What Can Biotech Expect from the New Administration?
During the first week after Election Day, various biotech indices were up more than 10%. Many analysts were proclaiming this a new golden era for the sector. But is this a temporary “Trump bump” or a long-term, sustainable harbinger of things to come for biotechs?
Certainly, the new administration can impact the biotech sector in a myriad of ways. Let’s examine a few issues biotech executives would like clarity on from President-Elect Trump.
The president-elect’s tax plan is to cut the top corporate tax rate from 35% to 15%, which could increase life science companies’ profits. However, net operating losses (NOLs) would be worth less at that new tax rate. Also, many developing biotechs have losses, so their tax rate may not be an immediate concern.
Trump has also called for a tax reduction so that companies parking cash overseas to avoid U.S. corporate taxes can repatriate those funds to the U.S. at a lower tax rate. For large pharma companies, this represents billions of dollars that could come back here for U.S.-based research, stock buybacks or dividends, and merger and acquisition (M&A) opportunities.
About Those M&A Opportunities
From August 2015 to August 2016, life science deals were down 65%. Much of that drop may have been related to uncertainty surrounding the presidential race, some fatigue from the euphoric valuations of 2014 and early 2015, and the tightening of tax rules. In fact, in the months leading up to the election, there was a $50 billion biotech sell-off in the public equity markets. However, the combination of lower tax rates and repatriated cash could fuel M&A activity. This could help large firms replenish older drug pipelines as well as breathe new life into struggling start-ups. It may also make acquisitions more competitive because companies with the same tax rate will have a level playing field when bidding.
President-Elect Trump is not a supporter of the Affordable Care Act (ACA). He has signaled, though, that he may keep certain ACA provisions in place, such as covering pre-existing conditions and the age at which children are covered under their parents’ plans. Biotech companies generally welcome the president-elect’s call for a repeal of the 2.3% medical device tax, which is part of the ACA. He has also advocated for letting people purchase health insurance across state lines, which could increase competition and lead to lower prices.
While the ACA has created more health care consumers, it remains to be seen what the president-elect’s replacement health care plan will mean for the biotech sector.
Both candidates advocated for lower drug prices, though Secretary Clinton was more outspoken. One bellwether was in November when the American Diabetes Association called on Congress to hold hearings on the increase in insulin prices.
Perhaps this statement from President-Elect Trump’s website sheds some light on his intentions: “Remove barriers to entry into free markets for drug providers that offer safe, reliable and cheaper products. Allowing consumers access to imported, safe and dependable drugs from overseas will bring more options to consumers.” Allowing the importation of drugs—as well as his inclination to let Medicare negotiate drug prices—may give pharmaceutical companies pause, however.
During the campaign, Trump often discussed removing regulatory barriers that could impede growth. In fact, he states: “Reform the Food and Drug Administration (FDA) to put greater focus on the need of patients for new and innovative medical products.”
A few legislative matters are at hand. Congress has just passed, and President Obama signed, the 21st Century Cures Act. The Act will fund to the tune of $6.3 billion various health and life science initiatives. This includes $4.8 billion to the National Institutes of Health (NIH) for disease detection and prevention, $500 million to help the FDA streamline the drug and medical device approval process, and $1 billion to states to tackle mental health issues and opioid addiction.
Further, the Prescription Drug User Fee Act, which allows the FDA to collect fees from the drug industry to fund the approval process for new drugs, is up for renewal in 2017. A new round of Medical Device User Fee Amendments—where medical device companies pay fees to the FDA when they register their devices or submit an application or notification to market a new medical device in the U.S.—is scheduled to take effect in 2017.
The tightrope that everyone concerned must walk is encouraging innovation, a free market and making lifesaving medications available as quickly as possible, while maintaining the highest levels of safety and efficacy.
President-Elect Trump has said his administration will “advance research and development in health care” and “make the commitment to invest in science, engineering, health care and other areas that will make the lives of Americans better, safer and more prosperous.”
There are currently billions of research dollars allocated to the NIH. Trump has indicated support for increased NIH funding, but has also questioned the NIH’s purpose and called for decreased federal spending. There is also a concern that under a Trump administration foreign-born researchers may shy away from the U.S.
The president-elect has made no secret of his intentions to kill the proposed Trans-Pacific Partnership (TPP) trade agreement and possibly re-negotiate the North American Free Trade Agreement (NAFTA). If Trump takes a more protectionist trade stance, as he’s discussed, it could cause the dollar to rise and adversely affect exchange rates. This could impact the bottom line of U.S. biotech companies.
It will be interesting to see how the president-elect will balance his promises of economic growth with his pledge to help ease the burden of middle-class Americans. So, to answer the question: What can biotech expect from the new administration? The answer is: We’ll see.
Catalyst - Winter 2016/17