Why the Trump Drug Rally Won’t Last

The stock market has been a lousy prognosticator of late. Prior to the election, Mr. Market seemed utterly convinced of a Clinton win. (It didn’t happen.) Then, as the outcome looked clear, it predicted panic—then galloped giddily into euphoria. (Hapless traders trying to chase these ups and downs no doubt mistimed them—because, well, it’s a sucker’s game to try to time the market. But then you knew that…)

That said, the market has seemed to send a more consistent message regarding the pharma and biotech industries. After the news of Trump’s victory, stocks of drug makers shot up—a sharp reversal from the previous few months of mostly steady decline when, to many, a Clinton presidency seemed inevitable. Shareholders were also buoyed by the defeat of Prop 61, the California ballot initiative that promised to lower drug prices by pegging what state agencies paid to prices negotiated by the U.S. Department of Veterans Affairs—an effort the drug industry reportedly spent $109 million to defeat.

And on first glance, the recent enthusiasm makes sense: Clinton signaled that she would come down hard on drug company “price gouging” in September, which sent stocks reeling. (Favorite hyperbolic headline: “Clinton Delivers Poison Pill to Biotech ETFs”). Trump, for his part, has said little on the matter. Clinton looked as if she would continue a cautious regulatory approach at the FDA. Trump has said he wants to cut “the red tape at the FDA,” claiming “there are over 4,000 drugs awaiting approval, and we especially want to speed the approval of life-saving medications.” (No, the “4,000” drug backlog doesn’t refer to what you think—and isn’t true in any case.) Clinton would largely keep Obamacare; and Trump, well, I wrote about this on Nov. 9.

Which brings me to whether our friend Mr. Market is right or wrong on pharma’s future in the Trump era. The answer is neither. (Psst—It doesn’t know.) The confusion doesn’t just center over what happens (and when) to the ACA—or on any prospective new drug-pricing regulation, for that matter. Trump has said he favors introducing more competition into the healthcare marketplace, including letting Medicare negotiate on drug prices. And market competition will do more to lower prices than anything. A case in point: Gilead’s steep stock drop in October had nothing to do with any political rhetoric on sky-high drug costs, but rather with the fact that its $80,000 or so Hep C combination therapy (Harvoni) might face pricing pressure from rivals J&J and Abbvie—adding another challenge to a company already facing a drop in its HCV drug sales.

Nor will a change at the helm at FDA do much to alter the pharma horizon. The drags on the industry today revolve around a paucity of innovation and the expensive, late-stage failures of drugs that continue to plague it. Those are two problems that drug makers will have to fix on their own.