Image source: Getty Images.
It's been two weeks since British citizens went to the polls and 51.9% of voters chose, surprisingly, to leave the European Union rather than stay. The polls prior to the vote had been incredibly close, but few, if any, pundits had gone so far as to predict that the U.K. would choose to leave the EU.
Nonetheless, Brexit is now a reality that Britain, the EU, and the rest of the world need to deal with. Uncertainty is perhaps the biggest side effect of Brexit. Since there's no precedent to a country invoking Article 50 and leaving the EU, no one is exactly sure what happens next. We know the U.K. will need to work out new trade agreements with EU nations, but there are no guarantees that things will go smoothly there. Additionally, there's the concern that other nations will follow Britain's footsteps out of the EU, or that weaker EU nations that are burdened by debt, such as Italy, Spain, or Greece, could further pressure the EU without the financial strength of the U.K.
In light of this vote, global stock markets plunged (although some markets have almost completely regained what was lost in the subsequent three-day period). The two days following the Brexit vote saw $3 trillion in global market value wiped out, including $2.1 trillion on Friday, the day following the Brexit vote, alone. This was the biggest single-day wealth decline on record, and essentially no sectors were spared.
Image source: Getty Images.
Brexit should have little to no effect on this sector
However, the emotional selling derived from Brexit wound up punishing a sector that will likely not feel much, if any, effects from the U.K.'s exit from the EU: healthcare.
Think about this for a moment: The few stocks that outperformed following the Brexit vote were safe-haven investments like metals and mining companies, as well as companies that provide basic-need goods and services, such as water and electricity.
But, if we extrapolate the definition of "basic need" a bit further, we can certainly include healthcare in the mix. People don't choose when they get sick, or what type of illness they're going to get. Presumably, with a growing population, this means a relatively steady stream of patients for primary care physicians and hospitals, and the constant need for pharmaceuticals, medical devices, and the companies that operate in the background to facilitate the purchasing of these products. This should create a situation where very few healthcare companies deal with pricing power pressures.
Additionally, Brexit uncertainty is likely to stall any efforts by the global central banks of developed nations to raise lending rates. In the U.S., the Federal Reserve had gone into 2016 with the idea of raising lending rates four times. However, weaker GDP growth, a weak May jobs report, and now Brexit have put its interest rate-hiking tactics on hold. For those healthcare companies that do take on debt, it simply means access to cheaper capital for a longer period of time. For cash-rich biotech stocks, it provides no material change to their business models or operations.
Is it time to go shopping?
What does Brexit mean for healthcare investors? Probably not a whole lot. It's always possible a global growth slowdown and a negative longer-term reaction in stock prices could halt certain elective medical procedures, which would be negative for select medical device companies, and possibly hospitals and surgical centers. But, as a whole, demand for healthcare services and products is expected to remain steady and/or grow. This means the Brexit tumble could actually be a blessing in disguise for opportunistic long-term investors.
Image source: Alexion Pharmaceuticals.
Case in point: Rare-disease drugmaker Alexion Pharmaceuticals (ALXN +0.00%) is down about 5% since the Brexit announcement. This drop in its share price comes just a few weeks after Alexion reported disappointing late-stage results from its REGAIN study, which tested Soliris in patients with refractory generalized myasthenia gravis. Alexion had been looking for yet another label expansion for its lead drug, but it will not get it in this case.
However, look at Alexion from a more sensible angle, and you'll realize that nothing has changed. Brexit isn't going to reduce the small pool of rare-disease patients it treats, nor is it going to have any effect on the pricing power of Soliris, which is currently the second most expensive drug in the world, at a price north of $500,000 per year. Alexion also scooped up Synageva BioPharma for $8.4 billion last year, giving it access to Kanuma, a drug designed to treat lysosomal acid lipase deficiency. Kanuma is expected to peak north of $1 billion in annual sales. At a PEG ratio of right around 1.1, Alexion is looking mighty attractive following Brexit.
Image source: U.S. Food and Drug Administration.
Another healthcare company that's taken what I believe to be an unfair beating following Brexit is Mylan (MYL +0.00%). Being headquartered in the U.K. has been a boon to Mylan, because it's meant lower corporate income tax rates than in the United States. The Brexit vote, however, exposed it to the full wrath of investors since it was headquartered in the U.K. Shares are still down 8% since the Brexit vote was announced.
Still, the long-term outlook for Mylan is bright, and very little has changed, even with the Brexit vote. Mylan operates in more than 150 countries worldwide, and the U.K. represents only a small fraction of its top and bottom lines. Even more important, as one of the leading generic drugmakers worldwide, Mylan stands to benefit as generic market share climbs. Mylan CEO Heather Bresch appeared on Bloomberg Go earlier this week and noted that 88% of global prescriptions written today are for generics, and this figure is only expected to climb. The Institute for Healthcare Informatics also recently suggested that 91% to 92% of all prescriptions written by 2020 could be generic. In other words, the Brexit swoon is probably overdone when it comes to Mylan.
Brexit may be nothing more than a bump in the road, or it may prove more damaging to the global economy -- we just don't know yet. But, what we can say with some degree of certainty is that healthcare companies are in pretty good shape, Brexit or not.
