Pretend for a minute that you don’t have any opinion whatsoever about Obamacare – good, bad or indifferent.
I’d like you to consider the practical, undeniable truth that some companies will benefit immensely when Obamacare is fully implemented. If you’re an investor, you need to leave your political beliefs at the curb – and just consider the profit potential of this huge government program…
When President Obama’s healthcare reform bill passed in late March 2010, name-brand pharmaceutical companies immediately scrambled to deal with the fallout. The timing could not have been worse.
Most branded pharmaceutical companies were already nervous about the lack of drugs in the pipeline. They were well aware that several best-selling drugs would soon lose their patent protection. They knew several of the industry’s cash cows – including Lipitor, Plavix and Seroquel – would lose their patents over the next two years.
The announcement of upcoming healthcare reform coupled with a loss of patents led to the inevitable – a sharp increase in the price of name-brand drugs.
Brand pharmaceutical companies know that healthcare reform will severely eat away at their profits, so they’re trying to squeeze as much profit out of their current pipelines as possible.
Blue Shield of California Vice President Nancy Stalker agrees: “ Because of the increased number of drugs going generic, they profit more from the brand drugs on the market by increasing prices,” she said.
Generic drugs already make up 70% of all prescriptions in the U.S., a percentage that will ultimately increase once the new healthcare laws roll out. The government will place significant cost pressures on pharmaceutical companies to keep prices low. Lower-priced generics mean lower costs for government programs, private insurance companies and, most importantly, patients.
Given these industry changes, there is little doubt that generic drug makers will thrive in the upcoming cost-driven environment.
But there is one area of generics that will thrive more than any other … biosimilars.
Biosimilars are the generic equivalent of name-brand biologics, which are name-brand products created by biologic – rather than chemical – processes. Biologics are heavily used in the treatment of various cancers, rheumatoid arthritis and adverse cardiovascular conditions.
Through the Patient Protection and Affordable Care Act, generic drug companies will be allowed to create an equivalent to the branded biologic.
Prior to healthcare reform, branded biologics were manufactured by the likes of Amgen and had 20-year, data-exclusivity patent protection. Under the new legislation, these name-brand products will have only 12 years of data exclusivity, which will certainly speed up the approval process for biosimilars. The new law will bring in more competition, and more importantly will create a new multibillion-dollar market.
Currently, there’s one major player in the biosimilar space – Teva Pharmaceutical (NYSE: TEVA), the world’s largest generic drug manufacturer and the 15th-largest pharmaceutical company.
You don’t need to know much about what’s in Teva’s pipeline. Actually, it’s irrelevant. Teva produces cash, and lots of it, partially BECAUSE they don’t have a pipeline … they have the competition’s.
The generics industry provides a relative safe haven in an uncertain global economy. And Teva, in particular, is the company best positioned to succeed over the long term in the generic pharmaceutical space.
Strong growth opportunities exist for Teva all over the globe, especially in Japan and the emerging market countries of Brazil, Russia, and Latin America. Additionally, the generic market is only now maturing and represents just a modest slice of the global drug industry.
While the drug sector is prone to regulation challenges and costly research expenses, it is a relatively safe industry for investors. Healthcare is viewed as a consumer staple, meaning that people will use medicines regardless of economic conditions.
In fact, generic substitutes become popular alternatives in tougher economies, such as we’re currently experiencing. What’s more, consumer staples are usually more resistant to downturns in the stock market.
Furthermore, many drug companies trade at incredible discounts. Teva is growing its earnings by roughly 11% each year, but the stock doesn’t even trade at 10 times forward EPS.
Best of all Teva is a shareholder-friendly company that currently pays a nice 2.8% dividend…just the type of stock I look for in the High Yield Trader service.
Last year we saw the largest ever impact of patent expirations, or what has come to be known as the patent cliff. Drug companies whose patents expired in 2012 collectively suffered a revenue loss amounting to $28.9 billion, meaning that there is that much more on the table for manufacturers of generics. In 2013, the revenue loss on account of patent expirations is expected to be in the range of $29 billion.
Given Teva’s position in the generic drug market, the stock is a great play for anyone looking for an incredible value investment in the healthcare sector.
But as I stated earlier, I want to show you how to position yourself to take advantage of an income stream that could last for years to come. Yes, we could just buy the stock and collect the 2.8% dividend but in this low interest rate market environment that’s just not enough.
Next week I am going to show you how to bring in a steady, reliable income using Teva. In fact, you don’t necessarily have to own the stock to take advantage of this opportunity. It’s simple and, more importantly, it’s REAL. Professionals do it every day and we do it as a way to bring in safe income in our High Yield Trader service.
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