Major Pharmaceutical Stocks Are so Utterly Destroyed that they Could be Starting A Big Rally Here

The pharmaceutical industry has had a tough couple of years, or basically a tough decade. The industry has proven to be amazingly innovative; for example, just in the last years Gilead has turned Hepatitis C from a devastating disease to one which is quickly curable. And, the industry as a whole faces a long-term tailwind in the form of an aging population.

Yet, the structural issues around patent expiration came into contact with hot button pricing issues (which the media personified in the form of Martin Shkreli) and out-and-out accounting fraud (Valeant). Then, came the threat of Hillary, whose 1993 efforts to revamp health care caused a dramatic swoon in pharmaceuticals at the time. As Hillary bashed Mylan’s Epipen pricing last summer, pharma and biotech just moved lower and lower.

Pharma rallied the day after Trump’s election, only to then reverse and move to dramatically lower prices each time he himself bashed the industry in his populist town hall meetings. Then came the perceived risk of dramatic changes to our health care system.

The prices of many pharmaceutical stocks today are so low that it may not matter whether there will be some new transformative health care system. Some stocks are trading at 6x or 7x earnings and most are trading below 11x to 12x. The perception of how bad things could become for these companies has become too baked into their current prices. Indeed, for these stocks not to trade higher, the US government would have both to overcome a huge lobby and to legislate a cut in US pricing by one-half to three-quarters.

On September 26, 1994, Senator George Mitchell announced that health care reform was dead, cutting Hillary off at the knees for the first time (the Russians did it again in 2016). Pharmaceutical stocks rallied dramatically in the days and years that followed.

That moment may be upon us again.

Editor’s Note: The author is long certain major pharmaceutical stocks, but does not necessarily like all big pharmaceutical stocks here.