug-benefit manager Express Scripts Holding Co.

Some analysts said on Thursday that investors could be becoming less worried about the speech while others said it was hard to predict what Trump might say.

Overall, shares of large pharmaceutical and biotech companies have struggled this year. While companies have endured product or other disappointments, analysts have pointed to concerns about pressures on drug-pricing as a cloud over the stocks.

By contrast, healthcare sectors seen as immune to such pricing concerns - makers of medical devices and research tools - have outperformed.

Friday’s speech may provide some clarity for investors, but the prospect of healthcare and drug pricing being a hot topic heading into the mid-term U.S. congressional elections in November may lead worries about the sector to persist.

“Even if we didn’t have a speech, people would be thinking about November and what may or may not happen and wouldn’t be investing with the same gusto that they otherwise would,” Funtleyder said.

Additional reporting by Ankur Banerjee in Bangalore; Editing by Steve Orlofsky