profiting from obamacare

http://www.smartmoney.com/Investing/Stocks/Profiting-From-Obamacare/rofiting From Obamacare

It’s not just the banking industry that’s reeling from Washington’s maneuvers: President Obama has proposed a major overhaul of the nation’s $2.4 trillion health care system. Whether or not that’s good news for our citizenry, we’ll leave for another time. But what’s in his plan for investors?

So far, Wall Street has taken a dim view of Obamacare. Health care stocks dived after he unveiled his 2010 budget proposal, which included a $634 billion plan to slash health care costs over 10 years and eventually expand coverage to all Americans. Back in the early ’90s, when Hillarycare was in the works, the sector stayed depressed until the plan died. This time around, analysts think big changes are more likely and many stocks in the sector face a less profitable future. “Obama came out with guns blazing to change the status quo,” says S&P Equity Research biotech analyst Steven Silver.

Still, some stocks may be spared the presidential knife. Take biotechnology firms. On the surface, the news is bad: Obama wants to open their drugs to generic competition, a potential profit killer. But generic biotech drugs haven’t gained much traction in Europe, says Silver, and competition in the U.S. is several years off. So for now, biotech firms enjoy strong pricing power for all their products. One stock Silver likes: Celgene (CELG). Sales of Revlimid, a cancer drug, are growing rapidly, and the firm has a “robust pipeline,” including new drugs for psoriasis and small-cell lung cancer. The stock has been very volatile, he adds, and the company pre-announced a weaker first quarter than Wall Street expected, sending shares lower. But he still likes it long-term.

Companies that make life-sciences tools (the equipment used in research and development), meanwhile, could actually benefit from the stimulus package, which includes an additional $10 billion for the National Institutes of Health over the next few years. One such firm, Illumina (ILMN), makes DNA-sequencing equipment and generates about 85 percent of sales from academic and government-backed labs, says Leerink Swann analyst Isaac Ro. The stock isn’t cheap, trading at 42 times estimated 2009 earnings, and it's run up 20 percent since early March. But analysts expect profits to be up 30 pecent next year and revenue should rise as labs get more grant money for DNA research, says portfolio manager Frank Sustersic, who owns the stock in the Touchstone Healthcare and Biotechnology fund.

In an era of insurance cutbacks and hospital downsizing, companies that make products for nonelective procedures could do well. Rose Ott, manager of the Alger Health Sciences fund, likes Thoratec (THOR), a maker of implantable ventricular pumps for patients waiting for heart transplants. The company recently launched a new, smaller pump that’s expanding sales to a wider array of patients. And it’s seeking FDA approval to allow physicians to implant the pumps in patients who aren’t eligible for transplants—a potentially large new market. “It’s a good story,” she says. And it doesn’t look like Obama’s scalpel will cut into profits.

President Obama’s budget includes several measures to get more generics to market -- and analysts like the industry’s prospects. One potential winner:

Mylan (MYL), the world’s third-largest generic drugmaker. Mylan recently bought a major European generics business, and profits should improve as it pays down debt and cuts costs, says Morningstar analyst Brian Laegeler. The stock is up sharply from 2008 lows, including a 47 percent rise this year and investors might want to wait for a pullback before getting in, says Alger’s Ott. But she likes its long-term prospects.
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