Article by Investment U
Healthcare reform could be a minefield for Big Pharma in the long run.
The Patient Protection and Affordable Care Act – less fondly known as “Obamacare” – was the big story to close out the month of March, as the Supreme Court officially took the case.
In an effort to figure out which way the vote was going to swing, the media analyzed every word, pause and twitch the justices made. Though all of that heavy-duty analysis doesn’t actually prove anything; while the Court has likely already decided the healthcare mandate’s fate one way or the other, “We the People” probably won’t find out until June.
Considering the political left’s repeated complaints about Solicitor General Donald Verrilli Jr. and Deputy Attorney General Edwin S. Kneedler’s admittedly painful performance in explaining and defending the law’s constitutionality, many legal beagles and casual observers alike believe “Obamacare” has less than a glowing chance of standing.
But if they’re wrong and the Supreme Court rules in its favor, there’s one set of stocks that’s going to suffer miserably in the long run.
That sector would be pharmaceuticals, both big and small. And there’s a little-known reason why that’s so…
It’s a commonly known fact that U.S. citizens pay a hefty price for their prescription medication compared to just about any other country.
In December 2009, D. Brad Wright, then a doctoral candidate at the University of North Carolina, looked into the price differentiations of Plavix, Nexium and Lipitor, all important drugs designed to treat common but serious health complications. He concluded that Europeans and Canadians often pay less than half of what their U.S. counterparts are forced to shell out.
That’s definitely a sad story (for the United States, at least), but there’s a twist to it that few people fully understand…
The real reason Americans pay so much more than New Zealand, Canada, Mexico, England, Germany, France, et al. is because – for better or worse – those countries all practice some form of socialized medicine. Because the governments pay the bulk of their citizens’ healthcare costs, they set very strict limits on just how much they’ll pay for medication.
And those limits lead to significant losses for the pharmaceutical companies that sell them. That makes sense, considering how much time and money it takes to bring drugs from theory to viability.
There are costly materials to work with, numerous tests to run, top-of-the-line facilities to maintain, the best and the brightest to hire and retain, and all of the other expenses naturally associated with running a business to pay for. In addition, clinical research can take an easy decade to complete… or they fail somewhere along the way, costing pharmaceutical companies millions and even billions in the process.
In short, there’s a reason why drugs are so expensive to buy.
It’s because they’re so expensive to make.
The United States is one of the few – if not the only – major countries out there that allows pharmaceutical companies to set their own prices. So America is one of the few countries they actually make a profit off of… a profit they need in order to survive.
Writing for MedcineNet.com, Dr. Omudhome Ogbru explains it this way:
“In a nutshell, the price paid by a patient for a medication must cover the costs of developing new compounds that become approved drugs and compounds that fail to become drugs, as well as marketing, post-marketing studies, and a profit. The profit ensures that the company provides a return to investors. Profit is the incentive for the risk that the company takes. Without the promise of a reasonable profit, there is very little incentive for any company to develop new drugs.”
All in all, it’s fairly safe to say that, without the United States paying more than its fair share of costs, the rest of the world wouldn’t have it nearly so easy. But even that cushion can’t last very long if the Patient Protection and Affordable Act stands.
As it stands now, the law requires everybody to have health insurance by 2014, either from a private insurer or the government. And if the U.S. government is going to remain financially feasible for long under that added burden, it’s going to have to start implementing the same price limits that the rest of the world is already working with.
In that case, companies like Johnson & Johnson (NYSE: JNJ), Pfizer Inc. (NYSE: PFE), Eli Lilly (NYSE: LLY), Abbott Laboratories (NYSE: ABT), Merck & Company, Inc. (NYSE: MRK), AstraZeneca (NYSE: AZN) and Novartis (NYSE: NVS) are all going to lose out big time before too long.
Good Investing,
Jeannette Di Louie
Article by Investment U