The Pharmaceutical Industry Gives the Obama Health Care Initiative $80 Billion and Can Come Out with a Bigger Prize—Who are the Winners??

The Obama administration's push to drive healthcare costs down may not be all bad news for the Biopharmaceutical Industry. While the industry today announced/agreed an $80 billion reduction over 10 years ($8 billion/year) in cost reductions to Medicare, they may be able to recoup a piece of that assuming the uninsured population become covered under a plan that encompasses prescription drug costs.

Incremental revenues could jump by $6-50 billion/year based on the assumptions one uses in per capita spend on pharmaceuticals and number of people whom would actually be covered under the plan. Taking a very conservative midpoint of 20 million incremental increase in covered people and a midpoint spend of $750/year per consumer on pharmaceuticals yields an additional $15 billion per year in revenues which equates to $150 billion over the 10 year life of the program that the industry (generously?) proposed.

Predicting he winners in such a scenario becomes an interesting exercise. As generic drugs account for about 2/3 of total prescriptions (by volume) and have growth rates in the 14-15% range in the US (versus flat or perhaps slightly negative growth of branded pharmaceuticals), one immediately has to focus on them both as a pure play and as part of the diversification strategy of large pharmaceutical companies.

On top of my list would Teva (NASDAQ:TEVA) followed by Mylan (NASDAQ:MYL) and Watson (NYSE:WPI) as near pure play generic manufacturers.

TEVA is rumored to be looking for additional acquisitions in both generics and specialty pharmaceuticals, is extremely well managed and positioned for growth both in the US and globally. Watson's recently agreed acquisition of Arrow Group which gives it a more global reach at a good price.

In the traditional large pharmaceutical space, my top pick would be Novartis (NYSE:NVS)-through its Sandoz unit as well as numerous European and emerging market generic initiatives and a strong piepline. We would then suggest that to a lesser extent, GlaxoSmithKline (NYSE:GSK) -with its numerous acquisitions, especially Ranbaxy agreement recently announced and Sanofi-Aventis (NYSE:SNY) with its broad base, generic and emerging market strategies are likely to thrive in this highly cost controlled, regulated, competitive environment.

We would be remiss to leave out Johnson & Johnson (NYSE:JNJ), not for its generic capabilities (near zero) or its eroding pharmaceutical product base, but more for its business model based on enormous diversification broadly across healthcare including branded pharmaceuticals, biotechnology, medical devices, diagnostics, consumer health and health informatics suggests that it is well positioned for the future. Finally, Shire (NASDAQ:SHPGY) is intriguing based on its business model of being a “virtual” pharmaceutical business that has decoupled itself from many of the overheads of R&D.