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Blue-Chip Biotechs Maneuver to Collect Monopoly ProfitsBy Dr. George HuangFriday, November 20, 2009 It's hard to find winners in the nightmarish health care reform bill passed by the House...
The bill doesn't address the major complaint of the American consumers – soaring costs. In fact, health insurers already predict skyrocketing premiums next year. Instead, the bill forces most employers to provide health care coverage or pay a tax penalty of up to 8% of payroll. The added cost will crush many small businesses.
The proposed legislation will bring some 36 million new customers to the health care system. That might be good news for drugmakers, insurers, device makers, and doctors. But the bill levies $140 billion in fees on drugmakers, $210 billion in cuts to doctors, and a $20 billion fee on device makers. And the proposed government-run insurance plan would directly compete with private insurers. So even though more paying customers may translate to higher revenues, new taxes and fees will hamper profit margins.
Individuals lose, employers lose, doctors and just about everyone in the health care system loses. But there is one clear winner from the new legislation – biotechs.
The current bill gives biotech drugs – those made from living cells – "market exclusivity" for 12 years. That means the FDA won't approve a similar drug for 12 years. Typical drugs only receive market exclusivity for three to five years.
(Don't confuse market exclusivity with patent protection. Even if patents expire, the FDA will defend a drug that has market exclusivity from competition. It just won't approve any competitors.)
Most biotech drugs already cost consumers tens of thousands of dollars per year. If these drugs get 12 years of market exclusivity, they're guaranteed those high prices for even longer. Of course, the government-enforced lack of competition will hurt U.S. consumers – they'll pay monopoly costs for their drugs. But it will be a boon to the biotech industry.
Fortunately for us, most investors didn't bother to scour the 2000-page health care reform bill for any upside. So the premier biotech names, the ones most likely to benefit from the extended protection, are trading at multi-year lows.
Here are three of my favorites:
Amgen is the largest biotech company on the planet. The company's top products (EPO/Aranesp) boost red blood cells in dialysis patients. These drugs have been on the market for years. While the near-term revenue is secure thanks to numerous patents and a slow FDA, the new exclusivity rules offer extra protection for investors.
Shares have rebounded slightly from a 2008 high. Any price under $50 represents a good entry point for long-term investors.
Genzyme is a biotech stalwart focused on rare illnesses. The company's revenue will grow 15% per year for the next few years. And it has at least six new drugs ready to launch by 2012.
The company is trading at a five-year low after experiencing some manufacturing problems. It's a temporary issue. If you can buy Genzyme under $50, do so. Tuck it away in your portfolio and forget about it for the next decade.
Finally, Boston-based Biogen has done a great job of growing its business over the last decade. Yet, its stock price has lagged. This creates a big buying opportunity.
Its multiple sclerosis and cancer drugs are textbook examples of expensive biotech drugs that generate gobs of cash flow. The market exclusivity only makes the cash flow even more secure. And with billionaire investor Carl Icahn on board, BIIB is worthy of a hard look for any biotech investor.
Keep your eye on the health care reform bill as it passes through the Senate, particularly the 12-year market exclusivity clause. If it passes, load up on these three names. You'll be glad you did.
Good investing,
George Huang
Further Reading:
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Pharma giant Merck rallies 15% in November.
Jack in the Box crumbles... down almost 10% yesterday.
Chinese stockpile soybeans... price surges to three-month high.
Earnings today... D.R. Horton, J.M. Smucker.
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