Pharmaceutical companies may have made a closed-door deal with President Obama not to oppose the health care law, but will it work out for them in the long run?
This morning, the stocks are falling, but are basically trading in line with the overall stock market. Pfizer (PFE) is off by 1.1%; Merck (MRK) is down 0.7%; and GlaxoSmithKline (GSK) is down 1.3%.
The law is clearly a mixed bag for the companies — as more than 30 million people are added to insurance rolls, they are going to buy more drugs. The law also eliminates the Medicare “doughnut hole,” which forced seniors to foot more of the bill for drug coverage if they used a moderate amount of drugs (as opposed to a lot or a little).
But the law’s emphasis on bringing down health costs, and imposing new fees on the industry, could cut into profit margins. In fact, analysts estimate that the industry will face $80 billion in fees and rebates over a decade under the new law, the Wall Street Journal reports. For one thing, drug companies have had to discount drugs that fall into the “doughnut hole,” and they are offering extra discounts to Medicaid — the discount has grown to about 22% from 16%, said GAMCO analyst Jeff Jonas.
Jonas sees the Supreme Court ruling as basically a wash for the industry — “this preserves the status quo.”
Because of that, investors need to “look back at fundamentals” in picking stocks. Jonas likes Bristol-Myers (BMY) and Johnson & Johnson (JNJ) for their strong pipelines. Both are owned by GAMCO.
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