Teva Pharmaceutical Industries Ltd (ADR) (TEVA), Perrigo Company (PRGO): Obamacare and Generic Pharmaceuticals

Will generic pharmaceutical makers like Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) and Perrigo Company (NYSE:PRGO) continue to be a value play after Obamacare kicks in next year?

That’s a fair question to ask because some of these companies seem to be on shaky ground now. Revenues and free cash flow have been falling without Obamacare.

Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) saw its revenues fall by 8% in the fourth quarter of 2012 and a pretty big drop in its free cash flow. Perrigo Company (NYSE:PRGO), which has been a market favorite, has seen a drop in its free cash flow by about $35 million since the start of the year. For the record, Perrigo’s free cash flow was $126.31 million on March 31. To be fair, drug makers have a history of a drag in free cash in the first half of the year and a steep rise in the second.

Part of the reason for Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA)’s problems is that more companies are entering the generic market in anticipation of Obamacare. Teva’s generic sales fell by around 17% in 2012 because of aggressive competition in the generic sector. Teva, of course, has the resources to strike back with aggressive marketing and other programs of its own if it wants to, namely $838 million in free cash flow as of March 31. That’s almost eight times the free cash Perrigo Company (NYSE:PRGO) has.

Generics are heating up and starting to resemble a sort of feeding frenzy. Perrigo Company (NYSE:PRGO) has even started marketing to promote its products. The idea, of course, is to let consumers know that generics are out there. It may also be trying to market to the millions of new customers it might get courtesy of Obamacare.

Possible Obamacare Boost

Obamacare will increase the benefits available to a lot of Americans with health insurance. That probably means they might be able to buy more drugs. Obamacare also tries to close the Medicare doughnut hole, which should increase the number of prescriptions bought by senior citizens. If you’re under 65 and have never heard of the doughnut hole, that means Medicare will now cover a greater percentage of the cost of prescription drugs.

Of course if a feeding frenzy results, the big shark has the advantage, and in this tank, Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) is the big shark. It has the money to run marketing blitzes and to give drugstores and other retailers incentives to move its products.

Obamacare Not a Cash Cow for Generic Drug Makers

The $1 million question in generic pharmaceuticals is how much of the new cash generated from Obamacare will they be able to keep? The tax credits and health insurance exchanges designed to offer health insurance to tens of millions of uninsured people are scheduled to come online in January.

On the surface, this would tend to benefit generic makers; after all, most health insurance plans encourage or in some cases mandate the use of generics. To be fair, most people don’t look at the brand name of their prescription the way they look at the brand name of their laundry detergent. They simply accept whatever the pharmacist hands them.