US health reform passes and market barely pauses

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Perhaps the biggest surprise from the approval of US health reform legislation at the weekend was the collective yawn from pharmaceutical investors. A year after the threat of health reform sent share prices tumbling, today following the final congressional passage of health reforms, pharmaceutical investors have largely brought their expectations in line with the reality that reform would pass, sooner or later, and have factored that outlook into their strategies (US health reforms make markets jittery. February 27, 2009).

In Europe, the Stoxx Europe 600 Health Care index was off just 0.12% in mid-afternoon trading and in early trading the Dow Jones US Health Care index was up 0.97%, led primarily by hospital companies. This minimal effect on big pharma reflects the view that increased taxes and costs on drug makers will be at least partly offset by increased sales volumes as the reforms extend coverage to 32 million more people in the biggest global market for drugs.

More insured, more sales, more costs

The package of reforms establishes a programme of health insurance exchanges from which uninsured Americans will be able to purchase health insurance policies. It will roll out over a period of four years, with the bulk of the insurance expansions occurring in 2014 and 2015.

Increased costs are more immediate, however. The bill requires drug manufacturers beginning in 2011 to rebate 50% of the costs of drugs for seniors covered by the government Medicare program who have fallen into a coverage gap referred to as the "doughnut hole". That will be on top of a $2.5bn tax on pharma companies in 2011, rising to $4.2bn in 2018 before dropping again to $2.8bn thereafter, and a drug price rebate for the Medicaid program for the poor and disabled.

In a note published today, Goldman Sachs analysts estimated the costs of the legislation at $100bn over 10 years, offset by a forecast of $40bn in increased drug spend over the same time period. As such, the analysts estimate the reforms will result in a 5% fall in earnings before interest and taxes per annum between 2010-2015.

Upside for biotechs

According to analysts, the legislation almost completely protects biotechs from price erosion through the establishment of an onerous biological follow-on pathway. Biologicals’ safety and efficacy data will be protected from generic use for 12 years, while generic manufacturers had sought just five years of protection (US health care reform limits further pain for pharmaceutical industry, March 19, 2010).

As such, it will be easier for a manufacturer to create their own molecule and go through normal approval channels than to wait the 12 years to use biotechs’ data as reference for a generic product, analysts interviewed today said.

The Goldman Sachs analysts estimated the costs of that provision at $7bn through increased price competition, citing estimates from the Congressional Budget Office.

Meanwhile, the generics sector along with branded manufacturers saw benefit from the elimination of proposals to ban "pay for delay" settlements between the two parties, which delay generic entry and the price erosion that comes with it, while protecting the 180-day exclusivity for first-to-file generic manufacturers. With loud grass-roots opposition that got within 50 feet of the Capitol, according to news reports, reform advocates did not also need loud industry opposition to any proposals.

The market’s message appears to be clear: Although the impact of health reform can be measured in the billions of dollars, the pharmaceutical industry has an even bigger challenge in the form of the patent cliff. As such, health reform, now that it can be measured and modelled, is something that can be planned and adjusted for.

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