BOSTON ( TheStreet) --The election of underdog Republican Scott Brown to the open U.S. Senate seat in Massachusetts Tuesday night greatly reduces the odds that health care reform will pass Congress and could extend a rally in health care stocks. Brown's victory over Democrat Martha Coakley for the Bay State Senate seat vacated by the death of liberal lion Sen. Edward Kennedy gives Republicans 41 seats in the U.S. Senate. With those numbers, Republicans have the votes needed to break the Democrats' 60-seat majority and force major changes, or even stop completely, President Barack Obama's health care reform proposals. The demise of health care reform is likely to be seen as a net positive for the health care sector, with investors expected to buying into the sector Wednesday. "We expect the broad health care rally to continue, given that many generalists perceive Obamacare as unfavorable to the sector. We would, however, specifically highlight the HMO stocks, which bear the greatest burden in the proposed legislation," said Monness Crespi Hardt health care analyst Avik Roy, in a note to clients Tuesday night. Roy expects HMO stocks with the largest exposure to Medicare Advantage are best positioned for a rally with a Brown victory, including Humana ( HUM), Coventry ( CVH), WellCare ( WCG), HealthNet ( HNT) and UnitedHealth ( UNH). U.S. pharmaceutical stocks were already outperforming the broader S&P 500 since the fall. Brown's victory could extend that rally, says Bank of America/Merrill Lynch analyst Eric Lo. "Failure for reform would remove any near-term
earnings pressure and provide incremental cash flows for companies to return to shareholders or utilize for deals to bolster the pipeline," he writes Wednesday, adding that Bristol-Myers Squibb ( BMY) and Eli Lilly ( LLY) have the most to gain due to their relative high exposure to government-related drug spending.
In recent weeks, Big Pharma and the biotech industry have threatened to oppose health care reform legislation working through Congress due to efforts by Congress and the White House to shorten the time period for which brand-name biotech drugs would be protected from generic competition. The drug industry wants 12 years of protection for its expensive biologic drugs, but recent legislative proposals would significantly shorten that time period as a way to pay for health care reform as well as help consumers gain access to cheaper drugs more quickly. Anything that short circuits efforts to reduce brand-name biotech drug exclusivity will bring cheers from biotech and drug investors. Big-cap biotech stocks like Amgen ( AMGN), Celgene ( CELG), Biogen Idec ( BIIB) and Genzyme ( GENZ), in particular, could see a rally if the overhang of looming bio-generics is removed. "This is more about sentiment but it's still a positive," said J.P. Morgan biotech analyst Geoff Meacham. -- Reported by Adam Feuerstein in Boston. Follow Adam Feuerstein on Twitter.