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Stock Investing ? Midterm elections make drug companies a sale

msposato06@yahoo.

msposato06@yahoo.com.

Best regards

Richard Stoyeck
http://www.stocksatbottom.com

Stock Investing ? Midterm elections make drug companies a sale
Copyright (c) 2006 Richard Stoyeck

Stock investing is tough enough when you have to deal with
the specifics of a company and an industry. When you throw
politics into the equation it becomes a whole new ball
game. Now stock investing can be a crap shoot at best.
Let's take a look at what's going on currently, and you
decide. First let's look at a little history.

For the better part of 50 years, the drug industry has been
nothing short of a fabulous stock investment. Whether it
was Johnson & Johnson, Pfizer, Merck, or any one of a dozen
other drug companies that developed into giants, you would
have made a killing with these stocks. One of these
companies Johnson and Johnson is the best performing
publicly traded stock of the last 100 years with a
compounded growth history surpassing 15% per year.

It was a simple concept, but yet difficult to execute.
These companies created drugs and then marketed them via
advertising to a captive audience of doctors, and their
captive audience the patients. As a stock investment, the
industry was basically unsurpassed. The reason is that
every other high tech investment as a rule had a longevity
of about 7 years. Technology can obsolete technology very
easily as you know.

This was not true of drug manufacturers, where it takes a
long time to bring a drug to market. You then have a long
patent life, and usually you can extend that patent life at
least once. Big Pharma as the drug companies came to be
called were making a fortune, and the stockholders with
them. When it came to stock investing, you couldn't own
enough of these wonderful companies.

It all started to change in the 1980's. A marvelous new,
but small industry started to emerge called the biotech
industry. Rates of growth for Big Pharma started to slow
down. Something was needed to kick-start the drug industry
once again, and the Federal government was more than
willing to lend a helping hand.

By the 1980's government had become big sponsors of drug
research. Our government had poured billions of tax payer
dollars into supporting basic and applied research at the
college, and university level. Myriad PhD's were hired,
laboratories built, and graduate students employed to go
find, and develop the next marvelous drug.

Congress then passed a law that mandated that the
discoveries taking place in these government sponsored
research labs (usually the top 50 colleges in the United
States) would have to be given to the giant drug companies
for final testing, and distribution. This meant that Big
Pharma would be the recipient of all this largess bestowed
on the government labs. The giant drug companies would be
the direct beneficiaries of tens of billions of dollars of
citizen sponsored research. It was the best of all worlds.

Throughout the 1980's, and 1990's, these actions sustained
the growth of the major drug companies. Unbeknownst to the
general citizen, the major drug companies come up with less
than 5% of all the major drugs sold in this country. The
real creators have been those government sponsored labs,
and the small bio-tech companies that have been spawned
everywhere.

Even with the giant government outlays, by the beginning of
the 21st century, we started once again to see a slow-down
in growth rates for Big Pharma. What was needed was a shot
in the arm. In 2003, the federal government supplied the
adrenalin, and the drug companies were only too glad to
accept it. Congress passed a new part III to the Medicare
law which meant that the government was going to start
picking up prescription drugs for citizens 65 years of age
and older. This program would cost tens of billions of
dollars.

More importantly, the government would not be allowed to
negotiate the prices of the drugs that they would pay for
under the act. This meant that the drug companies would be
able to charge BILLIONS OF DOLLARS more than if they had to
negotiate. It was the ultimate bonanza for the drug
companies, and their profits were inflated by billions. As
an aside, the program also called for insurance companies
to come in between the user which was the senior citizen,
and the Medicare program. This was a successful attempt to
also reward the insurance industry with billions in profits.

Democrats may have last laugh?

The problem is that it seems likely that the Democrats will
take over the House of Representatives in November. If
successful, they have already stated their intent to change
the program immediately. The Democrats want the federal
government to now have the right to negotiate lower drug
prices on behalf of the senior citizens. This will result
in lowering drug company profits to the tune of billions of
dollars.

Here's the wild part of the whole deal. For decades the
Democrats wanted to create a prescription drug coverage
program as part of the Medicare Program. They couldn't get
it done. They tried, and tried, and failed, and failed. It
took the Republicans to do it, but they only did it, to
benefit the drug companies, and the insurance companies as
well. Now that the Democrats may take control, they will
have the opportunity to roll back the drug companies
participation in the outlandish profits they are making. At
the same time, the Democrats will be able to keep a program
in effect, that they desperately wanted, but could never
make happen on their own.

It's fascinating how what seems to come around, always goes
around. Our advice is don't be caught dead owning drug
stocks if the Democrats take over the House in the November
election. They are in for some ride on the downside, as we
all will be watching the granddaddy of federal giveaways
get taken away.

Goodbye and Good Luck

----------------------------------------------------
Richard Stoyeck?s background includes being a limited
partner at Bear Stearns, Senior VP at Lehman Brothers, Kuhn
Loeb, Arthur Andersen, and KPMG. Educated at Pace
University, NYU, and Harvard University, today he runs
Rockefeller Capital Partners and StocksAtBottom.com
http://www.stocksatbottom.com

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