It’s worth noting that the political rhetoric against aggressive drug pricing practices appears to be one of the only things that two parties can agree on these days in Washington. Last night the WSJ’s Heard on the Street column warned: Don’t Write Off Pharma’s Nightmare Scenario… Drug-price rhetoric translating into law could pose surprise risks for investors, suggesting:
Democrats could try to attach drug-pricing measures to bills that would require Democratic support, such as a reauthorization of funding for the State Children’s Health Insurance Program, according to analysts at Cowen & Co. That program’s funding is set to expire at the end of September.
Investors also should keep in mind that President Donald Trump has an independent, unpredictable streak. It is conceivable he could issue new executive orders to chip away at high prices or even shock the world and support the Democratic plan.
Large-cap Biotech and Pharma stocks remain cheap for a reason, regulatory risk has kept valuations at bay since their all-time highs in late summer of 2015 when then Presidential candidate Clinton fired a warning shot in the form of a tweet across the bow of health care companies and unfortunate investors. It was a theme that then candidate Trump picked up on as it fit his populist message and as President has reiterated his intent to make drugs more affordable.
To my eye, the Health Care Select etf, the XLV, whose five largest holdings (JNJ, PFE, MRK, UNH & AMGN) make up 35% of its weight, recently failed at key long-term technical resistance, with a failed breakout at its prior 52 week high from August 2016, which happens to the be the point where it plunged in late August 2015, and appears vulnerable to a pull back to the uptrend from its Aug 2015 flash crash low, which looks to be near $70:
In early March we detailed a bearish trade idea in the XLV (Health Scare) for both the potential fundamental headwinds and what appears to be a poor near-term technical set up, and with options prices as low as they are in the space, with political rhetoric likely to only heat up, we are looking to roll and/or adjust this slightly profitable position to maintain baerish exposure while reducing overall premium risk. We’ll update when we do.