Drug stocks to remain stable after election

By Toni Clarke - Analysis

BOSTON (Reuters) - It may be tempting for investors in pharmaceutical and biotech stocks to rush for the exits if a Democratic administration takes over the White House, but drugmakers are about to prove once again why they are a safe haven.

Major decisions on how to cope with the credit crisis are likely to dominate U.S. government thinking in the new year, bumping down healthcare reform on the priority list for the new president and members of Congress.

That spells relative stability for drug stocks, which is attractive to investors seeking safety after a terrible October for the stock market -- one of the worst months on record.

"I think most investors feel the healthcare plans of both candidates are on the back burner until the financial crisis can be solved," said Damien Conover, an analyst at Morningstar.

Opinion polls and analysts are predicting a win for Sen. Barack Obama, the Democratic presidential candidate, with gains seen for Democrats in Congress. But even if Republican Sen. John McCain wins, any rally would likely be modest.

That said, select groups of stocks will likely benefit regardless of who wins: stem cell companies, for example.

Both Obama and McCain have voted to overturn current limits on federal funding for stem cell research. That has pushed up the shares of Geron Corp. (GERN.O) 33 percent over the past week. Shares of Aastrom Biosciences Inc (ASTM.O) and StemCells Inc (STEM.O) have doubled over the same period.

The rough ride for drug stocks looks fairly smooth compared with the rest of the market. Since the beginning of September, the American Stock Exchange Pharmaceuticals Index .DRG has fallen 15 percent and the Nasdaq Biotech Index .BTK 13 percent. The Standard & Poor's 500 Index .SPX has fallen 24 percent over the same period.

"In all honesty, I think at current valuations people are more inclined to play the big pharma names defensively," said Seamus Fernandez, an analyst at Leerink Swann. "Most people anticipate that this is going to be a Democratic Congress and a Democratic president, and that's already factored into expectations."

A stable post-election performance by U.S. pharmaceutical stocks would come in contrast to the 2006 elections when the U.S. Senate shifted in favor of the Democrats.

The group fell 5 percent compared with the S&P 500 in the week following those elections, according to JP Morgan analyst Chris Schott, the largest short-term election-related sell-off seen in the past 30 years.

The current economic environment, however, is over-riding traditional market reactions.

Among the current issues on the agenda of congressional Democrats are negotiating lower prices in Medicare's prescription drug program, allowing generic versions of biotechnology drugs and expanding health benefits to the uninsured.

"Overall, drug price control through Medicare under Obama could be perceived negatively, but practically it will be hard to implement," said Jason Zhang, an analyst at BMO Capital Markets.

Other analysts say McCain's proposals wouldn't be much more appealing.

"I don't think that McCain is particularly an upside opportunity because he has talked about implementing price controls for the industry and he has talked about reimportation," Fernandez said, referring to the importation of drugs from other countries.

Indeed, analysts at Swiss brokerage Helvea conclude that an Obama win would be relatively favorable to drug stocks as the added revenue from increased patient volume would outweigh any drug price declines in the short to medium term.

Obama's plan aims to build on the current employer-based insurance system and would require all employers except small businesses to offer health insurance or contribute to the cost of coverage.

It would replace the current individual insurance market with an insurance exchange in which small businesses and those without access to coverage could buy a private or public health plan with tax credits.

McCain's plan seeks to put health insurance into the hands of individuals by removing tax breaks for employer-paid health benefits and offering tax credits of $2,500 for individuals and $5,000 for families instead.

"For the pharma and biotech sectors, we believe that an increasingly cost-constrained healthcare market is going to favor those companies that can efficiently develop and market innovative products for which a real value-for-money argument can be made," said Charles Duncan, an analyst at JMP Securities. "I believe that, in general, favors the biotechs."

(Additional reporting by Bill Berkrot and Lewis Krauskopf in New York, Sam Cage in Zurich, and Deena Beasley in Los Angeles, editing by Dave Zimmerman)