Frédéric Gomez

Will the “Trump effect” last?

The surprising election of Donald Trump as the next US President led to a spectacular comeback of biotech shares. The long-term prospects depend on Trump’s healthcare strategy and the (much-desired) return of generalist funds.

Annus Horribilis – the finding was simple: 2016 was a year for investors to quickly forget. Between 12/31/2015 and 11/08/2016, the NBI (Nasdaq Biotechnology Index) lost 22.6%, to reach 2,738.24 points (at its lowest in 2016, the index reached 2,552.13 points). We were very far from the highest level achieved in July 2015 (beyond the 4,150 points mark). Apart from a few exceptions (Tesaro, GW Pharma, Blueprint Medicines, FivePrime Therapeutics or Spark Therapeutics), the vast majority of biotech companies listed on the Nasdaq, regardless of their market capitalisation, were down. And then, there was the election of Donald Trump. The consequence was immediate: the NBI jumped 9% in one day! Since then, the 3,000 points mark has been hit again. So, why is this “Trump effect” occurring? Many (good?) reasons can explain this effect. Financial markets like to be scared. Irrational behaviour is common and represents one of the components of market functioning. Repeated tweets of Hillary Clinton on drug prices and the victory prospects of the Democratic candidate had put US biotech stocks under pressure. The victory of the Republican candidate helped dispel short-term price fears. At the same time, the fiscal promise could encourage and bolster M&A activity in the healthcare sector. All the ingredients were combined for a spectacular rebound after the vote. 

Now, the fundamental question for investors will be as follows: Is this the beginning of a bullish rally that will last through 2017? The decisions made by the Trump administration will be dissected and the first announcements on the healthcare sector scrutinized. While it will be an important element, it seems obvious that the 2017 stock market performance will not be linked solely to political considerations. According to Pharmium Securities, one of the main factors for a successful 2017 is the return of generalist funds. These investors are essential for a rally. Sector-rotation could favour biotech stocks, especially if the clinical/regulatory news flow is positive.

In 2017, many biotechs could potentially win marketing authorisations in the US for one of their products (Genmab, Biomarin, Clovis Oncology) and report data (Bavarian Nordic, Galapagos). Like any brutal move where investors do not discriminate among companies, this correction may have been excessive for several biotech firms that are clearly undervalued, given their solid fundamentals (Vertex, Novo Nordisk). It is likely that smart investors have already made the same conclusion and may benefit from a rebound.

by Frédéric Gomez, Analyst at Pharmium Security