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Drug industry wary of Medicare expansion
Govt. involvement in pharma biz not a positive; may boost volume more than sales, analysts say.
December 9, 2005: 12:48 PM EST
By Aaron Smith, staff writer

NEW YORK ( - The new Medicare plan to cover prescription drugs will not provide much of a sales lift for drug makers after it goes into effect Jan. 1, even though volume will increase, according to IMS Health projections and analysts.

"We don't view [the new Medicare plan] as a constructive change for the drug industry," said Robert Hazlett, analyst for Suntrust Robinson Humphrey.

Beginning on Jan. 1, everyone on Medicare will have access to prescription drug coverage. Up until Jan. 1, Medicare only covers some drugs administered in doctor's offices, such as inhalation therapy drugs and cancer treatments.

The research firm IMS Health projects that Medicare will cover 28 percent of all prescription drug spending in 2006, a radical increase from its 2005 coverage of 2 percent. But the branded drug industry will get a revenue increase of only 1.4 percent from 2006 through 2009, according to IMS.

Drug industry analysts said the Medicare plan could bolster the volume of generic prescriptions, but this is unlikely to result in much of a sales jump. Hazlett said the Medicare plan could cause a mild decrease in revenue instead of an increase, despite greater volume, because of "the increased clout that managed care now has in commanding pricing discounts."

"Volumes have a chance to pick up after the program is more fully implemented, but negative impact on the pricing environment remains," said Hazlett. "It is not a clear positive [for the drug makers.] In general, greater government involvement in the pharmaceutical business is not a positive."

Ken Cacciatore, who covers the Israeli-based Teva Pharmaceutical (up $0.41 to $44.29, Research) and other generic drug makers, projected that the Medicare plan will provide an incremental sales increase of $1 billion through 2010, but this would be divided among all generic drug makers. For Teva, the largest generic drug company, this means an additional $50 million to $60 million in sales in 2006, said Cacciatore. Teva sales in 2004 totaled $4.8 billion.

"We call it a modest incremental tailwind to the industry," said Cacciatore. "We don't like to hype it. Those revenues are helpful but they're not overly meaningful."

The increase in drug volume could provide an increase in drug sales "in the near term" for branded companies, which have better profit margins than generics, said Albert Rauch, analyst for A.G. Edwards & Sons. But even drug makers who make money off Medicare will have to pay the piper later, said Rauch, when the government tries to find ways to cut costs.

"I think near term this plan is a benefit for the branded industry," said Rauch. "But I think after a while it would become a burden for the budget. After a while, in the face of budget cuts and budget constraints, the government might pressure the drug makers for bigger discounts."

To read about Medicare coverage of Viagra, click here.  Top of page

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