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

That means Obamacare may lead to more sales and possibly more revenues for generic pharmaceutical makers. Yet it could really hurt some smaller players, such as Actavis Inc (NYSE:ACT), because it will impose billions in new taxes on pharmaceuticals. Motley Fool analyst Dan Caplinger noted that a “Medicaid rebate” (Medicaid tax) alone could cost pharmaceutical companies $20 billion in the next ten years.

Actavis Inc (NYSE:ACT) is really vulnerable because its free cash flow has collapsed in the last year. The market favorite had $172 million in free cash in December 2012 but just $27.6 million on June 30, 2013.

Obamacare Taxes a Threat to Generic Pharmaceuticals

The question we have to ask is, where are companies with lower amounts of free cash going to get the money to pay those additional Obamacare taxes? They could pass it along to consumers, which is not likely given the increased competition in the generic sector.

The most likely answer is that they will restructure; by reducing expenses and eliminating dividends, these companies could avoid some of those taxes. Some news stories indicate that Actavis Inc (NYSE:ACT) is already restructuring.

Why Generic Drugmakers Need Obamacare to Work

In the long term gains from Obamacare, particularly new customers, may offset some of those tax losses. That, of course, depends on a major increase in the number of people buying prescriptions. If legions of new customers don’t appear at the pharmacy counters, all pharmaceutical makers will have to restructure to survive the tax hits.

There is another possible salvation for generic drug makers and that is overseas sales. Demand for drugs will increase overseas because the number of older people who need drugs is increasing. There will 220 million people over 60 in China alone by 2015. Fool blogger Paul Sangrey noted that Novartis was able to increase its sales in China by 22% in 2012 and by 15% in Russia in the same year. So there are some opportunities overseas that might off set any Obamacare tax losses.

Even though it seems illogical, generic pharmaceutical manufacturers face a volatile and uncertain future because of Obamacare. The law that should help them go “mainstream” but could make it harder for them to seize any new opportunities it creates.

Daniel Jennings has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article Obamacare and Generic Pharmaceuticals originally appeared on Fool.com.

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