Make no mistake about it: A lot of people on Wall Street believe, or fear, that the presidential election will have a profound effect on the business of medicine, especially if John Kerry wins.

"The election could change health policy," intoned a Goldman Sachs report issued six weeks ago. "Health care is the holy grail of domestic policy," chimed an election outlook analysis that was published four weeks ago by Friedman Billings Ramsey.

The prevailing sentiment on Wall Street appears to be that George Bush would be better for the pharmaceutical industry than would John Kerry, more for what Kerry might do than for what Bush will do.

"Election risk remains a major source of uncertainty" for big drug stocks, said Jami Rubin, the Morgan Stanley pharmaceutical analyst in an Oct. 17 report to clients. Kerry would be "a negative" because of fears that he would create "a less accommodating environment for private delivery participation" in Medicare's expanding role in reimbursing for drug purchases.

The election comes at a bad time for the industry, which has suffered from recent product-related disasters including the recall of Vioxx by

Merck

(MRK) - Get Report

and

Chiron's

(CHIR) - Get Report

manufacturing problems, which have knocked out half of the U.S. flu vaccine supply. Both events have triggered politicians' calls for investigations.

So, it's little wonder that Rubin, in issuing a report that previewed the drug industry's third-quarter earnings releases, used the headline: "Sentiment Shifts from Pessimism to Hopelessness."

By Thursday, the Amex Pharmaceutical Index of 15 big drug stocks was down about 9.5% while the

S&P 500

was up 1.5%. The drug index recently hit a 52-week low. Among the 15 members of the index, only two companies escaped the carnage.

Johnson & Johnson

(JNJ) - Get Report

was up 12.3% for the year;

Schering-Plough

(SGP)

was up 4%.

But other big companies are getting clobbered.

Eli Lilly

(LLY) - Get Report

, viewed by many as having a powerful research pipeline, was down 21% for the year.

Merck, plagued by the Vioxx recall and last year's failure of several experimental drugs in late-stage clinical testing, was down 32%.

Shares of

Pfizer

(PFE) - Get Report

, the biggest drugmaker, were down 18.4% as the company faces the prospect of patent expirations on several top-selling drugs without enough new products to compensate quickly for eroded revenue.

Pfizer, Lilly, Merck,

King Pharmaceuticals

(KG)

,

Forest Laboratories

(FRX)

and

Bristol-Myers Squibb

(BMY) - Get Report

were among the companies whose stocks were trading at or near 52-week lows by late October.

"It's hard to imagine the sentiment for the group getting much worse," Rubin said.

That sentiment is exacerbated by the perception that Kerry will impose more regulations, expand government's role and encourage the reimportation of drugs from Canada and other countries where drugs are cheaper.

"Kerry would seek lower drug prices," says the Goldman Sachs report. "A Bush victory would preserve the status quo .... Large-cap pharmaceuticals would see the largest impact, but managed care and biotechnology could be at a slightly greater risk under Kerry."

But what about the more benign perception that Kerry would increase government health care spending, provide health care coverage for many of the uninsured and encourage the expansion of scientific work such as stem cell research?

"The perception is that Kerry is not going to be good for pharmaceuticals," said Albert Rauch, a drug industry analyst for A.G. Edwards. "But he wants to increase health care spending, so that could be good."

Even Goldman Sachs conceded that generic drug companies, pharmacy benefit management firms and health care facilities "would benefit from some -- but not all -- Democratic positions."

Don't Forget Congress

Analysts and drug company executives worried about extreme measures from Kerry or Bush can take comfort in the role of Congress. Anything short of overwhelming one-party control over both houses will lead to enough lawmaking gridlock to derail the grandest plans for either candidate.

"President Kerry would have a difficult time getting things enacted with a Republican Congress," said Greg Kelly, Washington affairs analyst for the Susquehanna Financial Group.

"There was so much trouble trying to get the

2003 Medicare drug bill passed that I can't see too many major changes being made

by the next president due to Congress," Rauch added.

Sometimes, Congress can be more extreme than a president. One perception is that a second Bush administration backed by a GOP-controlled Congress would bring fiscal discipline to all forms of government. "The Republicans and Democrats are still in a spending mood," Rauch pointed out.

However, there is no denying that the next president will have a significant impact on health care: He will set budget priorities; appoint and nominate regulatory chiefs and cabinet officers; write voluminous regulations; and exercise the political and lobbying powers of the executive branch.

That means somewhere between perception and reality lies the next four years of health care policy. "Perception is much worse than reality," Rauch said.

Some Key Issues

Drug reimportation from Canada or elsewhere heads the list of concerns by big drug companies. Even though Bush had portrayed the issue as a debate over safety and Kerry has focused on access and price, Congress may be the arbiter depending on how many legislators respond to their constituents' complaints about high drug prices.

Greg Kelly, of Susquehanna Financial Group, pointed out that the drug reimportation is an issue that goes back to the presidency of Bill Clinton. The Secretary of Health and Human Services has the power to allow drugs to come in from Canada if the drugs had been certified as safe, Kelly said. The secretary's power has not been invoked. Reimportation has a better chance of passage if Kerry wins, he said.

Another big issue is the Medicare Modernization Act of 2003. "Senator Kerry would like to rewrite

the law to open up broader coverage," says the Friedman Billings Ramsey report. "This makes great copy, but actually changing

the law would require either an act of Congress or a judicial injunction."

Also on the presidential agenda is the law's requirement for Medicare recipients' drug coverage starting in 2006. Until the agency that administers Medicare develops regulations, the Bush Administration has created a prescription drug discount card program for the elderly. This "has fallen far short of its enrollment goals, creating concerns on the part of insurers and pharmaceutical companies about how seniors will receive the broader benefit in 2006," says the Friedman Billings Ramsey report.

Poor enrollment in this program "presents a real jeopardy" to Bush's goals, and a Kerry victory plus continued disenchantment by the elderly could cause Congress to renew the debate on the entire program. Right now, the investment banking firm says, the law is neutral for drug companies "because increases in sales volumes are likely to be offset by decreases in average sales prices."

Changes in Power

A Kerry victory, of course, would most likely lead to the replacement of key policymakers in government health care agencies, including Dr. Mark McClellan as head of Medicare. "We don't expect the divided Senate to give a nod to a new leader

who would bring radical changes," says Friedman Billings Ramsey.

But a change in political control in the Senate could also have a profound effect on health care policy. If the Democrats win, Sen. Edward Kennedy, D-Mass., could wind up as head of the Committee on Health, Education, Labor and Pensions. That would "likely mean a more active focus on drug pricing and competition issues, particularly reimportation and generic drug approvals," Goldman Sachs says. A change in party power also would give Democrats more influence on Medicare and Medicaid through the Senate Finance Committee and more influence on reimportation and generics via the Senate Commerce Committee.

The last word on today's debate belongs to Henry McKinnell, chairman and CEO of Pfizer. Asked on Oct. 20, whether Kerry or Bush would be better for the pharmaceutical industry, McKinnell responded that it doesn't matter because "both administrations will face the same problems."

The real issue, he said, is whether the next president focuses on the cost of care "which leads down the path of rationing price controls" or whether the next president focuses on "the value of health and the cost of disease," a path that will lead towards a greater emphasis on research, wellness and prevention. McKinnell wants the next president to "launch a national debate," adding that when a fully-informed public decides which path to take, it will favor health and wellness over rationing and price controls.