Friday, March 26, 2010
All anyone's talking about these days is the new health care reform...
As you've no doubt read already, the 32 million new customers the government's bringing into the fold will translate to higher revenue and profits for insurers, drugmakers, hospitals, and device makers.
You'd likely do well buying a broad health care fund like IYH or XLV. They've climbed already, and I see another 20%-30% rise over the next 12 months as more investors come to the same conclusion. But that's not what I want to tell you about today...
What I've found is much, much better.
Thanks to one rarely talked about provision in the bill, a subgroup of health care companies will enjoy government benefits of boondoggle proportions. Let me explain...
Hidden in the health care bill is a "12-year exclusivity" clause for biotech drugs. Biotech drugs are intravenous medicines made from living cells. Essentially, the FDA will protect biotech drugs from competition for 12 years. (Traditional drugs that come as pills only receive this level of protection for three to five years.)
Don't confuse market exclusivity with patent protection. Even if the patents expire, the FDA will defend a drug that has market exclusivity. It's simple. It just won't approve any generics.
Biotech drugs like Enbrel, Humira, and Herceptin already cost consumers tens of thousands of dollars per year. The exclusivity clause practically guarantees those high prices for years to come.
Of course, the government-enforced lack of competition will hurt U.S. consumers – who will pay monopoly costs for their drugs. But it will be a boon to the biotech industry.
Fortunately for us, hardly anyone has noticed the new protections, and the market has been slow to react to the news. So the premier biotech names – the ones most likely to benefit from the extended protection – have only begun their climb. Here are two of my favorite names...
Biogen (BIIB), the Boston-based biotech with established multiple sclerosis and cancer franchises, is a "must own." The company shares revenue from the leukemia drug Rituxan with Genentech. And its Avonex and Tysabri dominate the multiple sclerosis market. All three are textbook examples of expensive biotech drugs that generate gobs of cash flow. The market exclusivity only makes the cash flow even more secure.
Billionaire investor Carl Icahn recently stated his intention to orchestrate a sale of the company. If he's successful, investors could get $85-$90 per share, almost 50% from here. Even without a takeout, Biogen is cheap at just 14 times cash flow, worthy of a hard look by any serious biotech investor.
Genzyme (GENZ), a biotech stalwart focused on rare illnesses, has experienced major manufacturing problems over the last year. Just this week, the FDA forced the company to hire third-party inspectors for its plants. And the recent troubles have allowed competitors Shire and Pfizer to enter its once competition-free markets.
Despite its struggles, Genzyme's revenue will grow 15% per year for the next few years. And it has at least six new drugs ready to launch by 2014. Moreover, the 12-year exclusivity provides ironclad protection on its biologic drugs and pipeline. At about $50, Genzyme is a cheap way to profit from the health care legislation.
Huge tech rally continues... Cisco, Hewlett-Packard, Oracle, and Apple make fresh highs.
Online auction giant eBay hits new high... up 20% in March.
Bond market signaling trouble... yields on 30-year U.S. Treasuries break out to nine-month highs.