Home/Blog/Trading Ideas/Generic Drug Stocks Enjoying Early Obamacare Returns

Generic Drug Stocks Enjoying Early Obamacare Returns

27 January 2014 in Trading Ideas

Last month, we noted that big pharmaceutical companies had been flooding the market with more new drug launches than at any other time in the past two decades.

However, a skeptical and cost-conscious marketplace hasn’t exactly been fully embracing the new offerings. Only 13 of 271 drugs launched since 2006 have notched yearly sales of $1 billion, down from 33 of 257 drugs introduced during the previous five years.

This is effectively putting drug makers in a tougher position to withstand the hit they are already beginning to take from generic competition for previous blockbusters. And more is coming: Drugs with nearly $100 billion in sales are expected to lose patent protection between 2011 and 2015.

 

Now, we have moved into the early days of The Patient Protection and Affordable Care Act – Obamacare, if you will – and, judging by the recent investor embrace of generic drug stocks, Big Pharma’s dark days may just be beginning.

The Drug-Patent Cliffs motif has gained 9.3% in the past month, and is up 63.5% in the past 12 months. During those same time periods, the S&P 500 is up 1% and 26.1%, respectively.

A key question for investors of all healthcare stocks going forward is trying to determine what will be the impact of an increasing number of patients joining – and spending within – the Obamacare plan, versus the anticipated healthcare cost cuts to the bottom line given the affordability that the plan intends to extend to patients.

Standard Life Investments UK equity manager Thomas Moore believes pharmaceutical giants, such as GlaxoSmithKline and Astrazeneca, are unprepared for the general downward pressure that Obamacare cost-cutting could put on their drug pricing, as well as the shift from branded to generic drugs as a way of further reducing costs.1

“Astrazeneca and GSK have to realize that the cost of their healthcare provision is just too high for Obamacare, Moore told FundWeb. “There is a bit more pressure now to drive down the cost of medical care in the US and both Astra and Glaxo are in the firing line because they haven’t really bothered with generic drugs, as well as trying to reduce the cost for providing that healthcare ultimately to the patient.

Interestingly, the possible upside for generic drugmakers’ futures is appreciated by many of the larger companies within the sector itself, who are looking to expand their footprints by snapping up smaller rivals.

Take Teva Pharmaceuticals, for example – the highest-weighted stock (18.1%) in the Drug-Patent Cliffs motif. The company’s stock recently hit a 52-week high amid the company’s announcement that it planned to revive the deal-making strategy that made it one of the most acquisitive drug companies of the past decade.2

And lo and behold – Teva said earlier this week that it would purchase NuPath for up to $268 million.

What – or who — is next for Teva? According to a recent UBS analyst report, targets that are potentially attractive include Idenix Pharmaceuticals, Insmed, InterMune, and Puma Biotechnology.

Whatever the ultimate impact of Obamacare, the combination of an apparent secular move to generic drugs along with expected consolidation should make this sector one to watch.

1Pamela Morris, “Are healthcare stocks on the brink of an Obamacare boost?,” fundweb.co.uk, Jan. 14, 2014, http://www.fundweb.co.uk/news-and-analysis/global/are-healthcare-stocks-on-the-brink-of-an-obamacare-boost/2005195.article, (accessed Jan. 22, 2014).

2Trey Thoelcke, “Teva Acquisition Machine Gears Up: Who is The Next Target?,” Jan. 21, 2014, http://finance.yahoo.com/news/teva-acquisition-machine-gears-next-123030413.html.

*