2010 U.S. healthcare bill: Good, bad or double-edged sword?

Report examines reform’s impact on pharma

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WASHINGTON, D.C.—A recent report by business intelligence firm FirstWord concludes that by most accounts, the effect of the 2010 U.S. healthcare reform bill on the pharmaceutical and biotechnology industries is still "undecided," but the firm was also able to identify good news and bad news for these industries.

First, the good news: "There are some positives—inflow of new customers, closure of the 'donut hole,' biologics exclusivity clause, R&D tax credits and co-payment reforms," FirstWord says.

However, the firm adds that reform comes at a cost for both drug and biotech companies, in the form of annual market share fees, "donut hole" and Medicaid rebates. Some of the provisions and costs of healthcare reform to the drug industry begin relatively early on, with the Medicaid drug price rebates effective immediately, and more children and young adults covered by private insurance in September. In addition, FirstWord notes, the "donut hole" provisions and annual excise tax kick in at the start of 2011, as does a new rate scale that requires no copayment from seniors for annual preventive health screenings—a provision expected to lead to more check-ups and prescription of preventive medications.

But many of the other substantive changes to the industry will not be implemented until later in the decade, FirstWord notes in its 58-page report, "U.S. Healthcare Reform: Impact and Implications for the Pharmaceutical and Biotech Industries." This poses a problem for drug companies in how to finance these initial costs, as the likely upturn in revenue through an increased number of insured individuals will not be seen until 2014.
The report examines how analysts, drug companies and other involved parties view the law's impact.

Analysts have generally viewed the reforms as predominantly positive for the drug and biotech industries, with long-term gains and short-term earnings forecasts predicting a loss of between 2 and 5 percent. Yet, trade associations and the drug and biotech companies themselves hold mixed views on the likely impact of the legislation, how it should be implemented and how long it will be before the dust finally settles, the report states.

Much of the concern within the industry relates to patent expirations, the firm notes. Cited by many as the most important section within the legislation, it protects biotech companies from price erosion over a 12-year exclusivity period.

Many speakers at the recent BIO 2010 International Convention held in Chicago felt the 12-year exclusivity period was too short, with patent litigation effectively extending well beyond this. As Brian Barrett, senior director and assistant general patent counsel at Eli Lilly & Co., pointed out, "settling on a 12-year period is a missed opportunity. If 14 years or more had been selected, this would have taken the massive issue of patent challenge and litigation out of the equation, as most key patents would have already expired by the 14-year mark."

Market analysts' reviews of the healthcare plan are mixed. Standard & Poor's says the bill "would have a relatively neutral impact on major pharmaceutical players, with an increased market roughly offsetting increased costs," while Morgan Stanley analysts say the reform package "would depress earnings per share at European pharmaceutical companies by up to 2 to 3 percent in 2011."

Goldman Sachs estimates the reforms will result in a 5 percent fall in earnings before interest and taxes per annum between 2010 and 2015.

Taking a seat on the fence, Barbara Ryan, a pharmaceutical analyst at Deutsche Bank, says the reforms would be "a modest-negative" with the excise tax and rebates affecting revenue, "by about 3 percent, which is fairly manageable."

However, these estimates may well have to be adjusted as drug companies deliver their Q1 2010 earnings figures, FirstWord reports. Case in point: Lilly's first-quarter earnings have been reduced by 12 cents per share, which is several times higher than those predicted by Morgan Stanley, Goldman Sachs and Leerink Swann.

Drug and biotech company leaders also hold differing views.

Pfizer Inc. said its Q1 2010 revenue fell $56 million due to the reform law, with full-year earnings expected to decrease by about $300 million. However, the company re-affirmed its profit forecast for the year, predicting earnings of $2.10 to $2.20 per share. Outspoken CEO Jeff Kindler told the company's annual shareholder meeting in April, "by and large, although it's not perfect, the bill that emerged was reasonably consistent with the principles we advocated. The law wasn't the bill we would have written."

Christopher Viehbacher, CEO of sanofi-aventis, said the impact of the legislation "will be neutral to slightly negative, but better for the industry than if healthcare reform didn't pass."

William Weldon, speaking at Johnson & Johnson's annual shareholder meeting, said his company "supported affordable access to healthcare," adding, "there are parts we support, there are parts that we would not have supported." Weldon didn't elaborate.

GlaxoSmithKline stated it was "able to absorb" the costs of healthcare reform in its Q1 results and expected to "offset any further impact through continued operational performance."

AstraZeneca raised its guidance for core earnings per share for the full year to a range of $6.05 to $6.35, from an earlier range of $5.90 to $6.30. Simon Lowth, chief financial officer of AstraZeneca, noted that the company's earnings guidance already included "reasonable assumptions" on the impact of U.S. healthcare reform, and that the company expects to lose $300 million in revenue this year because of the legislation, and about $600 million in 2011.

Abbott Laboratories said its Q1 2010 sales were reduced by around $60 million as a result of higher Medicaid rebates. The outlook for full-year earnings has been reduced from a range of $4.20 to $4.25 per share to between $4.13 and $4.18 per share. Total revenue for 2010 is expected to be lower by approximately $230 million.

Amgen predicts that 2010 revenues will be reduced by between $200 million and $250 million, or roughly 2 percent of sales.

Merck & Co. announced that revenues are likely to be reduced by $170 million in 2010, with this increasing to between $300 and $350 million in 2011 due to provisions including the Medicaid drug rebates.

Speaking on behalf of the biotech industry, James C. Mullen, departing CEO of Biogen Idec, and Henri Termeer, CEO of Genzyme, offered their opinions about healthcare reforms at the recent annual meeting of the Massachusetts Biotechnology Council.
Mullen felt it does little to contain costs, warning that the U.S. healthcare system may become similar to that in Europe, where "governments try to rein in costs through price controls on drugs and medical services."

Termeer was more positive, stating the new law is likely to increase investment in the biotech industry with the introduction of the 12-year exclusivity provision, as well as the small biotech R&D credit tax, adding, "the Obama administration is actually interested in innovation."

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