Profit from Obamacare

banker xObamacare has been in the news of late. It was the centerpiece of the efforts of the Republicans to force the Whitehouse and Democrats to come to the table to negotiate budgets, deficits and the national debt. The efforts to overturn the law and its mandates failed miserably. And any future efforts will fail as well. By the time the Republicans have any type of majority, the provisions from the law will be solidly in place and irreversible.

The results are not going to be pretty for most people. It will mean more expensive coverage and higher taxes for the majority in order to subsidize the policies of those who cannot afford conventional heath insurance. Taking away provisions for pre-existing conditions and removing caps on lifetime payouts must be paid from somewhere and that is a fact. More people will have more access to health insurance, something that is not a bad thing by any means, but it’s something that will result in winners and losers. But, instead of lamenting what cannot or will not be changed, you can turn the tables on Washington and implement your own Obamacare investment strategy now.

Without a doubt, one segment of the healthcare sector is going to boom in coming years. It has less risk associated with it than the device sector for example or the biotech sector, which is prone to volatility. The device sector is actually under the gun right now for an end to tax breaks. The biotech sector is certainly a place to look for big gains fast, but like the mining sector, it’s hit or miss when it comes to small stocks that have to constantly dilute shareholders in order to pay for clinical trials, of which the minority proceed to actual drugs that can be profitably marketed.

There is the big pharmaceutical sector as well. These are companies with established pipelines and huge reserves of cash to pay for new trials and marketing. But, the big pharmaceuticals are under constant attack from the government and face increasing competition from the generic sector. They’re a good bet to profit from Obamacare despite the challenges, but there is an even better option.

That option is to buy the generic drug makers. These are in a class by themselves. They don’t face the massive hurdles of developing new drugs – they just knock off what’s out there. No need for expensive clinical trials – it’s already been done for them. They face government regulation, of course, but with much less risk since the legwork has already been done years ago by the bigger pharmaceutical companies. Their margins are not as big, but they are much steadier and they are not under the gun when it comes to losing patent protection. Look at them as the scavengers if you will.

With Obamacare, their markets just increased in size. They not only benefit from the increasing numbers of people who now have access to healthcare, but also from the increasing cutbacks by health insurers looking to their bottom-lines to squeeze out profits in order to balance their own risks of higher payouts due to the pre-existing clause and unlimited lifetime caps.

Two companies in this sector are worth giving a serious look to:

1)    Mylan Inc (MYL) is the smaller of the two picks. It is, however, growing faster than its competition. It has both generic and branded drugs, meaning that it does develop new compounds, but the vast majority of sales and profits come from the generic sector.

2)    Teva Pharmaceuticals (TEVA) is the 800-pound gorilla in the sector. It makes more money than Mylan and is much bigger when it comes to revenues. But it has a little more risk attached for two reasons. First, Teva is more international in scope and is based out of Israel. It faces greater currency risk and is more exposed to Europe even though the bulk of its sales come from the US market. It is also going through a massive restructuring that will impact its growth rate for a year or more. But after that restructuring is complete, Teva may emerge as the strongest play in the sector. It trades at about 9 times earnings; half the multiple of Mylan and that represents opportunity if it can get its act together.

Obamacare may be a burden for a lot of people and companies, but even the worst ideas have silver linings and the generic sector is the place to recoup some of those hard-earned dollars that you’ll be forking out.

To your wealth,

Banker X.


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