Post Election Blues. Trump, RFK & DOGE. Keep calm and carry on – this too shall pass.

The healthcare sell-off looks more severe when one drills down into more detail. Over the week since November 8th, the US-only S&P500 Healthcare Index declined 5.5%, the NASDAQ Biotech Index was down 10.2% and the Russell 2000 Healthcare Index fell 10.0%. The small-cap and mid-cap S&P 400 and 600 indices lagged the S&P500 by 150-175bp.

The cause of all of this seems obvious: even before the election, Trump suggested that he might “shake things up” by appointing Robert Kennedy (“RFK”) as Health and Human Services (HHS) Secretary. Lest we forget, even Trump 1.0 was not shy in his initial comments about the contempt he had for the pharmaceutical industry, and this is a position that has only been strengthened by what he perceives as ingratitude over “operation warp speed” during the pandemic, for which Trump feels he should get more credit.

Trump has also announced the creation of a Department of Government Efficiency (DOGE), looking to target annual savings of $2trn. This is a laughably high number in our view, and there is no way something like this could be achieved without meaningful cuts to entitlement programmes, as well as dramatic cuts to direct government spending. Perhaps this is why Aerospace and Defence names have also sold off (cf. boondoggles like Boeing’s Artemis SLS programme. It is now $7bn over-budget, many years late and technologically inferior to Musk’s own SpaceX Starship. It will also cost more per launch when it does come into service).

The key question for investors is how much these proposed nominations matter in the medium-term, i.e. how much they could directly affect the US economy, inflation and Federal spending patterns. For now, the market is suggesting they matter a great deal to healthcare, but readers will doubtless be painfully aware of how reflexive and reactionary this current market dynamic is. We will thus try to put this “policy overhang” into some sort of context.

First, the HHS Secretary. This is a cabinet-level position and serves as the principal advisor to the President on health-related matters. HHS oversees eleven Federal agencies, including:

• The Food and Drug Administration (FDA) is the principal regulatory body for drugs, devices, nutritional supplements, food products, veterinary products, animal feed and tobacco. It has an annual budget of c$7bn and employs ~18,000 people. The leader of the agency is also a direct Presidential appointment and it was reported overnight that Trump is considering Johns Hopkins surgeon Dr Marty Makary, who is a GI surgeon and public health policy lecturer at the institution. He is probably a less controversial figure than RFK and has relevant experience, but again has been a noted critic of current US healthcare policies and bodies.
• The Centers for Disease Control & Prevention (CDC) is a body that promotes public health through research and acts as a central co-ordinating body for the management of emerging health threats, from bioterrorism to novel pathogens such a COVID or Zika. The CDC also administers a free vaccine programme for uninsured American children, at a cost of around $5bn annually, by far its largest single programme. This is followed in scale by sexually transmitted disease prevention at $1-2bn annually. The CDC has an annual budget of c$12bn and employs ~15,000 people. The leader of the CDC is also a direct Presidential appointment.
• The National Institutes of Health (NIH) is the primary American agency for and public health research, around half of which is conducted directly (the intra-mural research programme or IRP) and the other half being grants to third-party researchers (the ERP). It has an annual budget of $50bn and employs ~18,000 people. The leader of the NIH is also a direct Presidential appointment.
• The Centers for Medicare & Medicaid Services (CMS) directly oversees the national retiree healthcare programme (Medicare) and works with states to help them oversee Medicaid (healthcare for welfare recipients) and CHIP, the Childrens Health Insurance Programme. It also oversees long-term care facilities and clinical laboratories to enforce standards of good practice. CMS controls annual disbursements of ~$1.5trn and employs ~6,000 people to manage this, with an administrative overhead of about $100bn. Once again, the head of CMS is a direct Presidential appointment and it was reported overnight that Trump is considering Dr Mehmet Oz, a former surgeon turned TV host, for this position. He is perhaps a little less controversial than RFK, but nonetheless a critic of the current systems and a Washington outsider.

All of these agencies were created by Congressional Bills and remain under Congressional oversight. Their mandates are clear, and they all produce annual reports to Congress that detail what they have done, what they have spent and their performance versus various KPIs.

This raises the first, potentially existential question that transcends the appointment of anyone to HHS or to these agencies directly: could they manifestly alter the operational parameters of the agency or re-direct its works without recourse to Congress?

As we noted in our first election update, RFK has some controversial positions on a number of topics that intersect with human health, especially around vaccines. However, he has already said that he does not plan to take away people’s access to vaccines. Perhaps we could see a defunding of the CDC programme on paediatric vaccines, as part of the “efficiency” savings. Were something like this to be attempted, we would expect various bodies to fight it all the way to the Supreme Court and, you have to hope, for the Government to be overturned on public interest grounds.

This is presuming that the RFK appointment can be made in the first place. Whilst the Republicans have control of the Senate (53+1 to 47), there are a number of people in the party who have already publicly expressed concerns over several of Trump’s proposed appointees, and there are surely more who object but are keeping a low profile for now. Ironically, it might be RFK’s pro-abortion views that sink his candidacy, rather than his position on food and vaccines.

US politics is an expensive game; Kamala Harris spent $1.3bn and still lost. As we noted in the previous election missive, the healthcare industry is the largest spender on Congressional lobbying. Politics 101 – do not bite the hand that feeds. With this front of mind, it would not take many aisle-crossers to nix these appointments. A so-called recess appointment might enable Trump to circumvent the Senate’s vote, but the Supreme Court has made those more difficult to implement following their perceived overuse during Obama’s second term.

The above points having been made, it is also important to balance this with the fact that the HHS secretary can, and has historically, interfered with and overruled an FDA decision for political reasons. This happened in 2011, when HHS Secretary Kathleen Sebelius (under Obama) prevented the FDA from allowing women under 16 to have over the counter access to the ‘morning after’ pill. More recently, the agency bowed to pressure under Trump to permit emergency use of unproven COVID-19 therapies such as hydroxychloroquine and plasma therapy.

This may seem dispiriting, but the good news in all these examples is that sense prevailed. Sebelius’ ruling was overturned by a Federal judge a few years later and the FDA ceased to support these unproven COVID treatments as soon as evidence of their ineffectiveness became available. America was born under the yoke of British tyranny and the whole point of the US political system is that it contains multiple checks and balances to restrain egregious behaviour. These remedies may take time to kick in, but the key point is that they exist.

Raw (i.e., unpasteurised) milk aside, he has some arguably less controversial views on the quality of American food and agricultural practices. As we all know well in the UK, one of the main obstacles to a post-Brexit UK-US trade deal was American insistence on parity on “non-trade barriers” such as food standards. According to the campaign group Sustain, the US allows the use of 70-80 pesticides that are not licensed in the UK, allows higher residual levels of such chemicals in human food, has far lower animal welfare standards, allows routine usage of high-dose antibiotics and hormones in livestock and requires very limited labelling of food products in respect of additives, etc.

Someone out there may well agree with the US on these topics, but somehow we doubt they will be anything other than a small minority, especially in the face of the growing evidence of the role played by “ultra processed” food products in cardiometabolic diseases and cancer.

The adoption of UK or EU food standards in the US would undoubtedly raise food prices there but might also have a positive impact over the longer-term to close the disparity in health outcomes between the US and the rest of the OECD. RFK made a good point when he said it would be better and cheaper for the US to ensure people did not become obese through a good diet, than to treat them with obesity drugs. However, this advice does nothing to address the health burden of the already fat, and thus the outsized sell-off of companies focused on obesity therapies also seems reactionary and wrong-headed.

Whilst the initial sell-off seemed focused on vaccine manufacturers, the contagion rapidly spread across the biopharma complex. Why might this be? The answer probably lies with that perennial political favourite: US drug pricing. Trump, in his first and second iteration, has been vocal about drug prices. To quote from his pre-election “Agenda 47” manifesto website:

“Healthcare and prescription drug costs are out of control. Republicans will increase Transparency, promote Choice and Competition, and expand access to new Affordable Healthcare and prescription drug options. We will protect Medicare, and ensure Seniors receive the care they need without being burdened by excessive costs”.

We heard much of the same schtick last time around, but (annoyingly for Trump), it was Biden’s Inflation Reduction Act (IRA) that has most recently done the most to lower US drug prices. There seemed to be some initial hopes that any roll back of the IRA, which covers various other areas that Trump does not favour, such as subsidies for electric vehicles (although Musk might have a few things to say about that), might help some of the US pharmaceutical majors.

However, this does not seem to chime with his stated objectives and historical pronouncements. In this respect, drug-related names under-performing the most during this reconsideration of Trump policy aims seems a logical outcome.

RFK has said that he thinks the FDA is too cozy with industry and he disagrees with direct-to-consumer advertising. The FDA has benefitted greatly in funding terms from having companies pay “user fees” when they submit new products for approval and RFK also opposes this practice, believing that it creates a conflict of interest. However, these fees have helped to fund the agency and also kept it efficient by creating a regulatory environment with known time frames for decision-making. These funding mechanisms are due for re-authorisation in 2027, so mid-term.

Any attempt to sever the link between companies and the agency would require the government to significantly increase funding or see the regulator shrink and bleed talent, which would inevitably slow new drug approvals. Perhaps the biggest risk of all for the healthcare sector is a loss of talent anyway – who wants to work somewhere where you are not valued or appreciated?

The same quote mentions the protection of the largest Federal entitlement programme (Medicare), which is why we struggle to give any credence to the $2bn savings number regarding Musk and DOGE. Cutting drug procurement costs would, of course, save money without impairing senior’s care, so it feels like an obvious avenue to look into.

Cutting grant disbursements to agencies like CDC and NIH would obviously reduce Federal spending. In the short-term, this might make no obvious difference to the wider US economy. In the longer-term, we think the effects would be negative. Public health relies on surveillance and this is costly. You cannot react to unseen threats.

Moreover, US pre-eminence in novel healthcare products and services stems from the strong academic foundations created through well-funded academic research. The US has already fallen behind China in terms of patent filings and any defunding of basic research would doubtless accelerate this geopolitically undesirable trend. Musk may be a controversial figure and a rather pugnacious individual in public discourse but he is self-evidently no-one’s fool and a man who understands and values innovation and science. It is difficult for us to imagine the US making such errors as part of a wider agenda to “make America great again.”

DOGE will include one other person – failed Republican Presidential nominee and latter Trump fanboy Vivek Ramaswamy. One might imagine that a serial biotechnology entrepreneur would hold the FDA in high esteem. However, this is far from the case. Ramaswamy is on the record from as far back as 2021, claiming that the agency is “corrupt.” Indeed, he has gone far enough in these comments for Roivant, the company that he founded (and in which he remains a significant shareholder), to publicly distance itself from him and his comments on the subject.

Whilst we think there is an element of pantomime theatrics to the more egregious comments, it seems unlikely that he will be a steadying hand in the cabinet on this topic.

And this brings us to the second important point. Markets abhor uncertainty and, in the absence of clarity, are free to fear the worst and tie themselves in knots. That feels like where we are right now: the dirty side of the storm. We have been here before and can think of a few parallel situations.

The most recent would be the GLP-1 ‘mania’ of autumn 2023, when the trade was “own Novo & Lilly and sell all the losers”. These “losers” were fast food and beverage companies and anyone marketing healthcare products linked to diabetes or obesity, since these were apparently going to cease to be an issue for society. This was patently nonsense, but it was a painful episode nonetheless: we saw the Trust’s Net Asset value decline 17% from the end of August to the end of October 2023. It then rose 28% again to the end of that year, when common sense reasserted itself.

The potential difference here, of course, is that nothing is going to change for many months. Trump won’t be president before January and we are probably looking at the end of Q1 2025 to know where we are on key Cabinet posts. In the meantime, all the parties concerned are free to prognosticate on social media to their heart’s content.

The inevitable “walk-back” to attainable policy goals begins later (if ever, under Trump). Of course, if Trump proposes a more acceptable figure to the FDA in the meantime, some of this sentiment could reverse. We saw from his first Cabinet that he does not seem to mind having opposing voices, so this is not off the table in our view and, even when someone is appointed, the historical revolving door leads one to wonder what they can actually get done before falling out of favour.

Other examples might include the summer of tweeting between Trump and Clinton during the 2016 election cycle on drug pricing, where the latter claimed she would introduce curbs on drug price hikes and both talked about direct price negotiations for Medicare, which Trump then reiterated. This “policy overhang” adversely impacted sentiment until well into 2017, before it was largely forgotten again when the realities of policy-making came to the fore. In this respect, you cannot really dismiss a policy objective until it is tried and has failed or it is ruled out (as they so often are).

We think the current Cabinet appointee-driven sell-off is an over-reaction and will correct in time. These things tend to be much less worse in reality than they seem upfront, especially in the US, where the system is intentionally designed to frustrate the concentration of power and seizing of the state apparatus by any would-be-dictator, all of this being enshrined in a written constitution. Let’s focus on the fundamentals; these remain positive.