Introduction

Although the political uncertainty has abated, Donald Trump has been able to single handily influence the movement of specific stocks [i.e. Lockheed Martin (NYSE:LMT), Ford (NYSE:F), Boeing (NYSE:BA) and others] and sectors (i.e. automotive, biotechnology, defense and healthcare). The overall healthcare sector has become volatile on the heels of any statement or tweet from Donald Trump. Case in point, Trump recently held a press conference and stated his stance with regard to the pharmaceutical industry and more specifically drug pricing. Trump stated that drug companies are "getting away with murder" when speaking to the drug pricing issue that has taken the spotlight. These remarks immediately resulted in a broad sell-off across the entire biotech cohort. The iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) shed more than 2.5% or $7 per share as these comments were heard during the live broadcast. The healthcare sector has been faced with a political backdrop that's put the entire industry on edge. The overall healthcare umbrella has become sensitive to any tweet from President Trump as he vows to bring down drug prices. As he pursues his agenda against drug pricing, much of these threats may have already been priced-in as seen in many healthcare related stocks [i.e. McKesson (NYSE:MCK), CVS (NYSE:CVS), AbbVie (NYSE:ABBV) and Allergan (NYSE:AGN)] that have seen sharp and sustained sell-offs. Lately, many large-cap pharma companies have create a drug pricing coalition of sorts to reign in transparency, separate themselves from a few bad actors and get out in front of Trump's crusade against the drug companies.

Figure 1 - IBB price activity over the previous 6 months with pronounced volatility that coincide with political rhetoric against drug pricing

Merck Joins Drug Pricing Coalition

Big pharma companies are joining forces as of late to address the price increases that the public and governmental officials have been demanding. Allergan, J&J (NYSE:JNJ), Novo Nordisk (NYSE:NVO) and AbbVie have committed to limiting any annual drug pricing increases to less than 10%. J&J went further stating that they will be publishing an annual report regarding its portfolio and the price increases they've implemented. AbbVie released data on its increases as well stating that Humira was increased by 8.4% with an only once annual increase moving forward. Merck (NYSE:MRK) becomes the latest pharma to join this drug pricing transparency coalition. Merck raised list prices by an average of 9.6% with an average net price increase of 5.5%

M&A and Repatriation Catalysts

The M&A activity has heated up as of late with J&J and McKesson making a big splash with acquisitions of Actelion and CoverMyMeds, respectively. Johnson & Johnson made an all-cash offer of $30 billion to acquire Swiss drug maker Actelion. This acquisition was approved unanimously by the boards of both companies and valuing the transaction at $280 per share, payable in U.S. dollars. This acquisition will be financed by cash held outside the U.S. while Actelion shares spiked 20% on the news. The drug discovery operations of Actelion will be spun off as a standalone company, termed R&D NewCo. Johnson & Johnson will own a 16% stake in the newly formed company with rights to an additional 16% ownership equity via a convertible note. McKesson reached an agreement to acquire privately-held healthcare IT company CoverMyMeds for $1.1 billion in an effort to strengthen its technology offerings to pharmaceutical manufactures, clinicians and payers. In addition to the latest moves, Pfizer's acquisition of Medivation for $14 billion, Allergan's acquisition of Tobira for $1.7 billion and J&J's acquisition of Abbott's Medical Optics unit for $4.3 billion. Recently, Ariad (NASDAQ:ARIA) Pharmaceuticals was acquired by Takeda Pharmaceuticals for $5.2 billion.

As campaign promises of repatriation of overseas assets and decreases in corporate taxes come to fruition, this could serve as a catalyst for M&A. These events taken in conjunction with chronically depressed valuations of many companies may accelerate M&A within the sector. The governmental stance on M&A activity may loosen up with the new administration while its pro-business agenda. Potential repatriation of overseas assets, decreases in corporate taxes and the loosening of M&A push back may bode well for the industry in the intermediate term. As the cohort remains suppressed, many prospective buyout candidates become more financially appealing to the acquirer due to beaten down valuations in concert with the maturity of pipelines coming into play. As this acquisition activity heats up, be on the lookout for stocks that have been rumored as takeover targets to heat up and possibly take IBB along for the ride.

Summary

As Donald Trump pursues his crusade against drug pricing, much of these threats may have already been priced-in as seen in many healthcare related stocks that have seen sharp and sustained sell-offs that have now leveled off. President Trump may be up against a formidable challenge with the formation of this new coalition on drug pricing transparency within large pharma. As transparency and responsible drug price increases enter the market, reigning in these costs may be more challenging when countered with this coalition and its vow to limit drug price increases. If this debate can be stymied by the coalition and largely put behind the industry, this cohort will likely rise. Potential M&A activity and a favorable repatriation environment can further support this sector. Collectively, all these potential events bode well for the sector and as IBB attempts to break through the $300 barrier be on the lookout for these events in propelling the index higher.

Disclosure: I am/we are long IBB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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IBB: Merck Joins The Drug Pricing Coalition For Transparency - Seeking Alpha