Drug Stocks Not A Safe Haven This Recession

| June 16, 2008 | 0 Comments

Have you noticed the strange events in the market recently?  No, I’m not talking about the recent volatility or sudden absence of IPOs.  What I’m talking about is the poor performance of the healthcare and pharmaceutical industries.

It’s common knowledge when the economy slows down everyone shifts their investments.  Savvy investors move into consumer staples and products people can’t live without.  Times need to be really tough before you stop buying deodorant and toothpaste.  Don’t forget food . . . can’t live without that.  The other major industry that usually performs well in recessions – healthcare.

The strength of healthcare.

When you’re sick, delaying treatment isn’t an option.  If anything, you want to be cured and quickly.  This means that healthcare companies do a brisk business in good times and bad.

Even better than healthcare is the pharmaceutical industry.  Not many people are going to stop taking medicine because of a recession.  And even better, everyone needs a refill every 30 to 90 days.  It’s a recurring revenue stream that businessmen salivate over.

So why aren’t pharmaceutical stocks on fire?

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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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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