Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Trump Stocks and Crypto Mania 2025 Incoming as Bitcoin Breaks Above $100k - 8th Dec 24
Gold Price Multiple Confirmations - Are You Ready? - 8th Dec 24
Gold Price Monster Upleg Lives - 8th Dec 24
Stock & Crypto Markets Going into December 2024 - 2nd Dec 24
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Last Time This Happened, Biotech Stocks Plunged by 50%

Companies / BioTech Jan 24, 2017 - 12:10 PM GMT

By: John_Mauldin

Companies

BY PATRICK WATSON : “They’re getting away with murder,” said Donald Trump at last week’s epic news conference.

No, he didn’t mean Russian hackers. He was talking about red-blooded American drug companies.

Trump went on: “Pharma has a lot of lobbyists and a lot of power, and there is very little bidding. We’re the largest buyer of drugs in the world, and yet we don’t bid properly, and we’re going to save billions of dollars.”


That last part isn’t quite correct, though.

Trump said there’s “very little bidding” when the government buys drugs. In fact, there’s no bidding at allwhen Medicare buys prescription drugs. The Bush-era legislation that created Medicare Part D bars the government from negotiating lower prices, despite it being the drug industry’s biggest customer by far.

That’s one reason pharmaceutical and biotechnology stocks performed so well in the last decade. And it’s why the prospect of losing that advantage pushed those sectors lower.

However, the Trump-inspired loss is actually minor compared to what another president once did to drug stocks. The dot-com bubble has some lessons we best not forget (I wrote about it extensively in my free publication, Connecting the Dots. Subscribe here)

The power of presidential statements

Remember Y2K Eve? We all partied that December 31 because a) Prince had given us the perfect song for it, and b) we thought civilization might collapse when midnight struck.

Fortunately, the electric grid stayed online, everyone survived, and the stock market continued its steady climb. The Nasdaq Composite Index had risen 86% in 1999, and folks expected more of the same in 2000.

They got it… for a few weeks.

At one point intraday on March 10, 2000, the Nasdaq showed a 26% year-to-date gain. Another double-your-money year seemed possible. Then this happened.

March 2000 turned out to be the Nasdaq’s all-time high and remained so for another 15 years.

That bear market had many causes, but Bill Clinton and the UK’s then-Prime Minister Tony Blair gave it the first push.

Genome sequencing and the biotech sell-off

The Human Genome Project was a big deal in the 1980s and 1990s. Scientists were trying to “sequence” our DNA (i.e., map which genes go where). It was a laborious process, even with that period’s best technology, but it promised to create medical miracles.

There was actually kind of a race underway. Universities and research institutions all over the world cooperated in a government-backed initiative.

Meanwhile, Celera, a private company led by biotech pioneer Craig Venter, was trying to do the same. Celera focused on genes it thought would lead to profitable drug breakthroughs.

Celera needed patent protection for its genome data in order to develop its business. No one was quite sure that was possible, but they invested like it was a sure thing.

Bad idea.

On March 14, 2000, President Clinton and British PM Blair popped the biotech bubble when they said genome data should be free to everyone.

You can see how much investors liked this idea in the Nasdaq Biotechnology Index. It had peaked a few days earlier but collapsed with the Clinton-Blair statement.

In just a few weeks, sellers chopped the biotech index almost in half.

Biotech traders heard that “freely available” line and hit the sell button. That was smart, but even they didn’t know how bad it was going to get.

Did Trump just do the same thing again? We don’t know yet. As they say, history rarely repeats itself, but it often rhymes.

Political favors don’t last forever

Back in that 2000 crash, biotech industry leaders made a key mistake. They thought getting the government to protect their genetic data would be easy: Pay some lawyers, make some campaign contributions, and voilà, you have a legal monopoly. Ka-ching.

It turned out not to be so easy.

Today’s drug companies are making a similar mistake. Because they greased the right palms when Medicare drug coverage passed back in 2003, they think they have a permanent right to set their own prices—which taxpayers must pay.

In both cases, private companies assumed they were permanently entitled to certain government benefits.

Yes, I used that word: entitled.

The “entitlement mentality” you hear about isn’t just for food stamp recipients. It exists within large corporations too, and the amounts are often much greater.

But even if Washington grants you a benefit, today’s Congress can’t tie the hands of a future Congress.

Senators and Representatives can change their minds anytime they want—and they should change their minds, or at least consider it, when voters demand change through the electoral process.

That’s a risk factor investors forget at their peril.

If a business depends on some kind of government favor, don’t assume it will be there forever. Biotech investors found out in 2000 that political privileges are never a sure thing. The Trump era may teach Big Pharma shareholders the same hard lesson.

Will the rest of the market collapse, too, as it did in 2000? Ask me next year.

Subscribe to Connecting the Dots—and Get a Glimpse of the Future

We live in an era of rapid change… and only those who see and understand the shifting market, economic, and political trends can make wise investment decisions. Macroeconomic forecaster Patrick Watson spots the trends and spells what they mean every week in the free e-letter, Connecting the Dots. Subscribe now for his seasoned insight into the surprising forces driving global markets.

John Mauldin Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in