What a Democrat Win Means for Defense Contractors, Drug Companies

WASHINGTON – By boosting the power of Democrats in Congress, voters likely set in motion legislative efforts that could lower the price of pharmaceuticals and cut defense spending.

But with the balance of the power in the Senate not tipping more than one or two votes, where it usually takes 60 votes to pass major legislation, companies such as Merck & Co. (MRK) and Lockheed Martin Corp. (LMT) may find themselves more the target of harsh political rhetoric than any hurtful changes in law.

Still, "there are not going to be wholesale changes in economic policy" because neither party has an overwhelming majority in either the House or Senate — and this may explain the recent rally in the stock market, said Vitner.

Companies in the technology, biotechnology and homeland security businesses may benefit, analysts said, if Democrats can pass legislation to increase the number of visas available to foreign-born workers, promote stem-cell research and inspect more incoming cargo containers.

Rep. Nancy Pelosi, D-Calif., who is slated to become speaker of the House, has promised to push for legislation that would allow the government to negotiate directly with drug companies to purchase medicines for Medicare. Such negotiation is forbidden under current law and the drug industry equates the concept to price controls.

Democrats also are expected to push for increase in the federal minimum wage.

Pelosi has pledged that Democrats also would move to raise the minimum wage — a policy change that could affect fast-food restaurants such as McDonald's Corp. (MCD), as well as other retailers — and she said her party would make it harder for companies to use the bankruptcy process to force concessions from workers on pensions and pay.

Some economists say raising the minimum wage might not have that big of an impact on retailers, whose labor costs would theoretically go up, or on workers, who after taxes would take home minimal gains.

"There's a huge gap today anyway between the minimum wage and average hourly earnings," Wachovia Securities economist Mark Vitner said.

House Democrats are expected to have a busy agenda coming out of a dozen years in the minority.

Rep. John Dingell, D-Mich., who will take charge of the House Energy and Commerce Committee, said he would try to run things "from the middle." He advocated stiffer enforcement of environmental violations and tougher energy efficiency standards for home appliances but steered clear of a strong position on raising automobile fuel efficiency.

Rep. Barney Frank, D-Mass., who will chair the Financial Services Committee, said building more affordable housing and forcing public companies to disclose more information on executive pay packages are near the top of his agenda.

"The debate will shift dramatically from the first day," said Bill Samuel, legislative director of the AFL-CIO, though he conceded that the Democrats' slim majority in the House would limit the effectiveness of their agenda.

With many political analysts viewing the Democrats win of the House as evidence of waning support for the war in Iraq, some Wall Street analysts are bracing for the possibility that military spending may gradually slow.

Even if Republicans manage to maintain control of the Senate, Arizona Sen. John McCain, a frequent critic of free-spending defense programs, is expected to take over as chairman of the Senate Armed Services Committee after Sen. John Warner, R.-Va., steps down because of term limits. McCain has a history of being tough on the defense industry, forcing the Air Force to change the terms of a Lockheed cargo plane contract and helping to uncover wrongdoing by Boeing and a Pentagon official in a separate Air Force tanker contract.

Lockheed Chief Financial Officer Chris Kubasik tried to ease jitters recently, saying the company has "worked well with both parties" and that its business, mostly long-term big ticket contracts, can withstand periodic political changes in Washington.

The Associated Press contributed to this report.