What this leaked Trump memo means for drug stocks

From Nick Rokke, Analyst, Palm Beach Daily:

Back in March, President Trump tweeted that drug companies “are getting away with murder” with their high prices.

The drug companies took notice. That’s why they spent $78 million on lobbying Congress in the first quarter of 2017.

That investment is about to pay off…

According to a recently leaked White House memo, President Trump is about to ease regulations on drug companies.

The memo contains a draft of an executive order that’s friendly to the drug industry’s interests. And according to media reports, President Trump could be just weeks away from signing it.

Here at the Daily, we’re always looking for great buying opportunities.

That’s why I reached out to Palm Beach Letter editor Teeka Tiwari. He wrote about this leaked memo in his October issue.

Regular readers know Teeka as our in-house cryptocurrency expert. But he’s also a former hedge fund manager and Wall Street executive.

And he has a knack for finding value plays with high growth potential.

So, I wanted to ask Teeka what he thought this leaked memo meant for biotech and drug companies…


Nick: Hi, Teeka. In your recent PBL issue, you wrote about a leaked White House memo that’s big news for drug companies. What’s it all about?

Teeka: It’s one of the biggest stories flying under the radar of most investors.

The memo contains a draft of an executive order that would ease regulations on drug companies.

But let’s take a step back to set the stage…

During the 2016 presidential campaign, both Hillary Clinton and Donald Trump were berating and threatening the drug sector. That led to a broad decline in prices.

We saw blue-chip stocks like Bristol-Myers Squibb, GlaxoSmithKline, and Biogen drop as much as 35%.

The damage was worse in the biotech sector.

Two of the most popular biotech funds—IBB and XBI—fell 40% and 50%.

Regardless of who won the election, Wall Street expected new regulations against drug companies. The political uncertainty scared many investors away.

And that drove down the profit multiples on these stocks.

Nick: How does this leaked memo change that?

Teeka: It means Wall Street’s dire predictions about big pharma won’t come true. In fact, we’re about to see a brand-new massive bull market in the drug and biotech sectors.

Nick: What makes you so sure?

Teeka: Back in March, President Trump tweeted that drug companies “are getting away with murder.”

He was threatening to implement policies to lower drug prices.

The first proposal would allow the federal government to directly negotiate with pharmaceutical companies over drug prices.

The second—and far more damaging—proposal would be to allow the importation of U.S. drugs from countries like Canada (where, on average, they are 72% cheaper).

Drug companies get nearly half their profits from the U.S. market. So, you can see this policy would have gutted the drug industry.

The CEO of drugmaker Novartis called the measures “draconian elements.”

The drug companies took President Trump seriously. That’s why they spent $78 million on lobbying in the first quarter of 2017.

And that investment is about to pay off.

Trump’s executive order will now take these “draconian elements” off the table.

That’s already led to some buying in the drug space.

Nick: So, is biotech now a great buying opportunity?

Teeka: Without a doubt, the best value in the market today is biotech.

Traditionally, biotech stocks trade at very high multiples. But now you can buy them below market multiples because they’re so hated.

For example, biotech valuations are 16.7% below their five-year averages. That’s cheap!

Nick: So, we know that biotech is cheap… What will drive it higher?

Teeka: The executive order has been in the works since June.

We expect a formal announcement at any time. As soon as it’s announced, you’ll see an immediate rush into drug sector stocks.

Now with the threat of “draconian elements” off the table, it’s time to go all in (while respecting position sizes) on the drug and biotech sectors.

Nick: Thanks T. Appreciate you taking the time to talk to us again.


If you’re looking to play this trend, the iShares NASDAQ Biotech ETF (IBB) is a one-click way to buy a basket of biotech companies. I wrote about it right here.

Regards,

Nick Rokke, CFA

P.S. In the October issue of The Palm Beach Letter, Teeka reveals four quality stocks that he says could can double your money over the next three years if President Trump signs the leaked executive order. 

If you want to learn how to become a Palm Beach Letter subscriber and get access to Teeka’s four stocks, click here.

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