Big Pharma Immune to Obama Overhaul

BOSTON (TheStreet) -- The health-care debate is raging, and the only thing that seems certain is no one will end up happy.

Some investors may be waiting to add more money to pharmaceutical stocks -- and some may have gotten out already. Regardless of the outcome of President Obama's health-care overhaul, however, the effect on drug makers such as Pfizer(PFE), Merck(MRK), Bristol-Myers Squibb(BMY) and GlaxoSmithKline(GSK) probably will be negligible. The same can't be said for health-insurance companies UnitedHealth Group(UNH) and Aetna(AET).

Under current rules, drug makers can receive a patent that's valid for 20 years after the discovery of a new drug. They get marketing exclusivity for five years. Those laws protect drug maker's investments in research and development. Without them, generic manufactures like Teva Pharmaceuticals(TEVA) could clean up. Investors should feel confident that patent rights will remain safe. If not, the incentive to conduct research on new treatments would disappear.

Health-care reform may actually help the pharmaceutical industry. If more people are covered under health insurance, more will line up at pharmacies to get their diabetes or blood pressure under control using drugs.

Some profits may be lost to increased care about waste in the system and a reevaluation of the necessity of some prescriptions, but 40 million newly insured Americans would translate into big money. Keep in mind that many pharma firms posted returns on equity of 25% or more during the financial crisis. The technology industry, which includes IBM(IBM), posted an ROE of negative 4%, and retailers such as Wal-Mart(WMT) had an ROE of negative 3%.