As the debate surrounding health care reform begins to wind down, it's clear that big changes are coming. And while it's easy to note the companies that are fearful of the proposals, it's far more advantageous for investors to figure out who is chomping at the bit.
Partisan rancor aside, we all have a common enemy in spiraling costs. So it stands to reason that companies capable of trimming fat from the system will have powerful allies on both sides of the aisle.
That makes the health care IT sector a safe bet, although stocks in this niche are becoming pricey.
Instead, I predict that an entirely new industry in the healthcare sector will be born 2010 -- one that will revolutionize the way we treat illnesses. It will save lives (not to mention millions of dollars), and line the pockets of shareholders.
My prediction is this: 2010 will finally be the year when biogeneric drugs break through.
Generic prescriptions now account for almost 70% of all pills taken nationwide. These inexpensive alternatives have saved more than $730 billion during the past decade. But pharmaceutical firms like Pfizer (NYSE: PFE) still rake in piles of cash while their products are under patent protection, a fair reward for their efforts and ample incentive to spur future innovation.
I think we can strike a similar balance in the biotech world. Biogenerics (or biosimilars) are already cutting healthcare costs in Europe, and bipartisan legislation pushing for a formal FDA approval "pathway" has been introduced in both the House and Senate.
The potential for consumers (and Medicare) to shave one-third off the $40 billion we spend on biotechs each year will prove irresistible. Replicating drugs based in living cells is a tricky business, but companies like Teva Pharmaceuticals (Nasdaq: TEVA) are up to the challenge -- and a regulatory green light could send this stock and several others soaring.
The average daily cost of a biotech drug is 22 times greater than a traditional drug -- some are considerably higher. Generics could shave those expenses by up to one-third and generate $100 billion in cost savings during the next decade. That's a much more politically expedient reform than tax hikes, and thus the path of least resistance. Opposition has melted to the point where even biotech hardliners are now fighting for lesser concessions.
In other words, the debate is over. Biogenerics are coming -- it's just a matter of the fine print.
This comes at a time when biotech's share of the overall pharmaceutical industry is in the process of doubling from 15% to 30%. Just two years ago, biotech drugs accounted for roughly $40 billion in annual sales. At the current trajectory, sales could top out at $100 billion within the next three years.
All it will take is one stroke of the pen and biogenerics could quickly carve out a large slice of this booming market.
At times, there can be as many as 10 different companies fighting to sell the same generic drug, making economies of scale critical to maintaining low production costs and undercutting the competition. In other words, this is an industry where size matters -- and Teva towers over its competition.
During the past decade, the Israeli company has literally become synonymous with generic drugs. At less than 12 times forward earnings, the shares trade at an attractive discount to the firm's projected growth rate. And when biogenerics hit the market, Teva could benefit handsomely.