How the election could impact drug pricing and the health care sector

Jason Kritzer, Equity Analyst,  Growth Team, and S amantha Pandolfi,  Portfolio Manager

Boston  - With just a few weeks until the election, investors are still trying to handicap a winner and determine how the policies of either a Donald Trump or Hillary Clinton presidency could impact the health care sector.

Health care stocks have struggled in 2016, based partly on fears that drug prices could be subject to greater government control under a new Democratic or Republican administration. Statements made during the presidential campaign regarding drug pricing have hit the biotechnology and pharmaceuticals industries, in particular.

Those fears have been amplified recently by the controversy over Mylan's pricing of the EpiPen and earlier, over Turing's sky-high pricing of Daraprim.

While drug pricing is a potentially decisive issue with likely big ramifications for biotech and pharma, it was not a subject of the first presidential debate, nor has it been a key topic in either campaign. Nevertheless, the candidates' platforms offer some clues as to how they might impact the sector.

Clinton has, at times, managed to move the entire biotech sector from her Twitter account. For example, the sector tumbled on September 21, 2015, when she tweeted about "price gouging" in specialty drugs such as Daraprim. Along with promises to "defend and expand" Obamacare, Clinton's health care plan proposals could:

• Employ regulators to judge the difference between acceptable price increases and price gouging.
• Fine companies that overcharge for generic and long-standing drugs.
• Import drugs or provide government support for generic drug manufacturers to make these products more affordable.

In general, Trump's proposals track traditional Republican positions:

• Repeal the Affordable Care Act (aka Obamacare).
• Allow for the sale of health insurance across states.
• Allow individuals to deduct health insurance premium payments.
• Give all individuals access to Health Savings Accounts.
• More health care pricing transparency.
• Allow cheaper pharmaceutical drugs manufactured abroad to be imported to the U.S.

Our view is that if the government attempts to regulate drug pricing, it would likely start with Medicare (i.e., drugs for the elderly) because the government pays a percentage of Medicare. A complete overhaul of Medicare drug pricing, including allowing the government to negotiate drug prices on behalf of Medicare beneficiaries, requires an act of Congress.

Although the Congressional math will be dictated by the election, we think there's a high probability for legislative gridlock. We are watching for the next president to potentially use executive orders to modify drug pricing. To date, executive orders in health care have started with smaller-scale demonstration projects.

Bottom line:  We think legislative gridlock prevents major changes from happening with respect to drug pricing in the next administration. We expect the headlines to focus on the "bad actors" in the sector. Keep an eye out for the use of executive order to curtail runaway drug pricing. With high dividend yields and innovative pipelines, there is still much to like about pharmaceutical companies for the long term.