Manufacturers avoid worst with U.S. drugs deal

LONDON (Reuters) - The pharmaceutical industry has headed off the threat of more onerous imposed cost savings by stepping up to the plate on healthcare reform in the all-important U.S. market.

A weekend deal, announced by President Barack Obama, offering some $80 billion in prescription discounts over 10 years to help elderly Americans afford drugs will crimp profits, but the figure is less than initially feared.

“Negotiations began with government asking for $130 billion, so $80 billion would represent a relatively benign outcome,” said Savvas Neophytou, an analyst at Panmure Gordon.

What’s more, the plan agreed with Senate Finance Committee Chairman Max Baucus, with the backing of the Obama administration, means concessions will be funneled in an area that could generate additional sales volume.

Drugmakers have agreed to provide a 50 percent discount for those elderly and disabled Americans in the Medicare health insurance program who face a gap in coverage after their drug costs reach a certain level, known as the “doughnut hole.”

“Roughly 20-25 percent of Medicare D patients reach the doughnut hole, and the majority of them either stop or switch their medications,” Deutsche Bank analyst Barbara Ryan said in a research note.

“Therefore, pharma may be providing discounts for branded drugs which will primarily represent incremental demand.”


In contrast to the 1990s, when companies fought President Bill Clinton’s health reform plans tooth and nail, this time around drugmakers have recognized they need to make sacrifices.

The result, for investors, is a deal that now gives a degree of certainty as Obama battles to drive through his ambitious reform package, according to Andy Smith, a healthcare fund manager at AXA Framlington in London.

“Healthcare reform, for the pharmaceutical sector at least, now doesn’t stand there as being open-ended, with a worst-case scenario of virtually everything going to generics. That’s no longer the case; you can move on and manage it from here,” he said.

The globalize nature of the pharmaceuticals industry means U.S. policy is critical for companies like GlaxoSmithKline Plc GSK.L and Novartis AG NOVN.VX, as well as home-grown businesses such as Pfizer Inc PFE.N and Merck & Co MRK.N.

The DJ STOXX European healthcare index .SXDP was the best performing sectoral benchmark by 7:22 a.m. EDT on Monday, down 0.2 percent, while the broader market .STOXX fell 1.3 percent.

The goal all along has been to stop the U.S. government getting more directly involved in drug pricing, as happens in Europe and Japan, where profits and sales growth have suffered as a result.

“Our initial take is that this is a win for the industry because it appears to short-circuit the prospect of direct government price negotiation outside of Medicaid,” Leerink Swann analysts said in a note.


Deutsche Bank calculates that $80 billion translates into roughly 2-3 percent of U.S. drug spend, but the nature of the deal is more palatable than alternative measures that could have increased the government’s direct purchasing power.

Although medicines represent only about 10 percent of the whole healthcare budget, the high-profile nature of the industry makes it an obvious target for cutbacks.

Significantly, by striking a deal now the pharmaceuticals industry may be lending a helping hand to Obama as his reform proposals face a rocky road through Congress.

AstraZeneca Plc AZN.L Chief Executive David Brennan, who also chairs the trade organization Pharmaceutical Research and Manufacturers of America, said in a statement the deal reflected a commitment "to make comprehensive healthcare reform a reality this year."

Editing by Sitaraman Shankar