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You'll Never Believe What I Want You to Buy

By Rob Fannon, editor Phase 1 Investor
Friday, August 14, 2009

The budget for the biggest and most powerful lobbyist in Washington, D.C. is $150 million.
I'm talking about the pharmaceutical industry.
To give you some perspective, $150 million is roughly twice the amount of John McCain's entire presidential campaign budget... And for the pharmaceutical industry, that's not an annual figure... It's just for the rest of the summer.
While Congress is in recess for the remainder of the summer, the drug industry will rule the television, radio, and Internet. The message? Support President Obama's health care reform.
It's hard to not get lost in the details of the health care debate. But there's only one thing you need to take away: The bill that eventually lands on President Obama's desk will extend medical insurance to 50 million folks who are now uninsured.
That's 50 million new customers for drugmakers.
Remember how candidate Obama vilified the pharmaceutical industry on the campaign trail? He promised government drug price negotiation and cheap imports from Canada. He ran attack ads targeting former Congressmen Billy Tauzin, now the head of PhRMA, the drug industry's top lobbyist.
Today, Mr. Tauzin is a regular guest to the White House. And those campaign promises have vanished. In exchange for the $80 billion cost-savings promise, President Obama conceded government price controls for Medicare drugs. He also stated the industry's pledge of $80 billion in savings over the next decade toward prescription drugs far exceeds any savings gained from drug imports.
And, finally, his negotiation tactics just enrolled the world's most powerful marketing machine.
You're about to be bombarded with pro-reform ads, sponsored by Big Pharma companies like Merck, Pfizer, and Bristol-Myers. This, in combination with President Obama's non-stop town hall schedule, should be enough to push health care reform through Congress this fall.
Here's the bottom line: Obama and the drug industry have radically transformed from foes to bedfellows... and while drug spending accounts for not even 10% of our health care costs, Obama's health care plan is forcing me to change my anti-Big Pharma tune.
Lost sales to generics, inefficient research, and withering pipelines aside, 50 million new customers in the world's richest drug market is huge.
As a result, it's time to dive headfirst into the world's biggest drug makers. It's time to buy Big Pharma.
At the top of my list is Switzerland-based Novartis (NVS). I've long maintained that Novartis is the only perfectly hedged Big Pharma player. Its in-house generic division is the world's second-largest player in the brand-name knockoff industry. CEO Dan Vasella was years ahead of this now-accepted trend.
Vasella's vision helped make Novartis a part of the lucrative vaccine business through its $5 billion buyout of Chiron in 2005. He established the Swiss company's stronghold in the biotech industry by relocating a major portion of the company's research and development headquarters to biotech-laded Boston. Novartis further diversified its product portfolio with a staged buyout deal with U.S.-based eye care company, Alcon.
Like its peers, Novartis is cash-rich (about $11 billion), supports a healthy dividend (4% yield), and trades at reasonable multiples (around 12x price to 2010 earnings).
Sure, just like its Big Pharma competitors Novartis faces patent expirations on two of its top-sellers (one for blood pressure drug Diovan in 2011 and one for bone drug Zometa in 2013). But with a healthy product pipeline and the windfall promise of 50 million new customers, Novartis should be the first name you turn to as you plunge into Big Pharma stocks.
Good investing,
Rob Fannon

In The Daily Crux
Market Notes
Mid-cap water play Tetra Tech reaches new 52-week high.
Spot silver climbs above $15.
Copper's rise continues... up 130% from December low. Southern Copper hits 52-week high.
Earnings today... Abercrombie & Fitch, JCPenney, Petrobras.
Market Watch
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China 44.42 -1.4% -0.6%
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Sector ETFs
Symbol Price
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%