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Not Even Government Interference Will Damage These Three Stocks

|Includes:BMRN, SNY, Teva Pharmaceutical Industries Limited (TEVA)

by Marc Lichtenfeld, Senior Analyst, Smart Profits Report

It’s bold. It’s ambitious. And if it works, it should make America a healthier nation.

Reform plans are a dime a dozen in Washington - many of which get stuck in political gridlock without ever reaching a satisfactory resolution.

And healthcare reform is no different, with multiple presidents trying - and failing - to pass a plan that would see every American covered by healthcare insurance.

The Obama administration is the latest to step up to the plate and take a swing. And with Congress currently chewing over the details of its plan, it has healthcare investors shaking in the knees, wondering how an overhaul of the system will impact biotech, pharma, medical devices, insurers and other medical stocks.

Are their fears rational? And what are the best stocks to play? I’ve got three for you…

An American Healthcare Utopia

Imagine a world where poor Americans no longer have to ration their medication. A world where parents don’t have to worry about how to pay for their sick child’s medical bills. A world where preventative and educational programs will hopefully keep people from getting ill in the first place.

Great aims, of course.

But what does it mean for the biotech sector?

Investors worried about how an insurance revamp will affect biotechs should know that the impact will be limited. Insurance already covers most high-priced biotech drugs.

In addition, many companies have programs in place to help patients who can’t afford the medicine.

In fact, if everyone has healthcare insurance, biotech companies could theoretically even see a bump up in revenue, as those patients previously receiving assistance would now be covered.

There is another provision, however that has the potential to roil biotech stocks…

The Waxman Way

Representative Henry Waxman (D-California) wants to see lower prices for high-priced biotech drugs.

As you may know, some biotech drugs can be exorbitantly expensive. For example, it’s not uncommon for cancer therapies to cost in the tens of thousands of dollars for a full cycle of treatment. And drugs that treat rare diseases can costs six figures per year.

To combat this, Waxman wants to see…

~ The introduction of generic biologics in the marketplace. But he wants it quicker than is possible right now.

~ The allowance of generic drugs onto the market after five years. Industry trade groups, on the other hand, want to see biotech patent exclusivity for at least 12 years.

This second proposal in particular is a problem for biotechs…

The “All Risk-No Reward” Plan

Having such a short timeframe for them to capitalize on their drug discoveries will likely dissuade them and their financial backers from pouring the cast amounts of necessary capital into the R&D for a drug.

Consider, for example, that it takes an average of $800 million and 8-10 years for a biotech company to bring a drug to market. It’s therefore ludicrous that they’d spend longer studying the drug than they would be allowed market exclusivity on it.

In addition, in the first year or two following FDA approval, a company very often goes to considerable effort to educate doctors about the benefits and risks of the new drug. So it typically takes a few years for sales of the drug to climb - and in many cases, the company may only be hitting its peak sales after five years.

To pull the rug from under them, just when employees and investors are being rewarded for years of patience and hard work, makes no sense.

There’s another problem with Waxman’s logic…

Note To Henry: Biotech Is Not The Same As Pharma

Waxman’s insistence that generic biotech drugs get to market faster could have serious ramifications on patients’ health.

Remember that biotech drugs are very different from pharmaceutical drugs. They’re made from living cells and are thus much more difficult to replicate than a traditional synthetic pharmaceutical product. So any slight difference in the manufacturing process can produce disastrous results.

With that said, you might think that the future for biotechs looks a little shaky. After all, just because something makes common sense, it doesn’t mean the government will follow.

So for that reason, I think it is apropos to consider some investments that should do well even if Waxman’s proposal becomes law.

Three “Wax-Beating” Biotech Investments

  • TEVA Pharmaceuticals (Nasdaq: TEVA): This is the best generic drug maker and should become a big player as generic biotech drugs gain momentum. TEVA isn’t cheap, but the company is expected to grow its earnings by nearly 20% per year over the next five years.
  • BioMarin (Nasdaq: BMRN): I’m a fan of biotech companies that specialize in treating rare diseases. Firms like this can navigate past Waxman’s proposals because with the market for rare diseases being so small, it will likely not be in a generic drug maker’s financial interest to go after that market with a lower priced offering.In this area, consider BioMarin, which has three drugs on the market that treat rare diseases and affect tiny patient populations. For example, MPS VI is a debilitating disease that causes severe deformities, stunted growth and other problems. BioMarin’s Naglazyme is the only drug on the market for the 2,000 known patients in the developed world affected by MPS VI. The drug costs $350,000 per year per patient.
  • Genzyme (Nasdaq: GENZ): This is a large-cap biotech company that conducts research in many different areas. It also has drugs that treat rare genetic disorders, including Fabry’s disease and Gaucher disease. Like TEVA, GENZ shares are pricey, but you get what you pay for. Genzyme is also a best-in-class biotech company, particularly in enzyme replacement therapy.

Good investing,

Marc Lichtenfeld

Disclosure: No positions