Investors cheer GOP's Senate win
Scott Brown's victory in Massachusetts may derail health care reform, which could help extend a rally in the sector.
By Adam Feuerstein, TheStreet
The election of underdog Republican Scott Brown to the open U.S. Senate seat in Massachusetts last night greatly reduces the odds that health care reform will pass Congress, and his victory could extend a rally in health care stocks.
Brown's victory over Democrat Martha Coakley for the Bay State Senate seat left open upon the death of liberal lion 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.
"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 last 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 wrote today, adding that Bristol-Myers Squibb (BMY) and Eli Lilly (LLY) have the most to gain because of 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 because of efforts by Congress and the White House to shorten the 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 period as a way to pay for health care reform and to 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.
"This is more about sentiment, but it's still a positive," said JPMorgan (JPM) biotech analyst Geoff Meacham.
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