Donald Trump's victory over Hillary Clinton for the White House means that some big changes are coming for the healthcare industry. Trump plans to repeal the Affordable Care Act as quickly as he can, which will have positiveandnegative implications for many healthcare stocks.
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In this episode of The Motley Fool's Industry Focus: Healthcare podcast, analyst Michael Douglass is joined by Todd Campbell to discuss what a Trump win means for healthcare investors. The duo also discusses how marijuana legalization measures did in the nine states where they were on the ballot, and thetakeaway for investors.
A full transcript follows the video.
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This podcast was recorded on Nov. 9, 2016.
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Michael Douglass:Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It'sNov. 9. I'm Michael Douglas, filling in for Kristine Harjes. I've got Todd Campbell, ourregular contributor, on the line. Todd,how are you doing?
Todd Campbell: I'm doing great. This is going to be a fascinating show,and hopefully we're going to deliver a lot of value to people. As you led with,it's Nov. 9, and that meansyesterday was a pretty important day.
Douglass: Yes. In caseanyone who's listening is not aware, yesterday was anelection day. Hopefully we're all aware, and hopefully we all got the chance to voteand exercise your civic duties. So, let's hop right in. Donald Trump is the president-elect. And the market responded. It was really interesting, because at first, there was asignificant move down in the market. At one point, I saw the Dowdownmore than 700 points. At this point --and it's roughly early afternoon --the S&P 500 is actually up a little bit. This is all more or less normal. Historically, the markets moved around 1% a dayover the last four elections. This is nottotally abnormal in terms of market movement. There's always a little bit ofresponse when somebody gets elected. Interestingly as well, healthcare isgenerally moving very positively. The IBB, the biotech index,has been up as much as 8%today. So, certainly, those with a lot of healthcare in theirportfolios are probably seeing some green.
Campbell: Especiallyif they happen to be focused on the biotech area of healthcare,which is just absolutely taking off today. There are a number of reasons, which you and I will chat about with our listeners in a second.I just want to go backwards in time for one minute. You mentioned, last night, the futures hadindicated of massive potential drop in the S&P. I think it's good to remind investorsnot to pay too much attention to those very illiquidovernight markets. They can make huge swings up or down. I know it can be frightening at times -- on balance, ignore them, because the result can bevery different the next day once those markets open.
Douglass: Yes. That is important. If there's one takeaway fromeverything --I'll just go ahead and give it away --it's that we should always treat intraday, day-of, week-of moves with a lot of skepticism. The number of times that somebody has had a quote, or a tweet, or there was a rumor of a thing and stocks moved a bunch,and it ended up really not meaning much in the long term. That's definitely the Foolish way to think about it. Thank you for that, Todd.
Campbell: Absolutely.I guess that's segues pretty nicelyinto what we're going to be talking about today, especially,I would like to focus a little bit of attention on this biotech situation,because that's the basket within healthcare that's performingso much more strongly than these other baskets. We'll talkabout some of the losers today as we go forward. Asmany of you know,if you've been listening to the showand following the biotech sector,it suffered a lot of selling in the past year. There were revelations ofincredibly high price increaseslast fallthat led presidential hopeful Hillary Clintonto come out with a number ofdifferent strategies or policy plansthat she hoped would cap pricing or limit the cost of drugs to payers and patients. As a result,the election of Donald Trump last nightchanges the dynamic a lotfor what kind of regulatory environment we could be infor this industry over the course of the next four years.
Douglass: Yeah. Or,at least in terms of the rhetoric. I think one of the really important thingsthat we all have to accept and acknowledge in elections is thatthere's a lot of discussion about what could be doneand what would like to get done,and then whoever you have elected,as president, then ends up having to work with Congress and the federal bureaucracy. So it's neverquite as simpleas people present it. But, certainly the tenor of that conversation has changed a lot now. A Donald Trump presidency, at least from the rhetoric so far,we would think would be less hostile to drug company price increases, in general.
Campbell: Sure. Onthe campaign trail, the two candidatespresented very different approaches on their view for healthcare moving forward. On the one side,you had Hillary Clinton advocating forchangeson the marginto Obamacare,that would improve it and potentially expand it. And then,on the other side, you had Donald Trump advocatingfor the removal and replacement of Obamacareentirely. So you've got some significant potential shifts. Andwith Congress also going red,I think while some of the smaller policydifferences between the two still could get debated fairly handily -- again,we don't know how this whole Obamacare they will shake outonce everybody starts negotiating -- but it would seem likewe're going to have a big change to how insurance isprovided, in Washington, at least.
Douglass: Yes. Certainly,the Republican Party has largely runon an anti-Obamacareplatform. We can't predict the future, but it seems likethat is something that could happen. If so, what'sinteresting about that is, that it actually potentially a bit of a con for these biotech companies where the stock prices are doing very well today,because it means you have a lesser patient pool. Fewerinsured patients tends to mean less healthcare.
Campbell: There's like 12 million people enrolled in insurance plans through Obamacare on the exchanges earlier this year. I think the effective, or the ones who paid, gets you down to a little bit less than 11 million. You get a lot of Medicaid expansion states, 30-plus of them, where a number of millions of people got enrolled there as well. Theoretically, depending on what replaces Obamacare, we don't know whether or not the overall pool of people that could get reimbursed for medication is going to shrink. If it shrinks,then that could be a drag on the top line. However, you could also argue on the other side thatthere are other components of the ACA, or Obamacare, that if removed,would actually offset that headwind,and could actually provide some tailwinds.
Douglass: Right. One of myfavorite things to say about healthcare is that we call it one industry,but it's really seven or eight, at least. You have biotech,and of course that gets a lot of the attention, a lot of the oxygen on this program. But there are other parts of healthcare, and in some of those, the stock price response to Donald Trump's election has been very different. Mostnotably, the hospital stocks are not having a good day, let's put it that way.
Campbell: Yeah. Youlook at large companies -- again. going back to some of the positivesif Obamacare is rolled back -- and then you look at the tax planthat Trump has proposed from business taxes, you could get asignificant drop in the tax rate for all of these companies, the ones that are profitable,down to 15%, whichconceivably would be a positive. There's also thepotential to repatriate cash -- that could be big for some of the large-cap biotech companies that operate overseas. That's a potential benefit there,not only for biotechbut also for the big drugmakers likePfizer,which has something absurd like $100 billion in cash overseas. So, there's a lot ofdifferent nuances you have to take into consideration here as you're evaluating the different industries within the healthcare sector, biotech just being one segment of that. There's less of a risk of price controls now. That would be good forspecialty drugmakers, andmakers of expensive cancer drugs, life-saving treatments, that type of thing. You mentioned hospitals as being a loser today. Absolutely. If Obamacare is repealed, that could push more people into uninsured care, or increase the bad debt expense at hospitals. Billions of dollars came off of bad debt expenses over the last few years after the passage of Obamacare. That's why you're seeing a number of these hospital stocks fall 20% today, or more. Then, of course, you also have the insurers that you have totake into consideration on this too, Michael, right?
Douglass: Right. It'skind of an interesting nuancebecause some of them have really struggled with the exchanges,but others have really benefitedfrom Medicaid expansion. What it really comes down to is,if you're trying to pick long-term winners or losers todayfrom this election, that's going to be a very difficult thing to do, because there's been a lot of rhetoric, there's been a lot of broad-basedconversations about these things, but the devil is in the details. It's going to be really difficult to know, really, who's going to benefit, and what nuanced change will make a big difference to any one group. My general thoughts for our listeners are: Watch, keep an eye out,but don't necessarily make decisions about your portfolio based on what's going on in the market today,or on what you think might end up coming out of a unified Republican government andnational legislature. Wait until you see the policy proposalsand better understandexactly what the winners and losers could be.
Campbell: Right. In the past, Kristine and I often talked about this. You have to look at the longer-term picture as being thedriving force behind healthcare. That includes a larger, older, longer-living population.
Douglass: Yeah. So,long term, the demographic tailwinds for healthcare still make it a very attractive sector. Let's wrap that there.
Let's headinto our second segment. That's talking aboutindividual state ballot questions. And my oh my, there was quite a bit about healthcare. Do you want to start with California Prop 61, Todd?
Campbell: Yeah, we'll take this one because it's easy and it segues nicely into what we were just talking about as far as drug pricing and the future of drug pricing. California had something on the docket. It was the California Drug Price Relief Act, also known as Proposition 61. Proposition 61 sought to tie California's healthcare spending, the state's spending on drugs, to the prices that are paid by the Veteran's Affairs Department. The concept there was theVeterans Affairs Department can typically pay 40% to 50% ofwhatever the list price happens to be for anindividual medicine. Therefore, by passing this, they're basically saying, "We're going to get whatever the lowest price is that the VA is passing on these drugs." Theoretically, that could save California as a state a lot of money.
Douglass: Right. And it didn't pass.
Campbell: Didn't pass.
Douglass: The drug industry spent over $100 million lobbying against it. It's believed to be the most ever spent on aCalifornia ballot measure.
Campbell: Yeah, $106 million or $109 million, depending onwho you listen to, was spent defeating this proposition. There were a lot of different things that could have happened, even if it had passed, they may have escaped some of the meat of the proposition. But, regardless, it's a nonevent because it was defeated. Proponents battled that $106 million or $109 million with $17 million. That tells you a little something. It suggests, we're still hunting for ways to control the cost of increasing drug prices. But,at least as far as California voters are concerned, tying it to the price that's paid by other governmentorganizations or government payers such as a VA is not the way to go.
Douglass: Yeah. There is a large conversation going on about drug pricing in the United States, and that the drug industry is engaged in as well, with other stakeholders, including payers and patients and patient advocacy groups and hospitals, etc. So, this is definitely a conversation that's going to continue, just not in this particular way. I do not think that the drug pricing conversation is over, by any means, and I don't think anyone really thinks it is, either. It's definitely going to be something that continues, and continues to be an issue that people are talking about and voting on.
Let's also turn to marijuana initiatives. There were a number of them that passed, and a few that failed, as well. Florida had a medical marijuana ...
Campbell: Yeah. Nine states in total had marijuana on the ballot. Not all of them were recreational. To give a little refresher: There's four states right now that have passedrecreational marijuana legislation. There are about 25 states that have passed medical marijuana legislation. On yesterday's ballots, you had California, Nevada, Maine, Massachusetts,and Arizona that had recreational on the ballot. Then,you had a host of other states -- Arkansas, Florida, North Dakota, Montana -- that were taking up the medical marijuana side. Broadly speaking, Michael, pro-marijuana advocates won the day yesterday.
Douglass: Yeah. You hadmedical marijuana pass in North Dakota,expanded use of medical in Montana,recreational in Massachusetts ...
Campbell: Yeah! Recreational passed inevery state except for Arizona. California passed it, Nevada passed it. Maine was a really close call,I'm not sure if they've finished calculating all the votes. But early results show it passed there.Massachusetts passed as well.
Douglass: Yeah. So, certainly a big one for marijuana advocates. Of course,here's the thing with medical and recreational marijuana -- there are no good publicly traded business models right now that really rely on the sorts of things these ballot measures are talking about. You have yourcannabidiolbiotechs, but they're really not that related to medical or recreational use of marijuana. So, while theirstock prices may or may not move based on a poll or the outcome of theseinitiatives, it really doesn't indicate anythingabout the underlying business model of a publicly traded marijuana company. There justsimply aren't any good ones right now.
Campbell: Yeah,most of them trade on the pink sheets. They're notsuitable for the majority of our listeners to even consider. It's not like you're talking aboutReynoldsorPhilip Morris -- established companies. These are very fledgling companiesthat oftentimes have nothing more than addresses. Do not invest in these stocks until they get to the big time. I think the reason we talk aboutmarijuana a lot on this show is simplybecause it's potentially expanding its use fordifferent medical indications. There has been a lot of success using it in epilepsy, for example. And there are a lot of forecasts out there that showsrising use of marijuana through legalization andthrough the expansion of medical marijuana laws could have this industry growing 30% annually for the next five to 10 years. So, there's definitely a big shift, and potentially a market opportunity here. However, it's still in the very early innings. In fact, I would say this is spring training. We haven't even started the game yet when it comes to marijuana.
Douglass: (laughs) Oh boy, another sports metaphor that goes right over my head -- no,I'm just kidding, I got that one. Thank you, Todd.I think that's exactly right. When you think about a lot of thesepolitical issues, government issues,you really need to think very carefully before you start picking winners and losers, because all too often, it's really just too soon to know.
In response to market volatility today, Andy Cross, our chief investment officer, wrote a note that was sent to all Motley Fool members. It's currently top of site on fool.com, so check it out there and you can see it. If anyone, for whatever reason, isn't able to get it and wants to, email and ask for it. I can certainly shoot you the link. That's firstname.lastname@example.org. Here was the quote -- andI really appreciated this and I think it really exemplifies the long-term Motley Fool ethos of investing when things get volatile in the market.
We believe in American capitalism regardless of who goes to work in the Oval Office or the Capitol. Today and the days ahead, we'll probably see movements in stock prices. Don't let your emotions get the better of you. Don't overreact. Markets will always swing during times of uncertainty, but remember: You're a true investor in businesses that create value for customers, employees, partners, and shareholders, and you're looking out years, not days or months. Remember that today is just one day in the market. We Fools will keep investing for the future, with optimism, as we always have, in the way we always have. We're honored that you're doing the same.
As always, people on the program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against stocks, so please, please do not buy or sell stocks based solely on what you hear. For Todd Campbell, I'm Michael Douglass, thanks for listening and Fool on!
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