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Is This the Dawn of a Generic Drug Boom?

4 October 2013 in Trading Ideas

A significant, but somewhat confusing reality that seemed lost in this week’s government shutdown battle over the Affordable Care Act was that the new healthcare law – Obamacare to most of us — is effectively open for business.

As the New York Times noted on Tuesday, millions of Americans visited online exchanges on the first day of enrollment, suggesting a healthy appetite for the new opportunity for health insurance.1

While the Times notes that a dragged-out political fight could sour people on the law and hurt enrollment totals, the conventional wisdom – for now – is that Obamacare is likely to survive.

In other words, for investors, it could be the time to ask: Where in this sweeping change can we find the investing opportunity?

For some traders, the generic drug sector seems like a logical place to look. As Andy Crowder, an options strategist at Wyatt Investment Research, pointed out earlier this spring, generics already make up 70% of prescriptions in the US, and that percentage will ultimately rise in the age of Obamacare.2

The government will apply significant cost pressures on pharmaceutical companies to keep prices low, Crowder said, and turning toward lower-priced generics simply means lower costs for government programs, private insurance companies and, most importantly, patients.

And let’s not forget the likely growth in customers. According to a report this spring by London-based research and consulting firm GlobalData, the new health law paves the way for a rebound in sales from both branded- and generic-drug makers, to the tune of $115 billion over a 10-year period.3

Enrollment in the Medicaid program alone is expected to increase by 19.5 million people, according to GlobalData. In total, the research firm estimates that 32 million formerly uninsured citizens will now be potential customers.

drug-patent cliffs motifPerhaps those figures partly explain the recent rise in generic drugmaker stocks as Obamacare reality has drawn closer. The Drug-Patent Cliffs motif, for example, has gained 7.7% in the past month. During that same timeframe, the S&P 500 is up 2.3%.

So far in 2013, the motif is up 35.6%, and the S&P 500 has gained 17.5%.

While it’s entirely plausible that generic drug makers will ultimately find that they, too, will need to lower prices to compete, Crowder points to one potential sweet spot amid generic firms – biosimilars. For regular folk, these are the generic equivalents of biologic drugs, which are made by biologic — rather than chemical — means. They’re mostly used in treating cancer, rheumatoid arthritis and certain adverse cardiovascular conditions.

Under Obamacare, Crowder notes, generic drugmakers will now be allowed to create generic versions of biologic drugs. What’s more, branded biologics will now only have a 12-year patent exclusivity period, as opposed to the current 20 years. That means competition, and potentially, a bigger future landscape for generic drugmakers.

1Abby Goodnough, Robert Pear and Richard Perez-Pena, “Opening Rush to Insurance Markets Runs Into Snags,” nytimes.com, Oct. 1, 2013, http://www.nytimes.com/2013/10/02/us/health-insurance-marketplaces-open.html?hp&_r=0.

2Andy Crowder, “Obamacare Will Make this Pharmaceutical Company Skyrocket,” Wyatt Investment Research, May 29, 2013, http://www.wyattresearch.com/article/obamacare-will-make-this-pharmaceutical-company%20skyrocket/29882, (accessed Oct. 1, 2013).

3Bruce Japsen, “Obamacare Will Bring Drug Industry $35 Billion in Profits,” forbes.com, May 25, 2013, http://www.forbes.com/sites/brucejapsen/2013/05/25/obamacare-will-bring-drug-industry-35-billion-in-profits/, (accessed Oct. 1, 2013).

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    22 Oct at 10:41 am

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