Daily Gains Letter

Is Obamacare Killing America’s Medical Innovation?

By for Daily Gains Letter |

Obamacare Killing America’s Medical InnovationThere are few things more unpopular in America right now than President Obama and “Obamacare,” or the Patient Protection and Affordable Care Act, as it’s known in the hallowed halls of Washington. According to a recent poll, 45%–49% of Americans disapprove of President Obama’s job performance; only 48%–45% approve. (Source: “American Voters 4-1 Want Special Prosecutor For IRS, Quinnipiac University National Poll Finds; But Fixing Economy Is More Important, Voters Say 3-1,” Quinnipiac University web site, May 30, 2013, last accessed June 10, 2013.)

America’s love for Obamacare is equally as tumultuous. Another poll shows that 49% of Americans say Obamacare is a bad idea, while just 37% consider it a good idea. On top of that, 38% say they will be worse off with Obamacare, while just 19% said they would be better off. (Source: “Health care law’s unpopularity reaches new highs,” NBC web site, June 5, 2013.)

The angst and love splits along party lines; 35% of Democrats say they will be better off under Obamacare, while just four percent of Republicans concur. Not surprisingly, individuals without health care have a more favorable view of Obamacare than those with health care. (Source: Ibid.)

No matter what you think of Obamacare, it’s going to forever change the way health care is delivered in this country. While President Obama claims the law is “the largest health care tax cut for working families and small business in our history” (source: “Obama’s Remarks on Health Care and Surveillance,” New York Times, June 7, 2013), to others, it’s not so clear cut. According to the Congressional Budget Office, the $1.0-trillion subsidy qualifies as one of the largest tax increases in history; affecting insurance plans, medical devices, and investment income. (Source: “Estimates for the Insurance Coverage Provisions of the Affordable Care Act Updated for the Recent Supreme Court Decision,” Congressional Budget Office web site, July 2012, last accessed June 10, 2013.)

On the heels of a depressed economy, the government is asking the health care sector to be more innovative than competitors outside the United States. With an estimated 32 million more Americans receiving insurance under Obamacare, prescription drug sales should experience a significant boost. Unfortunately, certain Obamacare policies could be getting in the way.

While the big pharmaceutical companies will continue to do well under Obamacare, they still need to curb their expenses to subsidize drug development failure rates and increased taxes.

But it’s not all a bed of roses. Because of Obamacare, drug makers need to provide higher rebates to Medicaid for prescriptions that could cost the industry around $20.0 billion over the next 10 years. Pharmaceutical companies also need to pay new excise taxes on branded drugs. By 2021, the total for the new taxes is expected to top $30.0 billion.

The average drug developed by a major pharmaceutical company costs at least $4.0 billion and can be as much as $11.0 billion. A single clinical trial can cost $100 million. While those costs are staggering, the main killer to a company’s bottom line is its failure rate. Fewer than one in 10 medicines that start human clinical tests succeed; therefore, drugs that actually do get to the market have to financially subsidize those that do not. (Source: Herper, M., “The Truly Staggering Cost Of Inventing New Drugs,” Forbes, February 10, 2012, last accessed June 10, 2013.)

Investors who do not want to expose themselves to certain drug makers might want to consider looking at businesses that support the industry. Simulations Plus, Inc. (NASDAQ/SLP) creates software that helps pharmaceutical researchers model absorption rates for orally dosed drug compounds.

To cut down on failure rates, reduce the time of bringing a new drug to market, and combat new Obamacare taxes, a lot of big pharmaceutical companies will be turning to companies that develop predictive software tools. If they’re trying to save money from Obamacare, there’s no reason why investors shouldn’t try and make money off Obamacare instead.

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