Tuesday, March 23, 2010

Healthcare Reform - Pharma's Big Win

Game over.  Dems will enact sweeping healthcare reform.  President Obama to ink the Senate version of the legislation into law today.  The Senate will then go through the reconciliation process to make the tweaks desired by the House.

In part, due to a masterful body of public policy work by Billy Tuazin (PhRMA) and Pfizer's Kindler, the legislation will be beneficial for Pharma over the next few decades.  Beyond that, however the jury is out.  Pharma succeeded in avoiding the big fear of Medicare price negotiation, parallel imports into the US and walked away from the "evil empire" label that pasted insurers through out the debate.  Of very significant impact, the legislation will fill the proverbial Donut Hole and insure more than a few previously uninsured Americans. It's this later point which will be the focus of this blog.

Insurance for the uninsured will kick into play in 2014.   The CBO has projected that Obama's plan will insure 32 million, largely younger individuals,  previously uninsured and further more mandate a pharma benefit.  The key to understanding the lift for pharma that will come from this aspect of the legislation is understanding the "insurance effect", a well known economic phenomena where individuals consume more healthcare when coverage is extended thereby lowering out of pocket costs.  Working the numbers (see earlier post for details, although here I used the higher CBO number for those obtaining insurance) I estimate insuring the uninsured could lift Pharma revenue by $10 billion per year or about a 3% revenue lift for the overall market. 

Call your broker.... while the impact on Pharma's top line seems minor, the impact on the bottom line will be substantial. Upwards of 14% will flow to gross profit and in turn flow to net income as companies take on little additional cost to capture the incremental revenue.  It's a freebie.  

Take Pfizer for example, a 3% lift in revenue to the roughly $50 billion in top line revenue in 2009 will mean a $1.5 billion revenue lift (actual lift will depend upon Pfizer's drug portfolio mix).  Assuming a 20% dost of goods sold, that brings $1.2 to the bottom line (assuming HC Reform simply expands the size of the US market which results in little to no increase in cost structure).  Pfizer reported $8.6 billion in net income.  So adding $1.2 billion increases this to $9.8 billion or a whopping 14% increase in earnings.   (of course this will be offset by the other "contributions" Pharma agreed to... reported to be $90 billion over the next 10 years, although my figures are a bit different, lower, more on this later).

Now be careful.  The impact will vary significantly by company.  Those companies whose portfolio of currently marketed drugs leans toward treating the elderly will have a significantly lower impact. Those companies whose portfolio leans toward the young will have a significantly greater impact. 

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