Why Trump’s Tweets Shouldn’t Sicken Health Care Stocks

Is the Health Care sector under siege from President Trump’s Twitter account? Last Monday, Trump tweet-slammed a large pharmaceutical company (whose name rhymes with Visor) for its recent drug price hikes, seemingly leading the firm to announce the next day it would reverse course.^[i] On the surface, this might seem bad for Health Care firms: Trump appears to be making drug policy via tweet, using his bully pulpit to badger companies into cutting prices for fear of bad PR. In our view, however, reality doesn’t quite match that perception. Both the tweet and the company’s response were mostly symbolic. We don’t believe either signals rising regulatory risk in the Health Care space.

While debate abounds over the societal merits of lowering prescription costs (which we aren’t weighing in on), from an investor’s viewpoint, sweeping reform could be a risk. On the campaign trail, Trump’s bold promises to push for such reforms sparked worries of political intervention potentially slashing Health Care earnings. Since taking office, Trump has occasionally talked up policy changes, but little action has followed. First, a May 11 Rose Garden announcement—and Health and Human Services policy blueprint—contained a fairly unambitious slate of prescription drug policy proposals. They were mostly about increasing competition—far tamer than common fears of letting Medicare negotiate drug prices, loosening drug import restrictions or the biggie: imposing price caps. The blueprint’s more substantive changes require Congressional action—a long shot, especially in a midterm year (more on this below). Unsurprisingly, nothing has yet come of either the announcement or blueprint.

Jitters resurfaced on May 30, when Trump predicted “voluntary massive drops in drug prices” in the next two weeks. But those weeks came and went uneventfully. It might seem that things are heating up now, though—what if Trump tweets at other drug companies, or they act pre-emptively to avoid unwanted scrutiny? Might they cave, too? This strikes us as improbable—and we think it misreads the recent tweet tiff. The target company (whose name, may we remind you, sounds a lot like Geyser) rescinded and delayed its hike but didn’t cancel it altogether—it is presently scheduled for the start of 2019. Turns out there is a big gap between short-term moves to sidestep bad press and permanently altering drug pricing plans. Elsewhere in the sector, scheduled price increases have mostly gone on as planned, suggesting President Trump’s supposed “bully pulpit” powers are modest. Although his tweets may be #exciting—and ready headline fodder—they aren’t where major pharmaceutical reforms come from. The executive branch can do little in this (or any) domestic policy area by itself. To the extent tweets and talk have an impact, it is probably superficial, PR-focused and centered around preserving goodwill and lobbying abilities.

Thus, genuine reform likely must come from Congress magically agreeing on one of the most controversial political issues in existence—unlikely, in our view. Supporting exhibits include the last time Congress tried to tackle healthcare reform, Republicans’ razor-thin Senate majority, internal divisions and upcoming elections—which typically discourage bold legislative agendas. While it is too soon to predict midterms’ exact outcome, evidence presently suggests they likely maintain gridlock. We aren’t saying nothing can happen (either before the election or after), but any prescription drug bill would likely be very watered down and take shape glacially. This reduces the risk of sudden, sweeping Health Care policy overhauls that might knock the sector.

Some states are getting involved as well—but we doubt much comes of their efforts, either. A new California law “requires drugmakers to give insurers, governments and drug purchasers advance notice of large price increases, as a way of publicly pressuring pharmaceutical companies to keep prices down.” And sure enough, in the last three weeks, several large drugmakers have rescinded or reduced previously announced price hikes on a small number of drugs in California. But the moves are superficial, in our view—as is the law itself. Drug companies can still raise prices in California—they just might have to pace them differently. Hence, workarounds should be a breeze. Pharmaceutical companies aren’t so hapless as to let minor disclosure changes in one state thwart their business model—and while many may find it unpalatable, sometimes this requires raising prices.^[ii]

Overall, we believe the hubbub overstates the power of Twitter and the presidency. Behind all the posturing and tweeting and fuzzy plans to maybe (or maybe not!) lower drug prices, the picture is largely the same: A largely inactive government featuring a less-powerful-than-thought chief executive. Big talk and little action is one facet of gridlock—a bullish force we believe should help lift US stocks this year.

[i] This garnered a congratulatory response from the Presidential Twitter account. Our fearless investigative reporting (aka, a quick scan of this pharma phirm’s Twitter account) indicates their social media team neither “liked” nor retweeted this tweet.

[ii] Which, we feel compelled to note, is the case for every firm in every sector around the globe.