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Investing 2006: Benefiting from Medicare Prescription Drug Benefits

With 2006 coming next week, excitement builds over the idea of starting over and making resolutions. Finances and investing are usually high on the list for New Year's resolutions. One of the big changes in 2006, for seniors, is the new Medicare Prescription Drug Benefit. This will be a great boost for seniors who struggle to pay for medications. While I am not sure how long this will be a viable program, I know that it will certainly help me with my retirement (never mind my age). As with every government big spending program, there are winners (companies and their investors) and losers (usually the taxpayers). Since you are likely to be on the loser's list if you are not a senior (you are a taxpayer, right?), why not make the best of the opportunity and add yourself to the winner's list as well (as an investor).

So, which companies stand to have gains do to the program? Obviously, they are drug makers. However, do not just think that any drug maker will suffice. There are specific drug makers that will do much better, as well as certain drug makers that will be worse off. So who will it be? Well, to understand that you need to understand prescriptions.

Fortunately for me, I read my prescription benefits, and my wife used to work in a pharmacy. In pharmaceuticals, there are typically three types of categories for drug coverage: non-formulary, formulary, and generic. These categories rank from worst to best in pricing coverage. Essentially, forumulary drugs are name brand drugs that are covered due to deals between insurers and pharmaceutical companies. They get a good price because they send volume. Obviously, non-formulary drugs are name brand drugs that are not on that list. Beyond that, you have cheap, generic drugs that are created after patents for name brand leaders expire.

You should understand that name brand drugs (formulary and non-formulary) cost more than generic drugs. But, there is a reason why new drugs are made: 1) to get a new patent that makes pharmaceutical money, and 2) because the new drug has more benefits than the generic drugs. So, people will tend to purchase generic drugs when they cannot afford name brand, especially when they lack sufficient coverage. That means that the formulary drugs on the Medicare Prescription Drug Benefit program will get a boost in sales.

So, picking a few companies that make drugs on the formulary list, and happen to be targeted towards seniors, we will stand a good chance at a nice return.

Companies that stand to gain (focused on cancer, Alzheimer's, and HIV/AIDS):

  • Bristol-Myers

  • Johnson & Johnson

  • Roche Holding AG

  • Abbott Laboratories

  • Norvantis

  • Sanofi-Aventis

Companies that stand to lose (focused on product marketing rather than product differentiation):

  • Pfizer Inc

  • Merck & Co.

  • Eli Lilly & Co.

  • AstraZeneca PLC

In any event, watch pharmas closely, they are risky because of heavy litigation. However, nothing ventured, nothing gained.


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