November 19, 2009 / 5:58 PM / 8 years ago

UPDATE 1-Healthcare stocks not unduly hurt by Senate plan

5 Min Read

* Allergan, Medicis fall on Senate health plan proposal

* Analysts see healthcare bill mostly benign

* Cosmetic treatment tax could hurt Allergan, others

(Recasts, adds analyst comment, updates shares)

By Toni Clarke and Debra Sherman

BOSTON/CHICAGO (Reuters) - Healthcare investors appear mostly unconcerned about the U.S. Senate's version of healthcare reform as most provisions were expected, but a surprise proposal for a 5 percent tax on cosmetic treatments is hurting companies such as Allergan Inc and Medicis Pharmaceutical Corp.

U.S. stocks fell across the board, with the Dow Jones Industrial average down 1.3 percent at midday and the Standard & Poor's 500 Index down 1.6 percent.

Health stocks mostly fell in line with the broader market.

The NYSE Arca Pharmaceutical Index was down 0.7 percent, while the Dow Jones U.S. Healthcare Providers Index fell 1.45 percent. The NYSE Arc Biotechnology Index dropped 1.8 percent, while the Standard & Poor's Healthcare Equipment Index was off 1.2 percent.

"For healthcare investors, we think a benign resolution is nearing," said John Sullivan, an analyst at Leerink Swann.

However, the unexpected tax on cosmetic treatments hit shares of Allergan, which fell 2.2 percent and Medicis, whose shares fell 1.7 percent.

The reform plan released on Wednesday by U.S. Senate Democratic leader Harry Reid would extend coverage to tens of millions of the uninsured and reduce the deficit over 10 years.

The bill includes a government-run insurance option that allows states to choose whether to participate, and it would raise the Medicare payroll tax on high-income workers. If the Senate passes a bill, any differences with the House version would have to be reconciled before a final bill can be voted on again in both houses and sent to President Barack Obama to sign.

"Although the Senate's version of healthcare reform is less expensive than the House's, its contentious tenets and cost mean a filibuster-proof 60 votes for passage is very unlikely," said Sullivan, in a research report.

The pharmaceutical industry keeps its $80 billion agreement reached earlier with the Senate Finance Committee to provide savings and rebates. The bill avoids provisions found in the House bill calling for greater rebates under the government's low-income Medicaid insurance program and price negotiation under the Medicare plan for the elderly.

Biotechnology companies also can rest easy, as companies such as Amgen Inc , Roche Holding AG maintain their 12-year period of exclusive sales for brand-name drugs before they would face competition from generic rivals.

Still, included in the bill's 2,000 pages is a tax on all elective cosmetic procedures, defined as "any cosmetic procedure which is directed at improving the patient's appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease."

This likely includes Allergan's wrinkle treatment Botox and Medicis's Dysport injectable products, which smooth facial wrinkles by relaxing the muscles, Oppenheimer & Co analyst Amit Hazan noted in a research note.

The makers of injectable wrinkle fillers, which also include Johnson & Johnson and Bioform Medical Inc -- will also likely be affected by the tax, as might aesthetic laser device makers, like Syneron Medical Ltd and Palomar Medical Technologies Inc , Hazan said, adding that Allergan has most to lose by far.

"This came totally out of the blue," Hazan said of the tax.

The annual revenue target of the excise tax on medical device companies is $2 billion, after tax. That is down from earlier proposals of $4 billion, proposed by the Senate Finance Committee.

"We continue to estimate the tax reduces industry earnings by 4 to 5 percent, on average, which assumes no offsets from price increases, cost cuts, or tax moderation" said David Lewis, an analyst with Morgan Stanley, in a research report.

"Broadly, some device makers may attempt to pass through some of these costs over time, but we are not convinced more than 25 to 40 percent of the tax can be passed on."

Shares of health insurer Cigna Corp fell 1.9 percent; Wellpoint Inc fell 1 percent and Aetna Inc fell 2.4 percent. (Additional reporting by John Whitesides, Donna Smith and Susan Heavey) (Reporting by Toni Clarke and Debra Sherman, editing by Dave Zimmerman)

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