By Andrew Leckey

The complex prescription for successful healthcare investing usually includes the careful consideration of drug pipelines, current-product sales, patent expirations, potential mergers and stock dividends.

Add to that list in 2010 an untested ingredient called healthcare reform.

"Institutional investors don't want to see big headlines about the healthcare industry that they weren't able to predict," said Les Funtleyder, health care strategist for Miller Tabak & Co. in New York. "So they're currently operating on the fear of increased regulation or pricing pressures."

If you're in any way optimistic that the outcome of healthcare reform won't be all that bad for drug companies, the current fears mean that healthcare stock prices will never be more reasonable than they are now. Prices are depressed and the dividends solid.

"Once we know what the reform will look like in detail we can then move forward," believes Linda Bannister, healthcare analyst for Edward Jones in St. Louis. "Managed care is the most at risk from healthcare reform, and then the risk declines from there."

Beyond the potential negatives of reform on drug stocks there may be some long-term positives.

"If 30 million people who didn't have health insurance were to have it, imagine what that does for a pharmaceutical company," said James Molloy, pharmaceutical analyst for Caris & Co. in Boston. "The plus side of drugs is that most people with insurance never pay full price, but instead pay a co-pay, and you can imagine what kind of car everyone would drive if they had a co-pay for their gas."

While awaiting a clear prognosis on reform, investors must fall back on traditional considerations that tend to favor big pharma that keeps growing bigger.

Merck's launches of diabetes drug Januvia, papillomavirus vaccine Gardasil and HIV drug Isentress have all been successes, while its acquisition of Schering-Plough could result in $3.5 billion in annual cost-saving synergies by 2012. More than half of Merck's sales are outside the U.S.

Warner Chilcott Plc (WCRX), whose stock is down 8 percent this year following last year's 96 percent gain, is Molloy's top pick in part because it has massive cash flow. This marketer of women's health and dermatology products recently purchased Procter & Gamble's prescription drug business. Its diversified product mix includes hormonal oral contraceptives and hormone therapy products for menopausal symptoms, as well as topical products of psoriasis and an antibiotic for acne.

The other Molloy favorite is Endo Pharmaceutical Holdings Inc. (ENDP), up 10 percent this year following last year's 21 percent decline. It is a specialty drug company in pain management whose flagship product is the Lidoderm adhesive patch for post-shingle pain. The company, which cross-sells many of its pain-related products, last year acquired Indevus Pharmaceuticals that specializes in urology and endocrinology.

"My biggest consideration is whether the good news or bad news is factored into the stock price," explained Molloy. "I also ask whether its primary drug has to be a $1 billion drug for the company's stock price to go higher."

Novartis AG (NVS) and Bristol Myers Squibb Co. (BMY) are Funtleyder's other favorites. Though he says "no one is firing on all cylinders right now," there is little downside, they offer solid dividends and their upside is the enormous potential of their drug pipelines.

Mergers can come fast and furious among drug companies, but is an unpredictable trend that none of the experts expect will take place soon.

"Pharma has been a consolidating industry ever since it was an industry," said Funtleyder, noting that patent expirations and slowing sales drove the most recent mergers and innovation may someday drive the next go-around. "Consolidation happens in waves and last year was a pretty big wave, so we think there will be a break for a couple of years before we see the next wave of consolidation."

Other Bannister choices include Eli Lilly & Co. (LLY), Pfizer Inc. (PFE) and Abbott Laboratories (ABT).

"If a company like Lilly is unable to execute its pipeline, then at some point it is going to have to make a sizeable acquisition or it will potentially be acquired," concluded Bannister, who considers investment in Lilly a three- to five-year story. "Yet most of these companies' strategies are licensing deals or small 'tuck-in' acquisitions, so I'm not betting on a new wave of industry consolidation."

 

Investing - Healthcare Reform Could Have Positive and Negative Effects on Drug Stocks

© Andrew Leckey

 

Personal Wealth & Finance ...

CAREERS | INVESTING | PERSONAL FINANCE | REAL ESTATE