Editors' pick: Originally published Nov. 9.
Investors have convinced themselves, at least temporarily, that President Donald Trump is going to make drug stocks great again.
Two widely owned exchange-traded funds, iShares Nasdaq Biotechnology (IBB) and the SPDR S&P Biotech ETF (XBI) , closed Wednesday up 8.9% and 10.4%, respectively, their largest one-day gains since October 13, 2008.
Shares of Pfizer (PFE) , the stodgiest pharma company in the world, rose 10% at one point during the day before closing up 7%. Regeneron Pharma (REGN) , Incyte (INCY) , Vertex Pharma (VRTX) , Biomarin (BMRN) , Shire (SHPG) and Celgene (CELG) all notched 10% or greater gains Wednesday.
Does the rally in drug stocks have legs? Here are some things to think about, in no particular order:
1. $98 billion. That's the amount of cash U.S.-based pharma companies have parked overseas, according to the investment bank Jefferies. The majority of that cash could be repatriated in 2017 and used for acquisitions, if Trump follows through on a campaign promise. Giddiness over the prospect of a biotech M&A resurgence is the truer reason for Tuesday's stock rally, more so than drug pricing. If we start to see actual deals announced, this year's heavy underperformance in the biotech sector could be a fleeting memory rather quickly.
2. Obamacare sucks, so good riddance. OK, but the millions of people insured under Obamacare also provide a nice revenue bump for biotech and pharma companies. (More patients, more drugs prescribed.) The replacement plan pushed through by Trump and the Republican Congress might leave the drug industry gains intact, or it might not. It's hard to predict since we don't know the specifics of the Obamacare replacement plan. Investors do not like uncertainty.