How the Obamacare Verdict Could Crush Drugmakers

What the drug industry negotiateth, the Supreme Court can taketh away.

When the Affordable Health Care Act was being written, there was potential for drugmakers to get hit hard. The high price of many drugs -- never mind the high development costs -- makes the industry look like bad guys.

Rather than sit back and take its lashings, the industry was proactive, negotiating a deal that actually makes the companies look caring. The drug companies offered a discount, starting at 50% and increasing from there, to seniors on Medicare while they're in the Medicare doughnut hole that requires them to pay 100% of the cost of drugs.

Within the program, the drug companies are probably recouping some of that cost. Some seniors might have stopped using drugs rather than pay the full cost through the doughnut hole, and others might have switched to cheaper generics. Assuming those seniors now reach the other side of the doughnut hole, companies can recoup some of the cost of the discount when the government takes over paying for the drugs.

More importantly, offering the discount helped get the entire Affordable Health Care Act through Congress, part of which includes an individual mandate that increases the number of Americans with insurance. Logically, more insured Americans means more people that are able to pay for drugs.

If the Supreme Court strikes down the entire law, then the net effect is the old status quo: no influx of insured Americans, but no discounts, either. If the Supreme Court upholds the law, investors in drugmakers should be content, because the industry did a fairly good job at negotiating its share.

Unfortunately, there's a third potential option for the Supreme Court: It could strike down just the insurance mandate and perhaps some of the provisions that are intimately integrated with the law -- the requirement to insure people with pre-existing conditions, for instance. This a la carte option would probably keep the doughnut-hole discounts intact.

Most drugs will take a hit, but companies with drugs that are preferentially used on the elderly -- cholesterol drugs like Merck's (NYSE: MRK  ) Vytorin and AstraZeneca's (NYSE: AZN  ) Crestor -- will feel the most pain. About the only drugmakers that will emerge unscathed are companies with drugs that are administered by doctors, like Dendreon's (Nasdaq: DNDN  ) Provenge or Regeneron Pharmaceuticals' (Nasdaq: REGN  ) Eylea, because they're covered under regular Medicare, not under the prescription drug coverage as part of Medicare Part D.

We won't have to wait that long to see whether the drugmakers will take a hit; the Supreme Court decision is expected on Thursday. While you're waiting for the decision, take a look at what Fool analysts believe is the next rule-breaking multibagger. Get the free report.