Drug Stocks Not A Safe Haven This Recession

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Take a look at this chart.  If any industry should be up and to the right this is it.



This chart shows the iShares Dow Jones US Healthcare Provider ETF. This ETF is stocked with a number of big pharmaceutical companies and many are household names.  Abbott Laboratories (ABT), Bristol-Myers Squibb (BMY), Johnson & Johnson (JNJ), Merck (MRK), and Wyeth (WYE).  Those are just the ones representing more than 5% of the fund.

Many of these companies are at or near 52-week lows.  I think there’s two big reasons for the discrepancy.  The first is due to industry-wide challenges.  The other is a little less obvious and potentially more harmful, but more on that in a minute.

The obvious problems.

Big pharma is plagued by a number of big challenges.  First is the drug pipeline.  There’s a number of blockbuster drugs with patents expiring. With competition from generic drugs a virtual certainty, corporate profits are going to fall.

Add to those problems the industry’s credibility issue.  Vioxx was pulled from the market – with huge amounts of press.  Then news that Vytorin actually wasn’t more effective came out.  These black eyes are causing many people to question the industry.  As a result, new drugs are being subjected to even more scrutiny.

Then you have the biggest problem of all.

This is the really scary unknown for the industry, and it could have the most lasting damage.  It’s the presidential election.

The problems in the healthcare industry and the potential impact of a new president shouldn’t be underestimated.  This issue isn’t limited by political parties.  Both presidential candidates are calling for changes to the healthcare industry.

A direct quote from John McCain's website:

“John McCain will look to bring greater competition to our drug markets through safe re-importation of drugs and faster introduction of generic drugs.”

And what about Barack Obama?

Here’s a quote directly from Barack Obama's website.

“. . . Obama will work to increase the use of generic drugs in Medicare, Medicaid, and FEHBP and prohibit big name drug companies from keeping generics out of markets.”

This doesn’t bode well for anybody in the pharmaceutical industry.

No wonder the healthcare and the pharmaceutical industry stocks are in a freefall.  It looks like November results don’t matter much.  Regardless of who wins, the pharmaceutical industry is in for a tough battle.

I’d avoid pharmaceutical stocks over the next few months.  At least until we see who the next president is, and how much they really want to reform the industry.

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