Following last year’s sweeping overhaul of the nation’s health care system, many pharmaceutical industry followers predicted Big Pharma would be one of the key winners. Conversely, experts predicted ObamaCare would have dire consequences for insurance industry stocks.
While it’s still early in the game, just the opposite has occurred.
In the case of the health insurance stocks, the reality of the law’s impact has proved to be far less onerous than expectations. The fact is, passage of the law removed the uncertainty hanging over shares of the insurance stocks. Once the dark clouds dissipated, investors saw an opportunity and jumped aboard. Their enthusiasm is reflected in the collective 15% increase in the industry’s shares during the past year.
The charge has been lead by Humana (NYSE:HUM), which is trading at more than $65, a 35% jump from a year ago. There still may be some upside for investors, as Humana trades at a relatively modest price-to-earnings ratio of just over 10, and the shares have received two analyst upgrades to buy since late February.
UnitedHealth (NYSE:UNH) has also had a nice run. Its shares are up more than 30% since March 2010 and now trade near $44. United’s P/E is also attractive at just under 11, and analysts also appear enthusiastic about its prospects, with two upgrades since the beginning of the year. While investors like the stock, evidently consumers are not similarly enthralled: UnitedHealth is among 32 finalists in one consumer group’s competition for the “Worst Company in America.”
Despite the good overall performance, the fear of the unknown still haunts health insurers. No one is certain about the consequences to their bottom lines of 2014 rules that create health state health insurance exchanges and prevent insurers from denying coverage to people who are already sick.
Although health care reform may eventually prove to be beneficial to the pharmaceutical industry, that optimism certainly wasn’t reflected in the price performance of most company shares for the past year. The iShares Dow Jones US Pharmaceuticals (NYSE:IHE) exchange-traded fund, which numbers Pfizer (NYSE:PFE), Merck (NYSE:MRK), Lilly (NYSE:LLY), Johnson & Johnson (NYSE:JNJ), Abbott (NYSE:ABT) and Bristol-Myers Squibb (NYSE:BMY) among its top 10 holdings, lagged by several percentage points the gain in the S&P 500 during the past year.
And if you isolate Big Pharma, the picture looks even worse, as many of its members suffered steep declines.
Many of these companies just couldn’t shake investor concerns about how they’re going to make up the billions of dollars they stand to lose in the next few years as many of their blockbuster drugs lose patent protection.
But those investors with a longer time horizon might want to gobble up some of these depressed shares now. That’s because Big Pharma stands to be well rewarded under health care reform. It’s estimated that some 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, a nice addition to Big Pharma’s bottom line.