#Investments — 13.10.2017

Obamacare Is Not (Yet) Dead – Act III

Guillaume Duchesne

The US health care reform is long and difficult. The successive attempts have been of no avail, but President Trump has not said his final word.

The saga of the US health care reform continues. Like in a Shakespearean tragedy, the action is played out in several acts, the third of which ended in another failure in September when several reform proposals did not materialise. American legislators have not come to an agreement, mainly due to the complexity of finding a satisfactory alternative. Yet President Trump has not said his final word. He wants to weaken Obamacare (deemed too costly) by signing an executive order that will offer Americans more flexibility when taking out health cover, thanks to a wider range of coverage options. President Trump has also decided that the US administration will discontinue medical reimbursements for cover provided under the Obamacare plan. Anticipating this risk of repeal, hospitals and insurance companies have corrected on the stock markets.

Following the previous two acts of these political procrastinations (Act I, a first attempt in March 2017, and Act II, a failure because of no majority), we looked at the consequences of potential reforms on the health care sector.

After each of these attempts to reform, the health care sector consolidated on the stock markets before strengthening. We are still convinced that particularly pharma stocks benefit from positive factors in the long term (robust growth in demand, cycle of new drugs and solid fundamentals). In the short term, the health care sector might benefit from a tax reform, another of President Trump’s ambitious projects.  Even though the latter is still vague and hypothetical, it could have an impact at several levels. Firstly, businesses whose activity is essentially on the domestic market should benefit from the reduction in the corporate tax rate from 35% to 20%. Secondly, US pharmaceutical multinationals should enjoy a reduced tax burden for the repatriation of cash of which they hold massive amounts outside the country. Pharmaceutical giants might use this liquidity to make new acquisitions or buy back their own shares. Finally, the reduction in the number of interest deductions that companies will be able to make should have a relatively small impact on the sector given its low debt levels.

The prospect of a tax reform in the US therefore augurs well for more good times ahead for the health care sector. However, as in most other sectors, valuations have been relatively strained, particularly since the post-election rally. Overall, the sector is now at an historic high in the US and is trading at 17x earnings, i.e. much higher than its 3-year average. Biotech stocks have returned to their 2015 records in the space of a few weeks.

A lot of good news seems to have been priced in.