Investing in Obamacare with Biotechs

Brian Hicks

Written By Brian Hicks

Posted October 3, 2013

Whether you agree or disagree with the Affordable Care Act (aka Obamacare), there are ways you can profit from the new health care law.

Needless to say, Obama’s health care plan has stirred up controversy since its inception, and it is the primary reason behind the government shutdown.

But this new health care law will open up new avenues of investment.

dr. obamaJudging from media coverage over the years, you have been led to believe that health insurance companies detest the new laws, but CEOs are secretly popping champaign bottles behind the scenes because the mandate portion of the law essentially guarantees new customers.

Cigna Corporation (NYSE: CI), UnitedHealth Group (NYSE: UNG), and Aetna (NYSE: AET) have all shot 100 percent since the health care law became official, CNN reports.

And there have been positive showings in the area of hospital stocks, since the higher number of insured people will mean less of a burden to hospitals struggling to pay for uninsured visitors.

Some hospital management companies in this category are Community Health System (NYSE: CYH) and HCA Holdings (NYSE: HCA).

Since state exchanges have only opened this week, there is not too much short-term gain as of yet. Right now, you’ll want to wait in the coming weeks to see how exchanges are doing and how the market is reacting. But when it comes to the new exchanges, insurance companies will invest more money to adapt to the ACA.

But you’re more likely to see immediate results under companies that have a specialty in Medicaid. Even though many states have not offered the Medicaid portion of the ACA, other states will soon follow, and stocks will gain as the public becomes more aware of the new policy.

Companies that specialize in Medicaid are Molina (NYSE: MOG) and Centene Corp. (NYSE: CNC).

The ACA will also provide a huge boost to biotech stocks. But that’s not the only reason they are doing well on the market.

Other Factors

As baby boomers retire, there will be a greater need for medical care and innovations within the biotech sector.

This is already going on, and this innovation surge has led to a number of highly advanced drug therapies, such as those that directly attack and reduce the number of cancer cells. Combined with the FDA’s effort in getting more of these drugs approved faster, this has fueled a new effort on the part of companies to make the best therapies.

The biotech industry and the government have a mutually beneficial agreement regarding drug therapies. The government wants to introduce more life-saving drugs for patients on the market, and there is the drive on the part of companies to focus on serious diseases such as cancer and blood disorders.

As of late, Big Pharma has been searching for patents to the latest drug therapies, and most of this innovation is coming from smaller biotech firms.

One notable deal was the acquisition of Onyx Pharmaceuticals by Amgen (NASDAQ: AMGN) in a $10 billion deal.

Big and small firms have saved assets, which can translate to dividend and shareholder payouts, along with the necessary capital to fund research projects. Pfizer (NYSE: PFE) is one company that has been doing well within ETFs, and it has been adept at storing assets.

What you’re seeing right now is positive growth within smaller biotech firms and the effort of bigger companies to gain access to groundbreaking therapies as numerous patents are set to expire.

Innovation within the Biotech Industry

When it comes to the issue of whether Obamacare will help or hurt the industry, the answer is both.

Obamacare targets larger drug companies as opposed to smaller firms. But smaller companies stand to benefit more, since the effort to approve therapies under the FDA will only increase under the ACA.

But there is a concern for many in the industry, along with investors who have a stake in the medical field.

One of the most direct impacts of the ACA will be the uncertainty involved as the law is fully implemented. There will surely be some kinks to work out, and this uncertainty could translate into the markets.

Here are some things to watch out for.

The ACA will directly affect the biotech industry with an annual tax on manufacturers and importers in the form of a fee that is essentially an excise tax run by the IRS. The tax will run from anywhere from $2.8 billion to $4.1 billion per year.

And there is a tax on brand name drugs that could stretch to $30 billion by 2021. Taxes for name brand drugs have been $5 billion in the past few years.

There will also be a Medicare tax on investment income of 3.8% percent for $200K and up and another Medicare Part A tax of .9% for incomes of $200K and up.

All of these factors could have negative consequences on investment and biotech growth, but overall, the pharmaceutical industry will have an additional $10 billion to $30 billion profit in the course of the next decade because of Obamacare.

This is mostly because of the mandate, which will secure more potential customers down the road. There will be $115 billion in sales within the next decade as a result of the mandated portion of Obama’s health care law.

Some big companies to watch out for are Johnson & Johnson (NYSE: JNJ), Merck & Co. (NYSE: MRK), and Eli Lilly & Co. (NYSE: LLY).

And there is a provision titled the Biologics Price Competition & Innovation Act that will open a new $20 billion yearly market. Biosimilars – medicines made in the cells of living organisms – have been legal in Europe since 2004. They have not gained much recognition, but they could catch on in the future. This could pave the way for advanced gene therapies, cancer drugs, and antibodies.

Overall, the industry is expected to grow to $476 billion by 2020 – mostly attributed to the new health care law.

But there is a trade-off.

As a result of greater participation in the Medicare program through rebates and price caps, there could be a $20 billion loss. name-brand drugs will take a hit from expiring patents, growing competition from generics, and the new taxes under the ACA.

Analysts expect little growth for name-brand drugs until 2016.

But the ACA could not have come at better time for Big Pharma, since additional sales to new customers will compensate for the loss of expiring patents.

All the while, Big Pharma will continue to engage in mergers and acquisitions to stay afloat and remain relevant.

But the companies most likely to benefit from Obamacare are generic drug companies, since patents are expected to expire in the short-term, and there is a provision in the ACA that allows the FDA to approve generic drugs much faster – all in effort to give people the cheapest drugs on the market. This essentially provides a counterbalance to larger companies that establish their own prices for name-brand drugs.

Generics to keep on your radar are Teva Pharmaceuticals (NYSE: TEVA), Perrigo Company (NYSE: PRGO), and Actavis Inc. (NYSE: ACT).

If you want to stay within the biotech field, keep an eye on smaller firms that are coming out with new drugs, and watch out for any impending mergers and acquisitions.

You may disagree with the ACA, but don’t miss the opportunity to profit from it. As the old saying goes: “If you can’t beat ‘em, join ‘em.”


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