Biotech Values

[DewDiligence]

Quiz: It was brought to my attention that the ft.com article linked to
in #msg-50385418 requires a subscription to be read. Therefore, I’m
pasting the article here and reopening the quiz. The quiz question is:
What is the consequential factual error in this article?

http://www.ft.com/cms/s/0/71c84832-639d-11df-a32b-00144feab49a.html

›Drugmakers fear price of US health reform

May 20 2010

The largest western pharmaceutical groups fear US healthcare reform will cost them more than $2bn in lost sales this year but they are taking widely divergent views on profit guidance.

Most large drugmakers are estimating a 1-3 per cent dip in sales this year as President Barack Obama’s reforms cut medicine prices, according to public disclosures by the groups, with up to double that impact forecast in 2011.

Eli Lilly estimated the reforms would reduce revenue by up to $400m this year and by up to $700m in 2011. Pfizer said it expected the reforms to lower revenue by $300m this year, $900m in 2011 and $800m in 2012. GlaxoSmithKline, based in the UK, said its revenue would also be hit by $300m this year.

However, whereas European groups were quick to absorb the expected impact of the reforms into their profit estimates, many large US groups this month reduced guidance, indicating a more dramatic effect.

Eli Lilly, for example, recently said the reforms would reduce earnings per share from $4.65-$4.85 to $4.40-$4.55. Bristol-Myers Squibb, meanwhile, said earnings per share would be 12 cents lower from healthcare this year, or down 5 cents after mitigating action.

“I think they are kitchen-sinking it,” said one market observer, arguing that, by creating a large provision, the US companies both damp expectations about a potential upside and limit the risks of a further backlash by showing that they have already been hit as policymakers seek fresh ways to cut costs.

Gbola Amusa, pharmaceuticals analyst at UBS, said: “I would imagine the companies are depicting the worst-case outcomes on the impact on their businesses. That’s a prudent business decision. The reality could be somewhat less.”

An analysis by Citigroup suggested that large US companies generate 42-64 per cent of sales in the domestic market, with BMS generating 64 per cent in the US.

Meanwhile, the maximum exposure to the US market among European companies is 42 per cent, held by AstraZeneca, based in the UK.

In a comment typical of his European peers, Andrew Witty, chief executive of GSK, said late last month: “We have absorbed US healthcare reform. I’m increasingly confident about where the business is headed. The headwinds have started to diminish and the tailwinds to grow.”

Jerome Contamine, chief financial officer at Sanofi-Aventis, echoed sentiments at Novartis and AstraZeneca when he said the reforms would trim sales in the coming months but that the French company had already taken the impact into account and saw no need to adjust its guidance.

Exposure to Medicaid, the US government-backed health insurance for the poor among the first and most significant programmes to be touched by reform, also varies widely.

Mr Amusa said that, while US health reform will increase the standard rebate on Medicaid from 15 to 23 per cent of average prices this year, some companies already offer still larger discounts and will experience little extra pain.

Some groups may also raise the price on which the discount is applied, also boosting revenues.

From 2011, companies will have to discount branded drugs in the “doughnut hole” – the price range within which the elderly on Medicare pay for themselves. Yet bridging the gap means more pensioners will take their drugs in full, adding to sales.‹