A Balance of Power in Washington is a Clear Sentiment Driver for Healthcare Stocks
MIZUHO SECURITIES USA INC. | US EQUITY RESEARCH
We analyzed the performance of the S&P 500 versus various S&P 500 healthcare indices in the last 13 elections and the data is clear: healthcare stocks have outperformed the market on both a PE and price performance basis when there is a balance of power in Washington post-election. As a result, we think the upcoming mid-term election is an important area to watch, especially for stocks impacted by drug pricing. Although the drug pricing will likely remain a hot topic in Washington after the election, we think this analysis illustrates that a balance of power in Washington is a clear sentiment driver for healthcare stocks.
We Think it is likely the House Flips to Democrat and Gridlock in Washington is Good for Healthcare Stocks. On a forward PE basis, the S&P 500 Healthcare outperformed the S&P 500 (18.2x versus 15.2x) post elections when the election resulted in a balance of power in Washington, versus when there is no balance of power, when healthcare typically trades in line with the market. Year-to-date 2018, the S&P 500 Healthcare is trading at 14.8x versus the S&P 500 of 15.8x. However, the S&P 500 Healthcare Pharma & Biotech is trading at 13.9x versus the historical average of 18.6x 12-months post an election that resulted in a balance of power in Washington. The drug supply chain stocks (retail pharmacies and drug distributors) are trading at 10.5x 2019E adjusted EPS.
The Mid-Term Elections may not end the Drug Pricing Debate but a Balance of Power Reduces Risk. Despite what happens with the mid-term elections, the drug pricing debate in Washington will rage on and we expect the Trump administration to continue addressing the proposals included in the drug pricing blueprint. But a balance of power should de-risk stocks impacted by drug pricing because the chance of legislative action is significantly reduced. Further, based on recent Washington checks, we still think it is debatable how much regulatory power HHS has to influence meaningful change. We think any changes to the current rebate system will be driven by behavior changes due to the unprecedented pressures from Washington, not dictated by legislation. Any change will happen over time given the complexity of the current system and likely be manageable from an earnings and cash flow perspective, as the industry will adapt and adjust to any new pricing model.
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