Drug ETFs Likely Winners of Health Law

NEW YORK (TheStreet) -- Now that the historic health care bill has been signed into law by President Obama, drugmakers are likely to reap all the benefits and for good reason.

The overhaul of the health care system likely will add to the revenue of Big Pharma companies. From a mere quantity perspective, the reform is expected to provide insurance coverage to more individuals, hence giving more people the ability to pay for prescription medication and pushing sales volumes up significantly.

From a competition perspective, it appears that the pharmaceutical sector has won nearly a decade of protection against generic competition for biotech drugs. Additionally, the law doesn't contain any measure which bars the sector from paying generic drugmakers to delay the launch of less-expensive alternatives. In essence, cash heavy pharmaceutical firms have the ability to pay off more cost effective competitors who manufacture "knock-off" alternatives and control the prescription drug market.

Another potential victory can be seen through the scrub of measures which could have potentially eaten away at revenue generated from drug sales to the elderly. More specifically, the law doesn't include any measures which would enable the government to dictate and negotiate the price of drugs sold through Medicare Part D, which for some pharmaceutical companies can comprise nearly 25% of all revenue.

Lastly, the new piece of legislation is anticipated to close the gap in Medicare drug coverage known as the doughnut hole, which forces elderly patients to pay for prescription drugs through the implementation of a discount program. This concession is expected to benefit pharmaceutical companies by enticing elderly users to stay around as opposed to them not taking their medicine or switching to lower-price generics because of cost constraints and affordability.

With this in mind, some equities likely to be influenced by the law include:

• PowerShares Dynamic Pharmaceuticals(PJP), which boasts biopharmaceutical giants Merck(MRK) and Gilead Sciences(GILD). PJP closed at $20.35 on Tuesday.
• iShares Dow Jones US Pharmaceuticals(IHE), which holds pharmaceutical giants Pfizer(PZE) and Johnson & Johnson(JNJ) as top holdings. These two companies are especially likely to reap the benefits of this new law. IHE closed at $60.96 on Tuesday.
• SPDR S&P Pharmaceuticals(XPH), which holds diversified health care companies like ViroPharma(VPHM) and Perrigo(PRGO). XPH closed at $42.79 on Tuesday.

Although a rosy picture lies ahead for the sector, it is important to consider the inherent risk involved with investing in equities. A good way to mitigate these risks is through the implementation of an exit strategy which triggers price points at which an upward trend could potentially be coming to an end.

Written by Kevin Grewal in Laguna Niguel, Calif.

At the time of publication, Grewal had no positions in the securities mentioned.

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