Hurry Up and Wait
Hey, have you heard about that health care reform bill signed last month? We're already seeing some impact on the biotech and pharma industries, just weeks after passage. And the news, it seems, isn't good.
Lilly shocked some analysts when it cut its 2010 revenue guidance by $350 million to $400 million, and added that 2011 revenues will be down $600 million to $700 million, all because of health care reform. It was clear that reform would have an impact, but the magnitude of these cuts was unexpected.
Lilly drew a lot of attention because it was the first major drug company to report earnings since the passage of health care reform. Since then, many other companies have also warned about the hit to 2010 revenues they will take from reform. This includes Abbott Labs (only a little), Johnson & Johnson (more, but not as much as Lilly), Baxter (came as a nasty surprise and wasn't just about reform), Gilead Sciences (about $200 million) and others. So far, none of these companies expect reform to hit profits as hard as Lilly is projecting. On the other hand, we've yet to hear from AstraZeneca, Sanofi Aventis, GlaxoSmithKline, and other companies. Pfizer and Merck both report earnings May 4, which will be two important data points on the impact of reform.
Still, it looks like Lilly might have the worst of it. The reform bill mandates a minimum rebate to Medicare (and Medicaid), so the impact reform will have on a company is, to a large extent, a function of how much of its products are sold through Medicare, and how much in rebates it was offering already. The In Vivo Blog explains that they believe Lilly is paying such a heavy price because Zyprexa, in particular, is prescribed primarily through Medicare and because the company has been so successful in protecting itself from past price concessions. In short, Lilly never worried so much about the commercial market, knowing Medicare was by far its most important channel, and it never offered any significant commercial discounts that would have forced larger Medicare rebates. It's rebate is going up a lot, while many other companies have already been forced into rebates that match or exceed the new minimum.
That may make Lilly a victim of its own cleverness, but it is certainly a strategy that has enriched the bottom line up until now. Too bad the music stopped.
Meanwhile, while some investors and drug executives may be cursing Billy Tauzin's name, recall that the upside of reform--namely, a whole lot of newly insured people that will start buying drugs--doesn't show up until 2014. The question is when the markets will start anticipating that gain and stop fretting about the present pain.
- Karl Thiel
Read the BioPharm Executive online newsletter April 2010.
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