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Hop Aboard the Pharma Pipeline

05/03/2012 12:46 pm EST


Neil George

Editor, Profitable Investing

Just as pipelines usually profit whether oil rises or falls, this health care stock stands to gain irrespective of the state of the pharmaceutical industry, says Neil George.

What’s ahead for the pharmaceutical industry? We’re talking about that today with Neil George. Neil, what do you see? This is a sector that’s been in the news and probably will remain in the news.

Well, Kate, it really has been. We’ve seen a lot of political wrangling as far as what types of drugs and drug products are going to be part of national mandates, or are certain employers able to exempt certain drugs because of other certain religious or cultural beliefs. And what are the rights to certain drugs?

And then of course, regardless of that part of the equation, we also have the biggest part of the issue—sort of the 800-pound gorilla in the room—of trying to control health-care costs. The idea that the cost of pills in this country is getting out of control; it is the fastest growing component of health-care costs.

The idea is that if we’re going to get any sort of handle on either private insufficiency or national insufficiency or state-mandated or government-mandated programs, we’re going to have to start addressing the overall costs, and we’re going to have to do things in a much more efficient manner than what we’ve been doing currently.

That means giving more competition to allow both companies and private insurers, as well as the government, to be able to have better pricing capability. Because otherwise, we’re not going to be able to afford to continue to supply our nation with the pharmaceutical products that they need in order to stay alive.

So, for investors, what should they be considering?

I think the thing you need to look at is many people start looking at the pharmaceutical companies themselves.

Everyone is sort of drawn to what’s the latest little gizmo drug…and that’s a very difficult thing to do for the average investor unless they actually are a doctor or have a scientific background, because you’re going to be dealing with a lot of scientific reports and an approval process in which it’s going to be very difficult to discern that.

For me, I like to look right in the thick of the market, where you’re looking at a company that is part of the solution—not just coming up with a new drug but delivering those drugs in the marketplace at a lower cost and continually driving those costs lower and lower. Therefore, one company in particular is St. Louis-based Express Scripts (ESRX).

I’ve recently started to invest myself in this. It’s a company that has made some very good acquisitions in some other pharmaceutical benefit managers that aren’t quite efficient, but have good reach—including the acquisition of Medco, which has been getting some notoriety.

And we’ve also been seeing that Express Scripts has really been very good at sort of twisting the arms of various companies as far as getting access to lower costs. The big victory they had was against Walgreens (WAG), which cost Walgreens and Walgreens’ investors a great deal, and in which Walgreens basically made a bad bet against the success of Express Scripts at trying to control their costs and get the needed drugs into the hands of ill folks at a lower cost.

If you look at both for company-supplied health insurance, government supplied insufficiency, and government programs—including even looking at Medicare and Medicaid; Express-Scripts plugs into this system as well—you’re looking at ways of trying to profit from cost control and more efficient distribution. And that’s where Express-Scripts really thrives. So, that would be a company I’d want to start looking at.

Any sectors within health care related to pharmaceuticals or the PBNs that people really should avoid?

Well, as I mentioned before, I think looking at the idea of the actual pill developers, the Pfizers (PFE) and so forth, the Eli Lillys (LLY)…again it might seem that many of these companies might be sort of value plays—and you’ll see them discussed that way—but as I mentioned before, they are the ones that are going to see their margins compressed.

They’re going to see, I think, some potential tax changes that might make it a little less profitable as far as some of their margins taken away. Some of the deductibility of some of their marketing costs. Therefore, I think you’re going to see more pressure that’s going to be coming their way.

Again, as I mentioned earlier, I really like to stick to the focus on part of the industry that really is part of the solution, the lower costs and tighter margins. That really is Express Scripts for me.

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