Health-Care Reform Lives: Here's Where to Invest

Last week, the House voted to repeal last year's health-care reform bill, the Affordable Care Act, but it's not likely to go beyond the House. The Democrats control the Senate, and President Obama isn't likely to sign the bill even if it got past the Senate. In fact, Obama didn't seem threatened by the House's move at all; he hardly acknowledged health-care reform in his State of the Union speech last night.

Obama did mention he was open to tweaks, but only ones that make "care better or more affordable."

Sounds like an investment thesis to me.

Better care
There was a time when drugmakers could throw out any drug and make it sell. It really didn't matter that there were multiple drugs using the same mechanism to treat a disease.

For better or worse, the age of me-too drugs is dead. A Food and Drug Administration approval isn't enough to guarantee meaningful sales.

Investors need to look for drugs that treat unmet needs. Drugs like GlaxoSmithKline and Human Genome Sciences' (Nasdaq: HGSI  ) Benlysta, which treats lupus, a disease that hasn't seen a new treatment in more than half a century. Or Vertex Pharmaceuticals' (Nasdaq: VRTX  ) hepatitis C drug telaprevir; current treatments only cure about half of the patients and have nasty side effects.

Even with all the hand waving and shouting about high health-care costs, drugs that truly provide better care will be paid for at premium prices.

Cutting costs
The switch from brand name drugs to lower-cost generics is one of the easier places to save money. Generic drugs are often priced 20% or less of their brand name counterpart, and health-insurance companies encourage their usage by reducing copays for generic drugs.

This is a low-margin, high-volume industry, so I think the large players like Teva Pharmaceuticals (Nasdaq: TEVA  ) and Mylan (Nasdaq: MYL  ) are most likely to benefit from the increased usage of generic drugs.

Some pharmaceutical companies have gotten into the act, but I don't see this as an area where dabbling will work well. Pfizer (NYSE: PFE  ) has a small generic division, but the company still outsourced its authorized generic for Lipitor to Watson Pharmaceuticals, presumably because Watson could do it for cheaper.

In my opinion, the only all-in-one pharmaceutical company worth looking at is Novartis, which sells generics under its Sandoz division.

The advantage of investing in generic drugs is that the thesis doesn't really go away even if the health-care reform bill were repealed. Sure, the health-care bill pushes more people into the system, which helps with volume, but patients will still want low-cost drugs whether there's health-care reform or not.

The bigger threat
While I don't see a repeal of the health-care reform getting past the President's desk, there's still the threat in court. Multiple lawsuits trying to strike down the part of the law that mandates that all Americans be covered by health insurance are working their way through the court system.

The early decisions have gone both ways, but I'm not sure it really matters; this one seems bound for the Supreme Court.

The problem here is that mandated health insurance helps bring healthy people into the system to balance out the sick people with preexisting conditions, whom insurance agencies like UnitedHealth Group (NYSE: UNH  ) and WellPoint (NYSE: WLP  ) are forced to take under the health-care reform bill.

In his speech last night, Obama said he's not willing to go back to the days when insurance companies could deny someone coverage because of a preexisting condition. But I don't see how that's a possibility if the health care mandate isn't kept in place.

These lawsuits are a real threat to the profitability of the health-insurance industry, but I'm not sure investors need to worry. If the mandate were overthrown, lawmakers will likely find a way to get the healthy people back in or the sick people out. If we're willing to save car companies, we're not going to let health insurers go out of business.

Buffett thinks this "picks and shovels" company should profit, regardless of Congress' health-care reforms.

Pfizer, UnitedHealth, and WellPoint are Motley Fool Inside Value picks. Vertex Pharmaceuticals is a Motley Fool Rule Breakers recommendation. UnitedHealth is a Motley Fool Stock Advisor pick. GlaxoSmithKline and Novartis are Motley Fool Global Gains selections. Motley Fool Options has recommended a diagonal call position on UnitedHealth Group. The Fool owns shares of GlaxoSmithKline, Teva, and UnitedHealth. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 27, 2011, at 12:03 AM, buddypaul wrote:

    If you currently have pre-existing conditions like me that have prevented you from being able to qualify for health insurance for at least six months you will have coverage options under new health care. Check "Wise Health Insurance" to find how to get quality insurance for dollars.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1429583, ~/Articles/ArticleHandler.aspx, 10/24/2014 1:21:09 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement