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12:00 AM
May 03, 2010
 |  BioCentury  |  Finance

Bedeviled by the healthcare details

Wall Street miscalculated effect of healthcare reform on Medicaid drug revenues

While the new U.S. healthcare reform legislation did not hide its new Medicaid discounts, the upfront costs apparently were largely ignored until the 1Q earnings began to roll in. Then seemingly everyone - large cap biopharma, analysts and investors alike - were taken by surprise by the quick impact of the new law on drug company P&Ls.

After the long passage process, the consensus apparently was that reform might have costs up front, but that the longer term benefits, like patent exclusivity for biologics and additional covered patients, would substantially mitigate them.

But as earnings season got underway, the upfront costs suddenly seemed underestimated as companies adjusted revenue and EPS numbers downward while the long-term benefits seemed overestimated and so far away as to factor little in current valuations.

"People tended not to overanalyze the impact in 2010 going into 1Q," observed Evan McCulloch of Franklin Templeton. "The general perception was that this will be negative in the short term and positive in long term. But maybe we underestimated the negative impact in the short term and overestimated the long-term positive impact."

The costs for the entire biopharmaceutical industry over the next decade were pegged at more then $100 billion and as much as $115 billion by Dominic Caruso VP of Finance and CFO at Johnson & Johnson, on the pharma's 1Q call.

He put the 2010 industry impact at $4 billion, or 2% of branded U.S. sales, and the impact in 2011 at about $11 billion, or 6% of branded U.S. sales.

The 8% surprise

Due to the vagaries of the law, some companies bear more of the brunt.

While several buysiders told BioCentury they were sorting out which biotech names are getting hit the hardest, one investor referenced a sellside report by Piper Jaffray's Ian Somaiya, who pegs the hit to both Gilead Sciences Inc. and Amgen Inc. at about 1.5-3.5% of revenue for each of the next five years.

The exclusion of orphan drugs from some calculations, including government sales serving as the basis for the new law's excise tax on drug sales, are expected to limit the exposure of Genzyme Corp. and Celgene Corp. in particular. Somaiya pegged their annual revenue exposure for five years at 0.4-0.8% and 1.2-2.5%, respectively.

The excise tax on the industry will be $2.5 billion in 2011, rising each year to a high of $4.1 billion in 2018.

Sven Borho of OrbiMed Advisors suggested the 1Q numbers from

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