LIVE MARKETS-Blue Wave healthcare angst may be overdone: Janus Henderson
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BLUE WAVE HEALTHCARE ANGST MAY BE OVERDONE: JANUS HENDERSON
Nasdaq's biotechnology index .NBI took a beating on November 5 as it was caught up in the sharp selloff of AI-related stocks on investor fears that the Democratic Party's control of Congress will hurt the AI trade.
But Janus Henderson portfolio manager Daniel Lyons argues that the weakness appeared to reflect broader deleveraging dynamics and other technical factors rather than any deteriorating fundamentals in biotech. He also makes the case that the Democrats' blue wave could have more nuanced implications.
Lyons notes that the equity declines were "most acute among genomics, diagnostics, and life science tools companies that had benefited from growing AI enthusiasm," which, he said, "had pushed expectations and valuations for some of these companies to increasingly stretched levels."
In recent months growing interest in AI-enabled drug development and personalized medicine had created a widening disconnect in the sector, with AI-linked life science tools stocks rallying sharply through September while more traditional biotech companies, including ones developing promising new treatments, "continued to trade at attractive valuations."
"We believe the recent volatility since early October could help refocus investor attention on fundamentals and the attractive entry points in these high-quality biotech companies," Lyons wrote.
He questioned comparisons between today's landscape and biotech froth before a Covid-era selloff in 2021.
After the post-pandemic drawdown and the Federal Reserve's 2022-2023 rate-hike cycle, he says that "biotech has emerged as a healthier and more disciplined sector." Many companies have stronger balance sheets and more experienced management while there are more commercial-stage assets now compared with several years ago.
Lyons says "valuation excess in today’s market has been largely concentrated" while the 2020-2021 boom was broad-based.
As for policy, Lyons concedes that it is too soon to know how the Democratic-led Congress will interact with Donald Trump's administration.
But he suggests that Democrats may look to shift the agenda toward expanding access and protecting healthcare coverage.
He sees Affordable Care Act (ACA) affordability near the top of the list and also sees prioritization of restoring subsidies and protection of existing Medicaid coverage rather than pursuing a major expansion.
"For Medicaid specifically, much of the debate has centered on concerns around new federal work requirements that could lead to coverage losses, particularly among lower-income populations," he said.
"The upshot is that greater coverage stability could be incrementally supportive for overall healthcare utilization and patient volumes," he wrote.
On the theme of affordability, Lyons sees drug pricing continuing to be "a hot-button issue," but he isn't expecting a push for new legislation.
"Instead, we believe Democrats are more likely to defend existing Medicare drug-price negotiation and other affordability provisions enacted under the Inflation Reduction Act," Lyons said.
"That could provide some reassurance for pharmaceutical and biotech companies, where policy uncertainty around drug pricing has periodically weighed on valuations."
(Sinéad Carew)
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