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Pharma shares dip as Healthcare Bill passed

As the US Healthcare Reform Bill is given final approval, response from analysts is mixed about the effect its implementation will have on pharma

As the US Healthcare Reform Bill is given final approval, response from analysts is mixed about the effect, both short- and long-term, its implementation will have on pharma. The Bill was passed, without Republican backing, on Sunday with 219 votes to 212.

While pharma shares edged lower as the US House of Representatives gave final approval to the sweeping healthcare overhaul, most analysts believe that the impact of the legislation on the pharmaceutical sector is likely to be relatively limited and there is still plenty of scope for further dilution.

Investors' fears were eased, too, as the Bill does not allow the US government to cap prices and premiums, which would have been of concern to pharma companies and insurers.

"Pharma stocks have slipped although they are far from being the worst performing sector in Europe," said Stephen Pope at Cantor Fitzgerald.

Jeremy Batstone-Carr at Charles Stanley Research said: "Critically, the pricing of prescription products remains free from external interference. The proposed legislation excludes any form of public option which would result in government becoming a major force in the industry, further rebates in Medicare, governmental negotiation of pricing and cheap imports from low-cost countries."

However, Tijana Ignjatovic, strategic healthcare analyst at Datamonitor, believes that the reform is a "double-edged sword for the pharmaceutical industry".

Datamonitor says that in the short term, it is likely that imposed discounts and rebates, in addition to raised industry fees, will lead to a market dip. This couldn't come at a worse time for an industry facing patent expiries in 2011 that are set to wipe tens of billions of dollars off annual revenue.

However, from 2015 onwards, these negative effects will be offset as revenues begin to rise, driven mainly by the increase in the number of insured people and the resulting increase in drug consumption.

While this will be beneficial in the medium term, greater government participation in provision of healthcare will inevitably ensue. In addition, growing cost strain on both public and private payers will lead to negative pressures on the pharmaceutical industry in the US, decreasing the overall value growth of the market and transitioning into a volume-driven market. Datamonitor also points out that it cannot be ruled out that unfavourable measures such as drug re-importation from Canada and Medicare Part D price negotiations may be introduced as healthcare costs start to bite.

Generic providers will also be questioning the benefits of the reform, despite a highly favourable outlook at the beginning of the process and President Obama's pro-generics stance. Although the promise of higher sales volume from more insured patients and growing cost-containment pressures will be seen as a great positive, the 12 years' exclusivity given to branded biologics, which is substantially longer than the usual five years given to small molecule drugs, will be a concern.

The legislation will give the US Food and Drug Administration (FDA) the authority, for the first time, to approve generic versions of biologic drugs, but branded products will be given a 12-year exclusivity period before generics may be developed.

Although pharmaceutical majors will contribute more than the originally intended $80bn in savings over 10 years to help pay for the cost of the bill, the legislation does in turn create 32 million more customers for the industry's products.

22nd March 2010


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