Drugs Immune to Democrats

Even if the GOP loses, don't expect big policy changes in health care.
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For the next few days, Wall Street can stop worrying about the Federal Reserve and instead keep wondering how the midterm election will affect the drug industry.

At the risk of spoiling speculators' predictions, there appears to be little chance of dramatic changes in health care policy unless the Democrats gain veto-proof majorities in both the Senate and the House of Representatives. Don't bet on it.

Even a narrow takeover by Democrats in both chambers means that President George W. Bush could be in vigorous veto mode, and each house requires a two-thirds vote to override a veto.

Bush might be able to keep his veto pen holstered for much of his term thanks to built-in roadblocks in Congress. For example, a narrow Democratic victory in the Senate means there probably won't be the necessary 60 votes to stop a filibuster, except in cases where enough GOP legislators run away from the party leader. Otherwise, Republicans can talk unwanted bills to death.

If Democrats win one chamber and the GOP keeps the other, no bill will get to the President. Unless, that is, conferees from both chambers agree on a final product. Divided power means extreme proposals from either party will likely get knocked out early on.

Given those impediments, let the speculation begin. Merrill Lynch predicts stocks of big drug companies -- the

Pfizer

(PFE) - Get Report

,

Merck

(MRK) - Get Report

and

Bristol-Myers Squibb

(BMY) - Get Report

set -- and health maintenance organizations would be harmed if the Democrats win the House or both chambers.

Meanwhile, shares of generic-drug makers -- think

Barr Pharmaceuticals

and

Mylan Laboratories

(MYL) - Get Report

-- would benefit. Another group that would likley be in a better position is that of the stem-cell companies, names like

Geron

(GERN) - Get Report

, the firm says in a recent research report.

The investment banking firm says Democrats want the federal government to negotiate prices on prescription drugs covered via Medicare, adding that they "would likely end" subsidies for big drug companies and HMOs. Although a Democratic-controlled Congress would be good news for stem-cell studies, Merrill predicts Bush would veto any bill that expands federal support for human embryonic stem-cell research.

Susquehanna Financial Group says the GOP's retaining control of both houses would be good new for brand-name drug companies, pharmacy-benefit managers like

Medco

(MHS)

and

Express Scripts

(ESRX)

, and managed-care companies. If Democrats take over both, or just the House, the beneficiaries will be generic-drug companies and hospital operators, the firm contends.

Government negotiation of Medicare drug prices is a key issue for Democrats, but Susquehanna doubts there are enough votes in the Senate to overturn a filibuster. If such a proposal is approved by the Senate, then Bush will veto it, the firm says.

In a recent report to clients, Susquehanna says greater Democratic influence could stop the practice of authorized generics, in which brand-name companies license products to generic-drug makers for a royalty. This practice enables a brand-name company to slightly reduce the revenue-damage caused by generic competition.

Generics makers complain that authorized generics hurt them economically. Federal law gives 180 days of market exclusivity to a company making the first application to the Food and Drug Administration for a generic drug. That marketing edge is crucial in a cutthroat business where profit margins are low.

Authorized generics dilute the margins of the first-to-file companies, but the practice has been upheld in courts and is supported by the FDA.

While WBB Securities predicts Democrats will gain control of the House, it figures they will "nibble at the edges" of health care policy rather than push for big changes "unless there is a clear mandate for a major policy shift."

Democrats are likely to increase spending for Medicare and Medicaid, helping the stocks of drug and device companies, the firm says.

"It is unlikely that a Democrat-led House and Senate will go after pharmaceutical companies, biotechs or physicians as a group," says a recent WBB Securities report. Instead, Congressional committees "are likely to call

Bush administration appointees and grill them on shortcomings," whether real or imagined.

"In the absence of windfall profits or major missteps, pharmaceutical businesses and health care professionals will experience a tolerant legislative environment under Democratic leadership," the firm says.