By Michael Wursthorn
Shares of drugmakers are rallying on hopes of greater pricing flexibility.
The blocking of a Trump administration rule that would have required drugmakers to disclose their products' pricing in television ads is expected to help pharmaceutical and biotech firms avoid some of the near-term pricing pressures that had weighed on those stocks in recent months.
Pharmaceutical stocks like Mylan NV, Allergan PLC and Merck & Co. rose at least 1.2% Tuesday, while biotech shops also rallied, including Regeneron Pharmaceuticals Inc., which added 1.5%.
The broad gains are being driven by a federal judge's decision late Monday to block the rule that would have required drugmakers to list prices to be included in direct-to-consumer TV ads for most prescription drugs covered by Medicare and Medicaid, Jefferies Group LLC health-care trader Jared Holz wrote in a recent note to clients. The move "bodes well for pricing efforts more broadly near term," he added, and investors are positioning themselves for the likelihood of pharmaceutical companies reporting solid second-quarter earnings results.
As of Tuesday, S&P 500 health-care stocks were projected to grow second-quarter earnings by 2.1% from a year earlier, the second-best rate of the broad index's 11 sectors, just behind utilities, according to FactSet. Most other sectors are expected to see earnings contract, with S&P 500 profits projected to fall 2.8%.
Health-care stocks also sport some of the market's most attractive valuations and could also be factoring into investors' interest. The S&P 500's health-care sector is currently trading at 15.5 times its earnings over the next 12 months, lower than nine other sectors except for financial stocks, according to FactSet.
The rule, completed in May and set to go into effect Tuesday before being blocked, was part of President Trump's broader effort to lower drug prices. Drugmakers argued the disclosure would confuse consumers into thinking they would have to pay more than they actually would for medications.
Still, some health-care companies remain vulnerable to new government regulation, something investors took notice of during Tuesday's session.
Meanwhile, reports that the White House will attempt to overhaul the kidney-care market as soon as Wednesday sent shares of dialysis-care providers sharply lower. Dialysis providers fell, with DaVita Inc. sliding 7.9% and Fresenius Medical Care AG shedding 5.5%. The losses pushed DaVita into negative territory for the year, while Fresenius remains up 15%.
The tug between gains and losses left the S&P 500's health-care sector up less than 0.1% in recent trading.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com