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Winning Stocks From Health Care Reform

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Parsing the sector for the companies that are best positioned to benefit.

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Like the touch of a magic wand, the passing of health-care-reform legislation by the House of Representatives in a 219 to 212 vote has pulled away the overhang that's kept stocks in the sector marginally depressed over the last few months.

Health-care stocks can now trade freely, without the worry over the uncertainty of government legislation. According to Miller Tabak analyst Les Funtleyder, managed-care stocks stand to benefit the most from reform, followed by pharmaceutical companies, biotech stocks, and lastly, medtech companies.

The managed-care sector and pharmaceuticals will get the biggest bump from all of the approximately 32 million uninsured Americans who will now become insured. The volume of new patients trumps any changes in taxes that the companies might be facing over the next decade, but don't worry, those taxes don't even start kicking in until 2011. The major pharmaceutical companies will face $80 billion in taxes and fees over the course of the next few years. Also good news for Big Pharma -- the bill doesn't include any control on pricing of drugs. (See Putting the Spotlight on High Drug Prices.)

Expect to see managed-care players like WellPoint (WLP) and Cigna (CI) getting some upside from reform since the company has little exposure to Medicare Advantage, which will have its payments frozen in 2011 and lowered in 2012.

Morningstar analyst Alex Morozov says the pharmaceutical companies that will benefit the most will be the ones with the largest biologics portfolios. He specifically calls attention to Novartis (NVS) for its presence in vaccines.

This will also be an area where biotech companies will gain from reform. Biologic drugs, or drugs made from living material (like vaccines or those based on DNA technology), are typically made by biotech companies. The bill includes a period of 12-year exclusivity on the brand-name biologics, giving biotechs with older portfolios a little more time before competition enters the marketplace. Companies like Amgen (AMGN) and Gilead (GILD) will be major winners because of this.

On the flip side of that, generic drug makers like Teva (TEVA) got little help from the bill and lost out on the 12 years of exclusivity -- the companies were pushing for a shorter period of only five to seven years.

Medtech makers like Medtronic (MDT) and Covidien (COV) already got lucky when a tax on the industry was reduced to $20 billion from $40 billion. Now the companies will be able to avoid hefty fees until 2014 instead of facing them this year. Morozov suggests this won't be a problem because the medical device companies have three to four years to come up with a solution.
No positions in stocks mentioned.

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