How will President-elect Obama affect your portfolio? Keep reading our special series for the lowdown.
As you can tell from our election series, U.S. presidential policies can affect a wide range of industries, but health care may be the industry that's most affected by the president because the government spends a lot of its own dollars on the tightly regulated industry. Depending on which companies you're invested in and which policies get enacted, the new president's plan could give your portfolio a healthy boost or some flu-like symptoms.
OK, not free, but President-elect Obama certainly wants to cut the costs of drugs and it isn't going to be pretty for the drug companies if he's able to get his plans through Congress.
One plan Obama has is for the federal government to negotiate Medicare drug prices. According to one estimate, that could cut revenue by a whopping $10 billion to $30 billion. But a more serious problem for drug companies like Pfizer (NYSE: PFE ) and Merck (NYSE: MRK ) would be if private insurers followed suit, renegotiating prices as well.
The other plan to lower drug prices Obama has is to encourage the use of more generic drugs. For small-molecule drugs, there's an established path to follow: wait for patents to expire or challenge them, and get a generic on the market. The difference in copayments alone is usually enough to get patients to switch from branded to generic drugs.
But biotech drugs are a whole different ball game. There is currently no U.S. pathway for generic drug companies to bring follow-on biologics to the market. That means that when biotech drugs from companies like Amgen (Nasdaq: AMGN ) and Genentech go off patent, under the current system they still enjoy a market free of direct competitors.
However, there's been talk of setting up a way for the FDA to approve follow-on biologics for over a year now, but I think the talk is likely to escalate next year with Obama pushing for lower drug costs. The only question is how much of additional patent protection can the biotech companies finagle during negotiations.
If you're wondering which generic-drug companies might benefit from such a change, you need only look to Europe and India where a pathway for approval is already set up. Teva Pharmaceuticals (Nasdaq: TEVA ) and Novartis (NYSE: NVS ) are already selling such drugs in Europe and will likely be the first to market in the U.S.
IT, meet HC
Another place where Obama thinks he can cut a lot of cost fat is in bringing health care into the 21st century. That includes investing $50 billion over the next five years in information technology to make health care more efficient. That could be an immense boost to companies like health-care software systems provider Quality Systems (Nasdaq: QSII ) .
The efficiency kick could also come in handy for pharmacy benefit managers like Medco Health Solutions and Express Scripts. They're saving companies and patients some serious cash through efficiencies like mail order drugs.
Insuring the uninsured
Obama's other big push will be to get health insurance for the estimated 45 million uninsured Americans. The Clinton Administration's attempt in the 1990s to establish universal health care proved to be a tough sell, so current health insurance companies like UnitedHealth Group (NYSE: UNH ) and Aetna are likely safe. Instead Obama wants to put the uninsured in a government-regulated National Health Insurance Exchange. If that sounds vague, that's because campaign promises are usually light on the details, but it seems likely that Obama will model his plan along the lines of the current Medicare Part D setup.
The increase in insured people using health care products should help drug and medical device companies simply because they'll have more paying customers. Whether that will be enough to make up for the decrease from lowered prices remains to be seen.
For drug and medical device makers, the wild card is who Obama will appoint as the Food and Drug Administration commissioner. I'll avoid jumping on the bandwagon of guessing who that might be, but investors should keep in mind that the commissioner will have a huge effect on the market. The speed at which drugs get through the approval system and the standards that drugs must pass to get into the market will have a direct effect on the drug companies' bottom line.
The president is only one person
It's important for investors to keep in mind that the president is not the only one affecting all this -- Congress will need to be on the same page as the president to get any of these policies enacted. With the $700 billion bailout weighing on the minds of taxpayers, it's not clear when, or even if, Obama's health-care plans will come to pass. Don't sell your drug stocks off in a panic, but do keep one eye on Washington while the other's on your portfolio.