By Kevin Grewal, Editorial Director at www.SmartStops.net
Despite all of the controversy surrounding the Obama administration’s health care reform bill, there is a good chance that some version of the bill will be passed by year’s end and America’s biggest pharmaceutical companies are supporting the bill.
Pharmaceutical companies are expected to pour nearly $150 million into advertisements supporting the reform and it makes sense. One reason is because the main focus of the industry has warped from being one that tries to sells pills to the masses to one that markets extremely expensive treatments to small groups of sick people.
Take a company like Merck (NYSE:MRK), for example, who came out with Zocor, a blockbuster drug which provided the life saving benefits of lowering cholesterol, or Pfizer’s (NYSE:PFE), top selling cholesterol drug Lipitor. To benefits of these drugs, in conjunction with the ability of these companies to actively market the drugs on television, led to a golden age of profits for these companies. It was a good ride while it lasted, but it is all coming to an end with the expiration of patents and the emergence of generic drugs.
What’s ironic is that the generic market is one reason pharmaceuticals are protected from the health care reform debate. A recent study indicated that drug costs comprise nearly 10% of health care spending and are expected to remain a small piece of the pie which has caused many pharmaceutical companies to focus on smaller markets like antipsychotic medicines. Whatever strategy Big Pharma takes on, they have already agreed on trimming costs and increasing savings as part of their deal on the reform. Many believe that this deal was struck because the reform will discount drug costs in Medicare which will prevent seniors from switching to generic drugs.
Another reason is that when cost and quality reform hit healthcare, it will probably hit other areas of medicine and not effect pharmaceuticals. The reason behind this is regulation. Pharmaceutical companies have to better than just produce a placebo to prove the benefits and performance of a new drug, whereas other areas of medicine have it a bit easier.
Lastly, the ability to market new drugs has been curtailed after the FDA yanked Merck’s painkiller Vioxx. There has been an industry-wide code of ethics which has been implemented, including, but not limited to, no longer handing out promotional materials to doctors and pharmacists, this has yet to hit other areas of medicine, like the lucrative medical device industry.
One thing is for sure, man-kind will always need drugs and strive to live longer, and Big Pharma knows this. For this reason, the pharmaceuticals companies are positioning themselves in a way to support the healthcare reform and reap some of its benefits.
Both Pfizer and Merck are already in an uptrend evidenced by the following:
Pfizer is up 39% from a March low of $11.66 to close at $16.23 on Thursday
Merck closed at $31.34 on Thursday, a 49% increase from a March close of $20.99.
When investing in these equities, keep in mind the risks involved. To help mitigate these risks, an exit strategy is vital. According to the most recent data from www.SmartStops.net, an uptrend in these ETFs could potentially come to an end at the following price levels: MRK at $28.76 and PFE at $15.27. These price levels change on a daily basis and updated data can be found at www.SmartStops.net.