ObamaCare Court Test a Non-event for Health Stocks

by Barry Cohen | July 5, 2011 2:31 pm

ObamaCare Court Test a Non-event for Health Stocks

The health care law President Obama signed last year survived its first test when a federal appellate court concluded the law’s insurance requirement is constitutional. So what was the reaction of the industries most likely to be affected by the new legislation? A big yawn.

Representatives of pharmaceuticals, biotech, medical equipment manufacturers, the health insurance industry and hospital conglomerates were pretty much silent on the first big court hurdle cleared by what is referred to as ObamaCare. Maybe they realize that, in terms of legal challenges, the game still is early in the first quarter and the court ruling amounts to little more than a field goal for Team Obama.

Two more appeals courts still have to rule on the legislation. However, it’s pretty much a foregone conclusion that the ultimate arbiter on the constitutionality of the health care law will be the U.S. Supreme Court. It’s likely the high court will rule on the Patient Protection and Affordable Care Act next year, probably before the election.

If investors thought the appellate court ruling was favorable or unfavorable to the health industry, it wasn’t obvious. During a week in which Wall Street enjoyed its biggest gains in two years, the increase in the Dow Jones Health Industry Index was only slightly behind the overall Dow Jones Industrials Average.

So are we unlikely to see the impact of the legislation reflected in the stock prices of health care companies until the U.S. Supreme Court rules on it? Or have investors just concluded that it’s a done deal and their optimism or fears are already built into the share prices of the players most directly affected?  The latter appears to be the case.

As we wrote earlier this year, the passage of the law seemingly removed a huge unknown that had been plaguing the shares of health insurance insurance stocks. In fact, investor enthusiasm for the big carriers has even picked up steam. Members of this group, including Humana (NYSE: HUM[1]), UnitedHealth (NYSE: UNH[2]), Cigna (NYSE: CI[3]), Wellpoint (NYSE: WLP[4]) and Aetna (NYSE: AET[5]), have left the DJIA in their rear-view mirror, with year-to-date prices gains ranging from 40% to more than 50%.

Even the pharmaceutical industry, which was lagging the DJIA at the end of March, has caught fire. The iShares Dow Jones US Pharmaceuticals (NYSE: IHE[6]) exchange-traded fund has exploded in the past three months and is now up 16% for the year. Among its top 10 holdings are Pfizer (NYSE: PFE[7]), Merck (NYSE: MRK[8]), Lilly (NYSE: LLY[9]), Johnson & Johnson (NYSE: JNJ[10]), Abbott (NYSE: ABT[11]) and Bristol-Myers Squibb (NYSE: BMY[12]). This performance is even more remarkable given the number of blockbuster drug patents that will soon be expiring.

Maybe investors finally got the message that pharmaceuticals stand to be well-rewarded under health care reform. It’s estimated about 40% of the provisions of the health care law are likely to spur the demand for drugs by adding 32 million new, formerly uninsured citizens to their customer rolls. This translates into as much as $115 billion in new business over 10 years.

As of this writing, Barry Cohen did not hold a position in any of the stocks mentioned here.

Endnotes:
  1. HUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=HUM
  2. UNH: http://studio-5.financialcontent.com/investplace/quote?Symbol=UNH
  3. CI: http://studio-5.financialcontent.com/investplace/quote?Symbol=CI
  4. WLP: http://studio-5.financialcontent.com/investplace/quote?Symbol=WLP
  5. AET: http://studio-5.financialcontent.com/investplace/quote?Symbol=AET
  6. IHE: http://studio-5.financialcontent.com/investplace/quote?Symbol=IHE
  7. PFE: http://studio-5.financialcontent.com/investplace/quote?Symbol=PFE
  8. MRK: http://studio-5.financialcontent.com/investplace/quote?Symbol=MRK
  9. LLY: http://studio-5.financialcontent.com/investplace/quote?Symbol=LLY
  10. JNJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNJ
  11. ABT: http://studio-5.financialcontent.com/investplace/quote?Symbol=ABT
  12. BMY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BMY

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