Page last updated at 16:17 GMT, Monday, 22 March 2010

Obama healthcare reforms may pay off for drug firms

By Richard Hemming
Business reporter, BBC News

US health reforms may mean an increase in prescription drug coverage

The investment community is hailing President Obama's healthcare reforms as potentially positive for the pharmaceutical industry.

Sector specialists say that although the result was a triumph politically for the Obama administration, from the industry's point of view it was a "best case scenario".

"US pharma appears to have fared relatively well," writes Merill Lynch's US healthcare analyst, Eric Lo.

"Having a plan in place removes an overhang on the industry by providing clarity on when and where the cuts will come.

"It could potentially add an additional 32 million lives with prescription drug coverage although some of this benefit will likely be offset by lower pricing," he says.

Prescription pricing

The generous assessment of the impact of the reforms for drugs companies stems from the fact that they do not include the so-called public option, which would have involved the provision of public sector insurance.

Had this been included, the expectation was that pharmaceutical profits would have been heavily reduced over time, as the government became the major buyer of prescription drugs, forcing reduced prices.

In its current form, the bill ensures that the US government will not be the major buyer in the pharmaceutical market.

Healthcare spending accounts for 16% of the US total gross domestic product, or $2.5 trillion, or $8,000 a person on 2009 data.

"Critically, the pricing of prescription products remains free from external interference," says Jeremy Batstone-Carr, the head of research at Charles Stanley.

The overall cost of the reforms are forecast at $940bn over 10 years, although it is likely that there will be changes to the highly contentious Healthcare Reform Bill.

Key provisions in the Reform Bill are not scheduled to become effective until 2014 and between now and then additional regulations will be required.

Before that year Congressional mid-term elections will be fought (which could result in a big swing to the Republican Party) and a further presidential election will take place.

Minimal earnings effect

The cost of the reforms on pharmaceutical companies is forecast to be around $100bn, "and is spread over a lot of companies", according to Mr Batstone-Carr.

According to the investment bank Merrill Lynch the biggest immediate cost for pharmaceutical companies will be the industry excise tax, which will total $28bn by 2019 and will commence next year.

The actual earnings per share (EPS) impact he expects will be "limited" at less than -3%.

The effect on each company's profits depends upon the percentage of its income that comes from government spending.

For example, Merrill Lynch expects the increased industry excise tax, due to be paid by drug companies, to reduce Pfizer's earnings per share by only 1% in 2011.

The drugs company generates about 35% of its revenues from the government.

The investment bank expects the increased excise tax to reduce the EPS for Bristol-Myers Squibb by close to 5% in the same year.

This company generates about 45% of income from the government.

Share prices in UK listed pharmaceutical giants GlaxoSmithKline and AstraZeneca were both up, by 0.8% and 1.4% respectively, at lunch time on Monday.

One senior corporate finance executive in the sector said that although Obama's reforms were "comprehensive" there are weaknesses due to the absence of reform in the law.

A difference between German and US healthcare is that both diagnose the same number of illnesses per capita of population, but German doctors only use a fraction of the diagnostic tests to reach their conclusions.

The investment banker said that this was due to American doctors being terrified of being sued if they made a mistake. Without tort, or law reform, he said, US healthcare costs would continue to remain high.

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