Stephen Foley: ObamaCare is bad news for Big Pharma
Saturday 15 August 2009
US Outlook: It has been a delight to see the good citizens of the UK getting all atwitter in defence of the National Health Service, in the face of so much bad-mouthing here in the US. If you can find an American, and disabuse them of the notion that the British government runs "death panels" that decide who gets life-saving treatment, that might help bring the healthcare debate here back into the realm of the real.
I still can't quite get my head around the idea we have to weigh our health against our wallets in this country, but this is the system that opponents of change say is the best in the world, despite all statistical evidence to the contrary.
It is certainly the best system in the world for the healthcare companies, whose margins in the US are fatter than they are anywhere else. Two of the UK's biggest firms, the pharmaceuticals companies GlaxoSmithKline and AstraZeneca, get around 40 per cent of their revenues from the US, making them critical players in the debate here – and meaning that the outcome of Barack Obama's fight for reform has some significant financial implications for UK shareholders.
The pharmaceuticals industry thinks it is playing a canny game. Early on, via its US lobby group PhRMA, it shook hands on a deal with the White House, pledging to cut the costs of drugs for senior citizens on federal health insurance by a total of $80bn (£48bn), and promising not to fund anti-reform ads as they have done in the past.
In return, they got what looks to some Democrats like an impressive list of concessions. There will be no congressional or White House push to allow the importation of cheaper drugs from Canada, and no other federal pressure for rebates that could push the cost of reform to the industry above that $80bn. With these promises in the bank, investors in drug firms rather think that the expansion of health insurance will actually lead to more people using their products, which would more than make up for the loss of margin.
Actually, the drug firms are much more likely to be losers – and not just because the pact with the White House is showing signs of breaking down. Within weeks the President suggested that he might be able to negotiate more than the $80bn from the industry, and as more details of the secret deal have leaked this week, anger among congressional Democrats has prompted even more equivocation from the White House.
Even if President Obama cuts the drug industry loose, as long as he does it at the last minute, when there will be no time left to lobby, he will have achieved his objective of neutering the industry.
There's a whole list of other worries for the world's largest pharmaceuticals companies, all stemming from the fact that President Obama is fixated on getting the cost of healthcare down. One way or another, that means slimmer margins for GlaxoSmithKline, AstraZeneca and their rivals. The betting is still that health insurance reform will pass in some form, either with a government-run scheme that will pull in people who fall out of employee-sponsored plans, or private-sector cooperatives. Whichever is the case, there ought to be big new players in what is currently a fragmented market, whose buying power can help drive down the cost of medicines.
And, before the current healthcare legislation began to take shape, another major development occurred that increasingly worries pharmaceuticals executives. The federal government this year set aside $1.1bn to fund "comparative effectiveness research". This will go towards studying whether expensive brand-name medicines are really any better than generic copies, and preventing the wasteful use of drugs that might prove to be ineffective on some types of patient.
Most importantly, the research will be a useful counter to Big Pharma-funded research studies, and the boondoggle propaganda of their super-remunerated salesforces.
The pharmaceuticals giants are switching their expansion plans as fast as they can to emerging markets, where richer populations are spending more on health. The trouble is, profits look set to erode faster in their largest market.
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