Drug Rally Wears Off As Medicare Bill Sinks In
By SCOTT HENSLEY, LEILA ABBOUD and GREGORY ZUCKERMAN
Staff Reporters of THE WALL STREET JOURNAL
With Congress finally set to approve new Medicare drug benefits, the fever that has gripped drug-company stocks is starting to lift.
Beginning Nov. 10, when it became clear that Congress was likely to pass some version of the legislation, shares of drug companies benefited, in part because the bill keeps the private sector in charge of drug prices and blocks the legal importation of cheap foreign drugs.
But the stocks have eased back in recent days, and some investors already are starting to fret that the long-term side effects of the drug bill could overshadow its recent tonic effect. The new benefit, these investors say, only postpones, rather than eliminates, the political pressure on the drug industry -- and delays a nasty round of price-cutting that could still come.
Matt Stephani, portfolio manager for Idex's Great Companies America mutual fund, owns drug stocks such as Wyeth, Abbott Laboratories, Pfizer, and Johnson & Johnson, and says he is worried. While the drug benefit will provide a short-term boost to the industry in terms of a bump in profits, "It will lead to more uncertainty in the long term because of the purchasing power of the federal government," Mr. Stephani says. "When you have half of the prescriptions being paid for by the government, you run the risk of your industry becoming very subject to the whims of Congress."
Drug-industry executives agree, calling the Medicare drug deal a necessary evil to deal with immediate political pressure stemming from high drug prices for seniors. Under the bill, the federal government would set aside $400 billion over 10 years to add a prescription-drug benefit to Medicare, which would be administered by insurers and private health plans.
Prices, analysts say, may get pinched, as health insurers running the new plans use their increased clout to drive hard bargains. But the private-sector approach drug makers advocated would at least mitigate the risk of prices dictated directly by government officials.
Some drug-industry optimists believe the expansion of coverage for drugs, even at lower prices, will spur offsetting increases in overall sales. "I think we as an industry will pay a price for it, but nevertheless I believe this will be compensated to a large extent by volume gains," says Daniel Vasella, chief executive of Swiss drug giant Novartis last week. Novartis shares are up 12% since Nov. 10.
Robert Essner, chief executive of Wyeth, supported the legislation, but sees no jackpot as a result. "I doubt very much this will be a financial boon for the pharmaceutical industry or our company," he says. Instead, he predicts increased competition among drug makers and greater pressure on prices.
Critics of the legislation aren't buying the industry's view. "This is a Medicare with no brain and no heart -- just a checkbook," says Alan Sager, a Boston University health-policy professor and critic of the privatization plan. He predicts the drug benefit will be a windfall for pharmaceutical companies, swelling their profits as more people get drug coverage but at a high price to the government.
The drug plan takes full effect in 2006. At that point, the government and senior citizens could find that drug insurance doesn't fit their expectations or their budgets. Seniors may rebel after gazing at their "doughnut hole" of financial responsibility, and the government may find that so many retirees get shoved onto Medicare rolls that costs skyrocket.
That, of course, is in the uncertain future. In the short run, the drug companies got what they wanted in terms of control over prices and blocks on foreign imports. Some sectors in particular, including some biotechnology companies, pharmacy-benefits managers and hospitals, stand to get beefed-up payment under the new law.
Among the big pharmaceutical companies, "those with more exposure to chronic illness will be helped more" than others because they are favored by seniors, says Heather Brilliant, an analyst at Morningstar Inc. Ms. Brilliant advises investors to shift into shares of Pfizer, which makes Lipitor, the world's biggest-selling drug. Lipitor treats high cholesterol and is taken on a continuing basis, so the drug benefit for seniors could be a boost to sales.
Drug companies that dominate the diabetes and arthritis-care areas also likely will benefit as sales of these drugs rise. Here again, Pfizer is the largest player in the arthritis area with Celebrex and Bextra, while Merck also is big in arthritis drugs. Eli Lilly is a big player in diabetes treatment, led by its Humalog drug. Lilly's antipsychotic drug Zyprexa, which accounts for about 36% of its sales, also could get a boost from the health-care bill, some analysts say, because the drug has been too expensive for some seniors.
On the flip side, companies with less of an emphasis on chronic drugs, including Abbott Laboratories, could see less of a boost, while specialized companies such as Genzyme that target diseases that aren't age-related also won't be helped much. Genzyme's biggest drug is Cerezyme, which treats a rare inherited disease.
Medimmune also won't see much of a boost, analysts say, because its biggest drug, Synagis, is for infants born prematurely.
"Every drug maker will have some [positive] exposure, but the question is of magnitude, and the magnitude is more intense for Pfizer," Ms. Brilliant says.
The bullish case for all drug makers is that the companies could make up for price pressures with more volume. That's what happened in the early 1990s, when health-management organizations, rather than choking the life out of drug companies by driving prices down, ended up boosting demand for their products.
But a key question for the future of the benefit, and the drug industry, remains: What happens to the 12 million retirees who now have drug coverage through their former employer? Even with $82 billion in subsidies to encourage employers to continue paying for their retirees' drugs, the temptation for employers to drop the benefit will be strong. Companies fork over $1,900 a year in drug coverage for each retiree, and the government subsidy works out to only $420 a year, according to Richard T. Evans, pharmaceutical analyst at Sanford C. Bernstein & Co.
Employers, already strapped with rising health-care costs for employees, are likely to slash their expenses by pushing the bills off on Medicare. Such shifting likely would degrade the gains in sales of drugs because the government plan is less generous than most employer-based private plans.
The specter of price controls won't likely come to a head until after the program has been up and running awhile, say 2008 or 2010, say analysts. That is when the pressure for the government to whack prices might become irresistible. The government's ability to negotiate prices would be strong because by then its purchases would account for 40% to 50% of retail-drug sales, up from 16% today.
Write to Scott Hensley at scott.hensley@wsj.com, Leila Abboud at leila.abboud@wsj.com and Gregory Zuckerman at gregory.zuckerman@wsj.com
Updated November 25, 2003 12:29 a.m.
online.wsj.com |
