SUMMARY
The drug-price reform focus of Congress affects biopharma stock prices
The likelihood that Republicans will control at least the House, is good for biotech stocks
The future of biotech stocks into 2023 will now depend more on the other key factors that drive the sector (see Table 1)
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This article is intended to factual and helpful to biotech investors, and is not intended to be an article promoting any political agenda or party.*
As we previously reported (Read our prior free article HERE; Amp Pro article HERE or Seeking Alpha article HERE), it is probably not a coincidence that the fall of biotech stocks started at around the time the current Congress and president took office (Jan 2021) (FIG. 1). XBI reached it's all-time high at ~$166 on Jan 31, 2022, less than 1 month after the current Congress and president took office. At its closing price today, the day after mid-term elections, it is down ~53% since the start of the current Congress, closing at $77.20. Although there have been some excursions above $85/share, our prediction in July 2022 that XBI would hover between $75 and $85/share has held true (Read our prior Seeking Alpha article HERE).
FIG. 1 Biotech sector stock prices since 2011, as represented by XBI and IBB. Vertical purple bar - Jan 4, 2021, day after current Congress began. Red vertical bar - Aug 15, 2022; the day before drug price reform legislation was passed into law.
Why does the make-up of Congress affect biotech stocks? Because drug price control legislation has a major impact on the potential value of current and future drugs, and thus have a major impact on the value of biopharma companies. Table 1 lists the major factors that affect the stock price/value of biopharma companies. These factors affect biotech stock prices between key readouts for an individual company. Thus, whether a Congress and president are more or less likely to enact drug price controls, is a major factor that affects the value of biotech and biopharma companies.
Table 1. Key factors that affect the therapeutics stock sector
1) Present biotech valuations vs. historical valuations
2) Biotech M&A activity
3) U.S. drug pricing reform discussions/progress
4) High profile clinical trial readouts
5A) Concerns about the economy/broader market (more economic concerns relatively better for biotech than most other sectors)
5B) Interest rates (lower interest rates = higher micro and small-cap biopharma valuations)
It became clear going into the current Congress especially with a drug-price reform president taking office, that drug-price reform was much more likely than in the prior Congress. That fact combined with over-inflated biopharma stock prices in January 2021, were major factors that set up the biotech bear market that began in Feb 2021, a month after the current Congress and president took office. On Aug 16, 2022 President Biden signed the Inflation Reduction Act into law, which includes provisions that are aimed at controlling prices for certain drugs*. Although the Act was not good for biopharma, it could have been much worse.
Based on the current election results, although it appears that although there will not be a huge increase in the number of Republicans vs. Democrats in Congress, Republicans should have at least a majority of the House of Representatives. Thus, it is highly unlikely that further drug price reform legislation will be enacted into law in the next Congress. On the other hand, without a large Republican majority in either the senate or the House, it is also highly unlikely that the drug reform law of 2022 will be repealed.
So what does the future hold? Well, none of us have a crystal ball. However, overall, going forward into 2023, a major overhang of the pharma/therapeutics stock sector is likely lifted. Thus, the mid-term election results will be seen as a long-term positive factor for biotech stocks. Now, the fate of the biotech sector during this upcoming Congress will be more affected by the other factors listed in Table 1.
Find out Amp's view of the future and how it is strategically playing its biopharma portfolios given the mid-term election results. CLICK HERE to become a subscriber today.
Article history: Published 11/9/22 by MV This article is not investment, tax, or legal advice. Please do your own diligence before making trading decisions. *This article is intended to be factual in nature. There are many factors that influence your and our political viewpoints and Congress and the President's stance on drug price reform is only one of many factors. **The Inflation Reduction act for the first time authorizes Medicare to negotiate the prices of some high-cost prescription drugs with pharmaceutical companies, puts an annual $2,000 limit on how much Part D prescription drug plan members will have to pay out of pocket for their medications, and levies tax penalties on drugmakers that increase product prices by more than the rate of inflation. The new law also caps the cost of Medicare-covered insulin at $35 a month and eliminates out-of-pocket costs for most vaccines under Medicare. #XBI #IBB
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