Innovation Will Offset Headwinds From Trump Drug Plan

Damien Conover: President Trump outlined a blueprint to lower prescription drug prices for patients in the United States. A lot of what's been outlined we don't think will impact the moats or the valuations for the majority of the large-cap pharmaceutical and large-cap biotechnology firms. There are some things in the proposal that will create some minor headwinds, but we think the innovation that's coming out of these firms will offset those headwinds. We want to talk a little bit about what some of those headwinds are.

First off in the blueprint, President Trump wants to encourage more generic competition. We think this is a good thing and is something that is more in line with our generic drug companies, which all have no moats, where that industry is a very highly competitive industry, commoditized, very difficult to get returns on invested capital.

Additionally, the blueprint calls for increased negotiation within Medicare drugs. This is a subsegment of the patient population. Those increased negotiations will put some minor headwinds into the pricing for a lot of drugs that the large-cap pharmaceutical and large-cap biotechnology firms sell. However, to put this in perspective, we only anticipate the increased negotiations for one of the key segments, Part B, to really hit the drugs sales by around 2%. That's not a major impact. Also, we anticipate that drug firms will be able to increase prices to offset some of that pressure in the Medicare Part B segment--so to be able to increase prices in other segments of the market.

Within this context, we think the innovation and strong pipelines within large-cap pharmaceutical and large-cap biotechnology firms will enable them to strengthen their position over time and continue to have wide economic moats.

On a valuation perspective, we still see these two groups as very well-positioned and undervalued. A couple of names we are highlighting are Roche, Pfizer, Eli Lilly, and Allergan. All of these firms, we think, are undervalued and most of them pay very strong dividends that we think will continue for several years.