StreetTalk: Bush Agenda Favorable to BioPharm Market? In Theory, At Least

I wrote in the December 2005 issue of Streetalk that no matter who won the election between George Bush and John Kerry, the result would have been good news to the biopharm industry - if for different reasons. I said that with President Bush back in office for a second term, industry red tape would be diminished and the life sciences sector would shift into higher gear.

But that was before the Vioxx scare. Now you can be sure Uncle Sam will be scrutinizing drug companies very closely after widespread media coverage — much of it negative — rattled the biopharm industry. That's what happens when a big pharma company like Merck takes a $28-billion market capitalization hit from the Vioxx fiasco, and when the Bloomberg US Pharmaceutical Index, which includes Merck and 13 other giant pharma companies, is down nine percent in January 2005 over a one-year period. More importantly, it's what happens when American consumers are anxious over the government's ability to protect them from potentially damaging pharmaceutical products. They want Bush to act quickly and protect them.

Year-End Review: Burrill Life Sciences Indices (All Burrill Indices):

That's bad news for Merck, in particular, and the pharma industry, in general. Why? Because with Merck inundated with Vioxx-related lawsuits, and Pfizer on deck due to problems with its marquee Cox-2 inhibitors, the glare from the unblinking media spotlight will take its toll on the industry, even with a friendly face in the White House. George Bush is a canny politician — nowhere near as politically tone deaf as his father — and will no doubt order the US Food & Drug Administration to get tough with drug companies.

Reforms will surely follow, with some decidedly uncozy ramifications for biopharm companies. How would the industry react to an independent public agency springing up to review and regulate approved drugs? Not very well, I'd say. Drug companies might want to appease the Bush administration by rolling out their own watchdog commissions comprised of industry heavyweights to conduct their own due diligence. Traditionally, this route has worked wonders for other industries like Wall Street and the high technology sector, with its alphabet soup of standards and practices bodies.

GAUGING THE BUSH FACTOR - PART II

What else does a Bush second term mean for the bioscience industry? Is there better news? Let's take a look.

Financially, the Bush re-election was good news, short term, for the biopharm industry. According to the Burrill Biotech Select Index, biotech stocks increased by five percent in November, surpassing the Dow Jones Industrial Average, which rose four percent during the same time period. The life sciences industry's market capitalization also spiked upward by the same amount — five percent — from $356 billion at the end of October 2004 to $373 billion by the end of November.

G. Steven Burrill, CEO of the San Francisco-based Burrill & Company, says the Bush election was a shot in the arm for companies and investors: "The biotech market took a turn for the better in November with the re-election of George W. Bush, the passage of California's Stem Cell Research Initiative, and a general market upswing. Once the uncertainty surrounding the election passed, the market jumped back up with many investors believing that four more years of the Bush administration will prove advantageous to the markets and to biotech."

Burrill also points out that the momentum in the stem cell research — triggered by California's decision to earmark $3 billion for research — will carry over into other states, and could lead to big profits for stem cell research firms. "The (California) legislation is already having a domino effect," adds Burrill. "Fearful that all the brightest and best will flock to California, other states, including New Jersey and Wisconsin, already have plans in the works to increase stem cell support." Expect other states to follow suit.

OH, CANADA?

Some pharmaceutical advocates I've spoken to say that government price controls on prescription drugs — long favored by Democratic political leaders and by senior citizen advocacy groups — won't bubble up under a second Bush term in the oval office. As always, free markets prevail in a Republican White House, this one backed by a Republican majority in both houses of Congress. A new wrinkle, perhaps as a result of all the lobbying by senior groups and by Democratic lawmakers, may see President Bush agree to some form of prescription drug imports from outside the US.

Even so, the best that the drug import lobby can hope for is access to prescription drugs only from Canada, and even then under some fairly onerous restrictions. The Bush administration has studied the numbers. It concluded that some form of "green lighting" cheaper Canadian drugs into the US isn't as big a political risk as industry observers think because US prescription drug exports to Canada comprise only 10 percent of all the prescription drugs sold in the US. Plus, Canada may want to think twice about such a deal. Looking at the issue from the Canadian government's perspective, what legislator in Ottawa wants to explain to his or her constituents why much needed prescription drugs are being shipped off to Miami or Milwaukee when they're needed in Moosejaw and Montreal? A big hurdle the Bush administration faces in allowing prescription drugs to come in from the Canadian cold is the recently enacted Medicare Modernization Act, which prohibits the import of prescription medicines from Canada. But in Washington, if there is a political will, there is always a way.

What's less clear is the ability of individual states to strike their own deals with Canadian drug suppliers and create a pipeline for cheaper drugs into their own commonwealths. Some states, like Vermont and Massachusetts, have already made noises about doing just that. With Medicaid costs skyrocketing, expect such deals to be triggered, and also expect US courts to jump into the fray to decide whether state-sponsored prescription drug deals with foreign countries pass judicial muster.

Other areas that could be impacted by a second Bush term are more liberal regulations for generic drugs — to appease those pro-senior lobbyists I've been talking about — and lifting of price controls on drugs made by overseas manufacturers, which are heavily regulated and heavily taxed by the US before being allowed into the country.

All in all, a second whirl in the White House may see President Bush surprise some of his conservative friends — including those running pharmaceutical companies — by attempting to flex his "compassionate conservative" muscles and wrestle issues like FDA compliance and prescription drug prices to the ground.

Celebrity author and business/finance commentator for CNN and Fox News, Brian O’Connell has written for Wall Street Journal and Newsweek, 79 Radcliffe Drive, Doylestown, PA 18901, 267.880.3144, fax 267.880.1939, brian.oco@verizon.net.