US healthcare reform bill win or loss for pharma?
If the stock market is any indication, the US healthcare overhaul is not too bad for the pharmaceutical industry. But are investors - and the industry - too optimistic?
By on Mar 22, 2010If the stock market is any indication, the US healthcare overhaul is not too bad for the pharmaceutical industry.
But are investors - and the industry - too optimistic?
Most of the major pharmaceutical stocks rose the day after Sunday's vote by the U.S. House: Pfizer, BMS, GlaxoSmithKline, Eli Lilly, Merck and Abbott all rose 1-2%, and generics manufacturer Teva added more than 2%.
A positive response by the industry is also reflected in this statement by the Pharmaceutical Research and Manufacturers of America (PhRMA), issued on the day of the House vote:
"We continue to believe that comprehensive health care reform will benefit patients and the future of America. That's why we have been involved in this important public policy debate for more than a year and why we support action by the House to approve the Senate-passed bill along with the amendments found in the reconciliation legislationTodays important and historic vote in the House will help to expand health care coverage and services to tens of millions of Americans who are uninsured and often forced to forego needed medical treatments.
On the same expectation millions more patients entering the system - hospital operators such as Tenet Healthcare, Health Management Associates or LifePoint Hospitals rallied as well.
The picture among insurance companies was more mixed, with Aetna and Cigna up slightly, but Humana, WellPoint and United Health Group retreating.
Is pharma too optimistic?
On the plus side, a number of factors will indeed increase prescription volumes and potentially revenues: 30+ million of formerly uninsured patients entering coverage; outlawing restrictive insurance practices such as refusing to cover people with pre-existing medical conditions or setting lifetime caps; addressing the Medicare "doughnut hole" through rebates and discounts on branded drugs.
However, while the volume increases will take some time to build, new rebates and discounts are immediate and will likely lead to an initial market drop. And this is on top of the patent expirations many pharma companies are facing. Short term outlook - not so great.
Nor is it certain that higher volumes will really translate into sales growth in the longer term. That is because the current bill may be lenient in terms of drug prices (perhaps to make it more digestible; even the patent law change that would have banned so-called pay-for-delay patent deals was eliminated at the last minute), but the need for a much more severe correction in a few years may already be baked in.
The promise of the legislation is twofold: to extend healthcare insurance coverage while keeping escalating healthcare costs under control. But success of the former is much more likely than the success of the latter.
The bill mentions a number of measures to keep healthcare costs at bay, including the idea of lump sum payments to hospitals and doctors on a patient case, and increasing computerization and automation. But these ideas are all very tentative, and it is far too early to tell how well they will work (or if at all) to contain or even reduce healthcare costs.
Thus, it is not unreasonable to expect that the rising number of patients coming into the system and increased drug consumption will put additional cost strains on both public and private payers - and if these become too painful, additional measures to drive down costs are just around the corner (some new, some perhaps not so new: drug re-importation and Medicare Part D price negotiation could very well come back on the agenda).
Countries that have universal coverage have had similar methods in place for years.
Quick back of the envelope reality check: About 260 million people in the US currently have some form of health insurance. The healthcare overhaul will add about 30 million, or 12%. This could mean 12% higher revenues, if the new entrants make use of the healthcare system in a similar way as the currently insured, and (big assumption here) that price levels remain unchanged. Not too bad considering that the outlook of the 50 largest pharma companies in the US is growth of less than 1% over the next years.
However, now consider this: a 2009 report by Decision Resources covering 170 of the most popular drugs showed that drug costs in Europe are an average of 40 percent less than in the U.S.! As the US moves closer to a European-type model (and not having a government option does not mean that the US healthcare does not become more Europeanized - in Germany, for example, there are about 130 payers today, and the system is increasingly adopting elements from US-style Managed Care, while using lots of generics), it is very plausible that drug prices will have to come down in the US as well when it turns out that the cost containment assumptions were unrealistic.
A 12% volume increase is then very easily swallowed up by even modest checks on drug prices.
And many cards, such as really pushing generics, have not yet been played over here.