4 Stocks to Profit From Obamacare’s Next Phase

The first five years of the Affordable Care Act were largely focused on increasing accessibility to health care. Now, we're moving into the next phase, which is concentrated on cost control and improved outcomes.

With those two goals in mind, four names jump out at us as companies that will benefit in this new phase. The first two are

On the other side of the equation regarding cost control, we have two names to highlight. One is

Here are snapshots of each company:

Merck Fair Value Estimate: $69 Economic Moat: Wide "Patents, economies of scale, and a powerful intellectual base buoy Merck's business and keep it well-shielded from the competition. As the bedrock of Merck's wide moat, patent protection should continue to keep competitors at bay while the company strives to introduce the next generation of drugs. Further, the company's enormous cash flows support a powerful salesforce that not only sells currently marketed drugs, but also serves as a deterrent for developing drug companies seeking to launch competing products. As a result, Merck offers a powerful partnership opportunity for externally developed drugs. The cash flows also put the company in the rare position of supporting the approximately $800 million in R&D needed on average to bring each new drug to the market. Also, while not as powerful as in the 1990s, Merck's research laboratories still hold a vast database of knowledge that should help the company to maintain its leadership positions in drug discovery and development. Also, the company's strong entrenchment in the emerging immuno-oncology area should strengthen the company's competitive position with drugs that carry strong pricing power." – Damien Conover, Sector Director

Roche Fair Value Estimate: $38 Economic Moat: Wide "We think Roche's drug portfolio and industry-leading diagnostics conspire to create sustainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss health-care giant is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor.

In Roche's pharmaceutical division, blockbuster cancer biologics acquired with Genentech--including Avastin, Rituxan, and Herceptin--continue to grow quickly as they gain market share in approved indications and garner widened approval in new indications and emerging markets. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche's diagnostic arm … Roche's biologics focus and innovative pipeline are key to the firm's ability to maintain its wide moat and continue to achieve growth as current blockbusters mature. Three fourths of Roche's top pharmaceutical sales are from biologics, which provides a buffer against traditional generic competition … Roche's diagnostics business is also strong. With a 20% share of the global in vitro diagnostics market, Roche holds the number-one rank in this industry over competitors Siemens, Abbott, and Ortho. Pricing pressure has been intense in the diabetes-care market, but new instruments and immunoassays have buoyed the core professional diagnostics segment." –Karen Andersen, Strategist

Express Scripts Fair Value Estimate: $100 Economic Moat: Wide "We believe Express Scripts possesses a wide economic moat. The firm's substantial claim volume gives it the opportunity to take advantage of two key industry drivers: superior supplier pricing leverage and unmatched centralized cost scale. With total adjusted claims well above 1.3 billion, the PBM is able to negotiate favorable drug pricing with suppliers. This factor gives it the advantage of growing its client base by providing low-cost products, while at the same time preserving its gross margins. Scale is also a source of competitive advantage as each additional claim processed is more profitable than the previous. Centralized and technology system costs are able to be spread across the entire level of claims, which clearly gives an advantage to larger PBMs. Due to these factors, Express Scripts is able to produce gross and operating profit per adjusted claim that are top-tier. The firm's significant advantages have historically produced ROICs well above its WACC and we believe this trend will remain over an extended period." – Vishnu Lekraj, Senior Equity Analyst

LabCorp Fair Value Estimate: $135 Economic Moat: Narrow "LabCorp's narrow moat is based on its vast national infrastructure, which translates into a considerable scale advantage over smaller regional labs in the independent diagnostic testing industry. With 50 primary testing labs and 1,800 patient-service centers across the United States, LabCorp is able to run tests on 470,000 specimens each day at a substantially lower cost than most of the hospitals, doctors offices, and smaller independent labs that populate the market. LabCorp's ability to accommodate higher throughput and its extensive use of automation affords the firm a much lower cost structure--significantly lower than that of hospitals and smaller independent labs. This advantage also means LabCorp's model is characterized by substantial operating leverage. This operating leverage has worked against the firm in the wake of the recession when health-care utilization fell down. But, as utilization slowly returns to growth, LabCorp should benefit." – Debbie Wang, Senior Equity Analyst

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