Tougher action on drug pricing by Democrat Hillary Clinton had clouded the outlook for biotech stocks this year. But, the startling win of Republican Donald Trump dissipated the fears. Also, biotech stocks recovered from a sharp sell-off witnessed over the past one year.
Trump’s plan to repeal Obamacare, free up cash currently held overseas for tax reasons along with his rhetoric on the campaign trail suggest that he will be more amicable toward the biotech industry. Taking such bullish trends into consideration, it will be judicious to invest in fundamentally sound biotech firms.
What Led to the Trump Win?
Though it came as a complete surprise, Trump won the required number of electoral votes in spite of Clinton’s lead by 170,000 popular votes. This makes it the second most closely contested presidential election in modern history after the famous Kennedy-Nixon clash of 1960.
So, what are the probable reasons for his victory? Trump won the presidency by riding an enormous wave of support among white working-class voters, which helped him triumph even in areas that supported Barack Obama in 2012. Coming to the figures, around 72% of white men without college degrees voted for Trump. His strength among white voters led to a commendable performance in the upper Midwest, while he also garnered considerable support from blacks and Hispanics.
Trump’s political ruthlessness was certainly appreciated by half of the electorate who has lately grown weary of “political correctness”.
He sure had a way with his words from “Low Energy” Jeb Bush to “Little Marco” Rubio to “Lyin’ Ted” Cruz to “Crooked Hillary”. To top it, FBI’s unprecedented investigations on Clinton, did, help him secure the seat (read more: 6 Stocks to Profit from a Trump Presidency).
Biotech Shares Soar
Trump’s victory fueled a market sell-off across the world (which changed during the course of the day) while biotech stock indices braved it and scaled higher. The iShares NASDAQ Biotechnology Index (IBB) soared 23.37 points or 8.9% to settle at 284.99 on Nov 9.
ISHARES NDQ BIO Price
The index jumped from a critical support level of 250 earlier this week, which is the low end of the trading range for the index for most of this year. Whenever the index has bounced back from such a level, it has invariably resulted in an average rally of 15% this year.
Biotech behemoths are enjoying a similar bull run, with Celgene Corporation (CELG), Amgen, Inc. (AMGN), Gilead Sciences, Inc. (GILD), Regeneron Pharmaceuticals Inc (REGN) and Biogen Inc (BIIB) rallying 10.7%, 5.8%, 5.9%, 13.8% and 8.2%, respectively.
Trump Victory: Big for Biotech
Trump’s stance toward the biotech industry has been friendlier than that of Clinton. Trump remained silent on the drug pricing debate, which could mean fewer headwinds for the industry. Clinton, on the other hand, raised quite a hue and cry last year, vehemently criticizing the sharp hike in the price of Daraprim, used to treat parasitic infections.
Clinton suggested a wide range of policies to check drug prices and reduce healthcare payers’ drug costs. She also proposed reinvestment in research and development, and drug reimportation from countries that pay less for their medicine, something that didn’t bode well for the industry.
Meanwhile, Trump announced plans to “repeal and replace” the Affordable Care Act, better known as Obamacare. Even though the act helps purchase insurance plans at a subsidized rate, it does levy taxes on the industry that reduces profitability. A tax target is set, which will be collected from the drug industry on an annual basis. Next year, the target was expected to rise to $4 billion from $3 billion this year. This implies that a drug maker having 15% market share of all branded drug sales will have to pay around $600 million in taxes next year. If such a fee is nullified by repealing Obamacare, it will significantly boost earnings for biotech firms.
Trump’s business tax plan should also benefit biotech companies. He plans to trim business tax rate to 15% from 35%. The lower tax burden is expected to boost profits for large biotech companies. Such firms can, in the meantime, repatriate cash held overseasand only pay 10% tax on it, as per Trump’s policy. This extra cash can be further utilized for stock buybacks, boost earnings, pay dividends or invest in drug research.
5 Solid Choices for Biotech
No one knows what the future has in store for the biotech industry. There might be a lot of turbulence in the industry till Trump formalizes his healthcare plan. But, the aforementioned bullish factors call for investing in solid biotech stocks.
We have, thus, selected five biotech stocks that have tremendous financial strength and are also poised to grow in the near term, thanks to Trump presidency.
Such stocks boast a VGM score of ‘A’ or ‘B’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners. Such stocks also flaunt a Zacks Rank #1 (Strong Buy) or #2 (Buy).
Enzo Biochem, Inc. (ENZ) is an integrated life science and biotechnology company. The company has a Zacks Rank #2 and a VGM Score of ‘A’. The Zacks Consensus Estimate for its current year earnings improved 5.9% over the last 60 days. The company’s expected growth rate for the current year is 15%. Following Trump’s victory, the company’s shares surged 6.3% on Nov 9.
Exelixis, Inc. (EXEL) is a biopharmaceutical company that engages in the discovery, development, and commercialization of new medicines. The company has a Zacks Rank #2 and a VGM Score of ‘B’. The Zacks Consensus Estimate for its current year earnings rose 31.5% over the last 60 days. The company’s expected growth rate for the current year is 34%. After Trump’s victory, the company’s shares soared 20.5% on Nov 9.
Genmab A/S (GNMSF) is a biotech company that develops antibody therapeutics for the treatment of cancer internationally including the U.S. The company has a Zacks Rank #2 and a VGM Score of ‘B’. The Zacks Consensus Estimate for its current year earnings surged 109.8% over the last 60 days. The company’s expected growth rate for the next year is a whopping 224.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Heska Corp (HSKA) manufactures, markets, sells, and supports veterinary products. The company sports a Zacks Rank #1 and a VGM Score of ‘B’. The Zacks Consensus Estimate for its current year earnings climbed 19.5% over the last 60 days. The company’s expected growth rate for the current year is 82.4%. Following Trump’s victory, the company’s shares gained almost 3% on Nov 9.
Incyte Corporation (INCY) focuses on the discovery, development, and commercialization of proprietary therapeutics in oncology in the United States and internationally. The company has a Zacks Rank #2 and a VGM Score of ‘B’. The Zacks Consensus Estimate for its current year earnings scaled more than 200% over the last 60 days. The company’s expected growth rate for the next year is a staggering 163%. After the Trump win, the company’s shares rallied almost 13% on Nov 9.
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