Biotech bounces as the bones of Trump's plans on pricing emerge

Trump With Hand Raised
Favorable tone from the FDA and expected strong Q2 operating results could drive additional gains.

Biotech stocks are enjoying their most buoyant patch in months, with three straight days of solid gains on reports that President Donald Trump's threatened crackdown on pricing may not be as tough as feared.

The IBB climbed more than 4% yesterday to $316.10—its highest level for a year—with the XBI following suit with a 4.7% gain that took it to levels not seen since the third quarter of 2015.

Just months ago the rhetoric on medicines pricing coming out of the White House was giving the industry the jitters—who can forget Trump's assessment that the sector was "getting away with murder." Now, it seems a draft version of the promised executive order on pricing has been heavily influenced by pharma industry proposals, according to a Kaiser Health News report, soothing investors' concerns about a clampdown.

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The document—prepared by President Trump's Drug Pricing and Innovation Working Group led by former Gilead Sciences lobbyist Joe Grogan, who is the associate director of health programs for the Office of Management and Budget (OMB)—seems to focus more on easing regulatory hurdles, extended patent rights overseas to prevent the U.S. industry "subsidizing" the rest of the world, moving toward value-based pricing and ending discounts for low-income hospitals.

Moves to promote competition seem to focus more on the generic rather than brand-name sectors, according to KHN, which says some of the text in the draft has been lifted from policy papers drawn up by the PhRMA industry body.

Analysts Geoffrey Porges and Bradley Canino at Leerink think that the lifting of perceived fears of pricing regulations is a big factor behind the gains, but not the only one. A "favorable tone" from the FDA under new Commissioner Scott Gottlieb is also having an effect, and they suggest the rally "does not yet reflect more positive operating results, not to mention industry consolidation which we still expect."

They reckon there's another 15%-plus in upside to come, with the second-quarter results season likely to spark another push for the sector, with Celgene, Regeneron, Vertex and Alexion all highlighted as likely to outperform the market.

"Reports suggest that Trump’s proposals will deal largely with will easing regulatory hurdles for companies developing competitive medicines and extracting more value from foreign markets for U.S. innovation," they write in a research note.

"Without a strong stance on drug prices from the administration, it seems unlikely in our view that any such legislation will be passed by the Republican Congress."

Meanwhile, FDA initiatives to revise the drug development and regulation processes that seem favorable for the industry, and especially rare disease manufacturers, are another plus, given that "Commissioner Gottlieb has publicly stated that the introduction of new, effective therapies is the best way to reduce overall healthcare costs."

As biotech executives' anxieties recede, they are predicting the industry will start using its collective cash of about $275 billion for deals that will expand pipelines, bolster therapeutic franchises and plug forthcoming revenue gaps from "generic and innovative competition."

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