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#Investments — 13.07.2017

Equity markets: Obamacare is not (yet) dead – Act II

Guillaume Duchesne

What are the consequences for the healthcare sector?

Over the past few weeks, US senators have been reviewing a new version of the American healthcare reform. But Donald Trump is not happy with the result: the draft bill has still not been passed. With no significant consensus, the vote was postponed until after the Independence Day celebrations (4 July).

President Trump faces difficulties with his reforms

The US authorities are trying to square the circle. President Trump had promised that this reform would not penalise anyone and would even generate cost savings. The exercise is proving very complex and even unresolved. Although Obamacare did not satisfy all Americans, the proposed reforms certainly do not meet with unanimous approval. Divided on many aspects, the Republicans, who initiated this bill, have failed to find a consensus within their own party. The central sticking points are the scrapping of medical cover for dozens of millions of Americans, replacing it with a system often deemed disadvantageous for a slice of the population. The measure is becoming unpopular among many US citizens. Whereas certain senators fear discontent among their voters ahead of the midterm elections of 2018, the conservative Republicans consider that the planned savings are insufficient.

The Senate will continue to debate the reform this week with a view to casting a vote during the week of 17 July. In addition to potentially passing this legislation, the two chambers (the House of Representatives passed its own bill earlier in the year) must reach a compromise between the two bills. As the proverb goes, “it’s not over until the fat lady sings”!

What are the consequences for the healthcare sector? (read our previous publication).

Below are the current facts concerning the healthcare sector:

  • Reforms have a minor direct impact on the pharmaceuticals industry. Decisive factors for industry giants are innovation in new products, growing markets, drug regulations, R&D, currency movements, etc. Analysts will not revise their earnings and sales forecasts after the outcome of the Congress vote. 

  • The net effects of the reform could even be positive for pharmaceutical companies.  If a tax reform is implemented following the healthcare debate, pharmaceutical groups may even benefit from tax cuts.  

  • Hospitals and health insurers benefitting from the Medicaid health plan are, on the other hand, directly concerned by the reform. The prospect of reduced individual cover for a large number of Americans is hurting revenues. On the equity markets, the share prices of these companies have benefited from the status quo in the Senate. But in the coming weeks, shares are likely to be volatile ahead of the outcome of the vote on the healthcare reform. 

  • High drug prices are often bemoaned by politicians.  During the presidential campaign, Donald Trump did not depart from this rule. Regulations on drug prices are therefore a decisive factor for the pharmaceutical sector. As long as the authorities do not address drug pricing (which they have not done for several months), companies will continue to enjoy a favourable environment. The White House is working on an executive order on this issue. Furthermore, it may relax rules in the industry to simplify the drug approval process, and in turn, drive down prices. In this case, the unveiled preliminary versions of the executive order would not penalise pharmaceutical groups too severely. 

  • The performance of health care stocks has deteriorated recently. Since the rise in interest rates, the sector has been suffering from a sector rotation, mainly into bank stocks.

 

The challenge of transforming the American health insurance system goes beyond the healthcare sector. Its success will depend on the ability of the US government to implement other plans, including a major tax reform. If the government does not achieve cost savings from the reduced medical cover (the draft reform should slash the US federal budgetary deficit), it will have less leeway for future measures. In conclusion, the absence of a medical insurance reform is less of a concern for the pharmaceutical industry than for President Trump himself.