With the recent election of Republican Scott Brown to the Massachusetts Senate, Obama's universal healthcare plan has been thrown into a quandary. As Brown represents the crucial 60th vote needed to guarantee passage, the Democrats will need to go back to the drawing board for a final version of the bill. Top officials stated that a final revamped version of the bill could focus on curbing insurance company practices, such as denying coverage to sick people, and helping low-income families and small businesses afford coverage.
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Adding a Dose of Generics
One thing both parties can agree on is that saving money and lowering costs are important parts of healthcare reform. Accordingly, the increased use of generic prescriptions will appear in whatever version of the bill materializes. Many generics are nearly 70% cheaper than their brand name versions. According to the Generic Pharmaceutical Association, patients saved an estimated $121 billion in 2008 thanks to generics. Increasing prescription prices are one of the big contributors to rising costs, so lawmakers will take aim at this easy target for healthcare savings.
Big pharma is taking notice. Swiss-based Novartis' (NYSE:NVS) Sandoz generic drug business is the company's second largest division. Sandoz produces nearly $7.6 billion in sales for the firm. More recently, Pfizer (NYSE:PFE) has been snatching up shares of generic rivals - this time bidding on German generic-drug maker Ratiopharm. The majors have been positioning themselves for any changes in legislation that would be pro-generic.
The Portfolio Prescription
The generic-drug sector fell along with everything else in the market meltdown of 2008, but has rebounded quite nicely since. Many of the top generic-drug producers have had several quarters of good earnings and should continue to do so for the next few years. Around $70 billion worth of brand name drugs will lose their patent protection by 2012, including the Sanofi-Aventis (NYSE:SNY) and Bristol-Myers (NYSE:BMY) joint effort, Plavix. Investors may want to take a look at some "generic" names for their portfolios. Here are two picks.
Israel's Teva Pharmaceuticals (NASDAQ:TEVA) is hands down the largest producer of generic drugs in the world following its acquisition of Barr Pharma in 2008. The company is still on an asset buying spree using its massive cash flow. It is expected to compete with Pfizer on the Ratiopharm bids. The company produced net sales of nearly $3.5 billion in the third quarter of 2009, and is expected to beat that number when it reports in February. Teva also received a very bullish upgrade by Moody's, making it the first generic-drug company to have a rating of A.
Watson Pharmaceuticals (NYSE:WPI) is another stock setting its sights higher in 2010. The company recently reported 2010 expectations of $3.05 to $3.30 per share on revenue of about $3.5 billion. With operations in 20 countries, Watson has been working on becoming a global leader in the generic-drug business. With its $4.3 billion market cap and increasing sales, the company could become an acquisition target itself.
The Bottom Line
Whatever form the United States healthcare bill takes, odds are that it'll include a healthy dose of generic drugs and cost cutting. Both Teva and Watson offer ways to play the growing market, both as leaders and possible buyout targets. (For further reading about the healthcare industry, check out Investing In The Healthcare Sector and Stocks On Drugs: What It Takes To Get High.)
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