The Administration is considering a major policy change, that would bring cholesterol drugs like simvastatin and standard diabetes medications off prescription.
It's an extension of existing policy that has, at times, caught me out. I spent a lot of time with a relative recently, getting a prescription filled for Naproxen, a potent pain reliever. I figured this was going to be a continuing hassle, then found a big bottle of it over at Costco (NASDAQ:COST) for under $20.
Most assume the winners from such a policy change would be the makers of the drugs and, perhaps, the media companies that would book new ads.
But in fact the big winners from such a change would be the insurers and the pharmacies.
When a drug goes over-the-counter insurers don't have to cover it any more. This lifts a huge burden on many insureds policies. Your insurance company used to have to pay for Claritin. Now you can get it at Costco.
Speaking of Costco, pharmacies will be the biggest winner here. They usually get no margin on their prescription business. They do get retail margin on over-the-counter drugs (just as with greeting cards).
There are policy risks and medical risks from these changes. Consumers have to be trusted to get what they need, and take what they need. The Administration has to balance the millions who now don't take their drugs because they can't afford them, or don't have insurance, against those who might become haphazard in their pill-taking without someone offering help.
That's why I think the bigger winners here may be pharmaceutical specialty companies like Walgreens (WAG) and CVS Caremark (NYSE:CVS) (as opposed to Costco). They have people behind the counter to advise on these medications, and can gain share that way. This may also expand their mail-order opportunities.
Of those two I prefer Walgreens. They have been pretty beat up from their hassle with ExpressScripts (NASDAQ:ESRX) their their evolution into a wellness store will be aided by this move, and the ESRX thing will eventually end.
But it's the insurers who will see the biggest bumps. Companies like UnitedHealth (NYSE:UNH), Aetna (NYSE:AET), and WellPoint (WLP), which are presently processing hundreds of millions of prescriptions for these medications every month, may no longer have to do so.
From this group it's Aetna that's most beat-up right now, trading at a PE of under 9. This will improve the earnings and in time the multiple.
Some common generic medications are already below the cost of insurance hassle. I was very surprised recently to find that my own cholesterol drug cost no more without insurance than my co-pay. That's not true for all medications, and thus may result in some pushback against the policy. But it's increasingly true for many, and increasingly true over time as drugs like this go into general distribution.
Margins are going to move here, to your pharmacist and your insurer, from the drug companies. And overall health care inflation will be reduced.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.