US Healthcare Policy: The Presidential Paradox
Healthcare share prices tend to reflect some trepidation leading up to and shortly after the US presidential elections, yet for the last five elections the sector outperformed in the 12 months following the election (Figure 1).
Potential changes in the US President and Administration logically add uncertainty for healthcare, given the role of American product launches and prices in funding global product development and rollout. The nomination of Robert F. Kennedy Jr. as US Secretary of Human Health Services triggered a shock in the sector in late 2024, with his confirmation hearings scheduled for late January of 2025. While predicting the potential policy actions of President Trump is challenging, healthcare does not seem to be a central issue new Administration.
Past performance is not a reliable indicator of future performances. Markets could develop very differently in the future.
At 35-year Valuation Lows, is the Worst Case Priced In?
Healthcare is here for the long term. The needs of a globally-aging population, rising incidences of chronic conditions, and lifestyle decisions continue to offer long-term growth opportunities for healthcare. The industry continues to respond to the growing demand with a phenomenal innovation engine. Over the long term, healthcare equities have also been financial market outperformers. [1]
With relative valuations at 35-year lows, [1] our analysis shows that share prices are clearly discounting a negative scenario. Nothing can be ruled out, but Trump’s prior presidency was not a bad period for the sector.
Government Policy, M&A, Rates
So what warrants these extremes of sentiment and valuation? Parts of the sector certainly over-earned during the Covid-19 period – for example, testing and therapeutic companies. Yet these exceptions are mostly behind us. Today, controversies and questions centre on three key subjects, US healthcare policy (above), M&A, and interest rates.
With large, cash-rich biopharma companies facing patent expirations, mergers and acquisitions are an integral part of their long-term product strategy. Tighter regulatory reviews for M&A transactions in the US are likely to loosen under the new pro-business government.
Although interest rates have limited impact on the business of healthcare, higher rates can shift investor interest away from the ‘longer-duration’ segments such as biotechnology. With the US 10-year yield near 15-year highs, the probability is skewed towards a more favourable rate environment.
Diagnosis? Stock Selection!
Healthcare fundamentals remain strong. Opportunities remain across hundreds of human diseases for better, differentiated therapies, and the industry continues to generate compelling new solutions. New drug approvals have been strong for several years, remarkable advances have been achieved in robotic surgery, and significant new cardiovascular solutions have been introduced.
The sector may remain volatile until the market has clarity on the policy front. But given the valuations, fundamentals, and sentiment, the current situation brings to mind the words of The Sage of Omaha: “Be fearful when others are greedy and [to] be greedy only when others are fearful.”[1]
[1] Warren Buffet, Berkshire Hathaway Letter to Investors, 1986.
