Is health care reform dead? That's the fear among many Democrats following yesterday s upset victory by Republican Scott Brown in the Massachusetts senate race for Ted Kennedy's old seat.

The win gives the Republicans a critical 41st vote in the Senate, enabling them to block passage of the health care bill President Obama s top legislative goal. Brown indicated he would oppose the plan if elected and House and Senate Democrats appear unlikely to try and push the bill through before he's seated. Senate Democratic leader Harry Reid said after the victory last night that Brown would be seated as soon as his paperwork is received. Virginia Democrat Jim Webb also put out a statement saying it would be fair and prudent to suspend voting on a bill until Brown is seated.

Health care stocks soared yesterday in anticipation of a Brown win, and analysts say there could be more upside ahead. The health care SPDR ETF (XLV), which tracks a basket of large-cap stocks in the sector, rose 2.4% and is up 6.2% for the year, nearly double the market s gain. Stocks in the sector already were undervalued compared to the broader market. Analysts and traders feared that a big reform package would chip away at the industry s profitability. That may still happen, of course, because the Democrats may still use procedural measures in the Senate to get around the 60 votes necessary to break a Republican filibuster. Still, Brown s victory is likely to delay passage of a bill, at the least, and the sector could see at least a short-term pop.

Indeed, while the old thinking on health care was to avoid companies with lots of U.S. exposure, some strategists are now arguing the opposite. The British biotech firm Shire (SHPGY) gets over 76% of its revenues in North America, for example, and has good possibilities to benefit from the legislation s demise, says Stephen Pope, chief global equities strategist for Cantor Fitzgerald in London. Other European drug stocks could also benefit, he points out, with AstraZeneca (AZN), Novartis (NVS) and GlaxoSmithKline (GSK) topping the list of companies with the most North American exposure.

This article is an excerpt from our Early Bird markets story, which was originally published the morning of Jan. 20.