S&P's Top Biotech Beneficiaries of Health Care Reform

With the passage of the U.S. Senate's version of the health care reform bill on Christmas Eve, investors may now want to take a look at the growth prospects for the biotech industry. It's likely to benefit from the legislation that's leading to a major health care industry overhaul in 2010."We think the industry is positioned for renewed investor %%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% interest in 2010, despite lagging the market to date in 2009," says Steven Silver, biotechnology analyst at Standard & Poor's Equity Research.

%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% S&P is projecting that biotech will have a bounceback year because although the sector's well-known large-caps are currently trading lower than normal, most have strong fundamentals. What's more, late-stage products in their developmental pipelines are solid.

Longer Exclusivity on Biotech Drugs

"We attribute much of the industry's underperformance to uncertainty over the potential impacts of health care reform legislation under consideration in Congress," says Silver, noting that some of those fears were overblown. In fact, S&P expects the new legislation to contain provisions that may actually help biotech firms. That's because the bill would clarify regulatory steps required to approve so-called biosimilar drugs, cheaper versions of biotech medicines.

It would also lengthen the exclusivity period competitors must wait before generic versions of drugs can hit the market. The longer a drugmaker can keep the exclusive rights to sell a drug, the higher the return on its investment in that drug over the long run. Some have argued that an exclusivity period of 5-1/2 years is adequate, but current legislation seems to be leaning toward a period closer to 12 years.

"An exclusivity period of around 12 years would be viewed by S&P as a win for the biotech sector, since the White House and some members of Congress had earlier pushed for much lower periods of exclusivity," says Silver. "In our view, the lower the exclusivity period, the less incentives drugmakers have to engage in innovative research, which carries higher clinical risks. Although we also expect reform legislation to bring about greater scrutiny of drug prices, we see any impacts from this to be largely offset by an increase in the number of patients with health insurance coverage."

For investors with an interest in the biotech industry, S&P believes such developments could boost the following stocks and mutual funds:

Gilead Sciences (GILD): Prospects are enhanced by increased royalties from sales of Tamiflu, which is being used to contain the global swine flu outbreak, and Gilead's dominant position in HIV/AIDS treatments.

Celgene (CELG): Long-term growth prospects are the highest among large caps in the industry, primarily due to its leadership in blood cancer treatments, including multiple myeloma.

Vertex Pharmaceuticals (VRTX): Expected approval in 2011 of telaprevir, its hepatitis C drug and its leadership in treatments for the rare genetic lung disorder cystic fibrosis position this firm for strong growth.

T. Rowe Price Health Sciences Fund
(PRHSX): This fund rose 17.8% year to date through October 2009, outperforming its peers and ranking in the top quartile of its peer group over the one-, three-, five- and 10-year periods as of Nov. 27. Assets are diversified among pharmaceuticals, biotechs, health insurers and pharmacy benefit managers.

JennDry Jennison Health Sciences Fund (PHSZX): This fund rose 8.1% year to date through October 2009, modestly below its peer averages, but it outperformed the peer average over the one-, three-, five- and 10-year periods. It also ranked in the top quartile of its peer group over the five- and 10-year periods as of Nov. 27. Largely consists of pharmaceutical and biotechnology holdings.

DWS Health Care Fund; S (SCHLX): This fund rose 10.4% year to date through October 2009, and has outperformed the peer average over the three-, five- and 10-year periods, as of Nov. 27. The fund's expense ratio was below its peer average, and it has no front-end sales load, but is subject to a 2% redemption fee.

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