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Revival for Health Care, Biotech

Kevin Baker

It was a big week for the health care and biotech industries.

With a change in power in Congress, the Democrats have launched their "100-hour plan," which includes a focus on Medicare drug pricing and reversing the ban on stem-cell research. Also, California Gov. Arnold Schwarzenegger unveiled a plan for universal health care insurance for the country's most populous state.

On Thursday, a bill to reverse the ban on federal funding on research on new lines of embryonic stem cells passed the House by a margin of 253 to 174. While this may not immediately include enough Republican votes to override the president's veto threat, that may change after the U.S. Senate passes a more moderate bill and negotiates, in conference committee, enough compromises to capture a veto-proof majority of both chambers.

The stock market prices companies on the basis of where business conditions might be six months or more into the future. Drug discovery at biotechnology companies can take years, and the market sees a favorable legislative environment for these companies developing.

On the other hand, established drugmakers such as Merck ( MRK Quote) and Pfizer ( PFE Quote) are paying high premiums to buy smaller biotechnology companies in an attempt to replace drugs that are coming off patent protection.

While this may be good for holders of biotechnology stocks and funds, it has the potential to dilute the value of pharmaceutical companies. This, combined with an attempt by some members of Congress to reduce the revenue these companies receive from Medicare for their existing drugs, puts big drug stocks in a negative light.

The impact of Schwarzenegger's universal health care insurance plan for California on health and biotech stocks is less clear. Hospitals, for instance, would have to pay a 4% fee into the system, however it would eliminate most of the unpaid emergency room care given to the uninsured.

For drug companies, this may be a long-term positive, as children or adults who had previously stayed out of the preventive health care industry would be able to purchase prescription drugs. Or, if the critics of the plan are right, drug companies will produce fewer innovative new drugs if they are restricted on pricing.

( BIPIX Quote) ProFunds Biotechnology UltraSector ProFund was the big winner this week, climbing 2.84% in the five trading days from the close on Thursday, Jan. 4 to the close on Jan. 11.

The fund is designed to return 150% of the movement of the Dow Jones U.S. Biotechnology Index. With weightings of 80.0% biotechnology, 17.8% pharmaceutical, and 1.8% health care products stocks, the top holdings are Amgen (AMGN Quote), Genentech(DNA Quote), Gilead Sciences (GILD Quote) and Genzyme(GENZ Quote).

Next on the list is the exchange-traded fund Biotech HOLDRs Trust (BBH Quote), which gained 2.63%. It holds the same companies listed above for BIPIX as its largest holdings, along with Biogen Idec (BIIB Quote), Applera (ABI Quote), and Medimmune ( MEDI Quote). Almost 81% of the fund is concentrated in biotechnology companies and more than 15% in pharmaceutical stocks.