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The Deal: Intended Consequences

NEW YORK ( TheStreet) -- Biotechnology companies are basking in a valuation bubble, with many initial public offerings being expanded and oversubscribed and share prices soaring in first-day trading. But other changes in the business environment are gaining momentum that could put pressure on these companies' valuations, notably market forces resulting from health reform.

Several trends, most of them nudged forward by President Obama's Affordable Care Act, are coalescing and point to pressures on drug companies to lower the prices they charge consumers for pharmaceuticals. One of the goals of ACA is to decrease the cost of healthcare. Putting pressure on outrageously priced drugs is one way the law aims to do that. The result of that pressure could be declines in profit from new drugs.

The reasons are easy to see. Health care costs are shifting to consumers at a faster rate than ever before, and with the opening of the health care exchanges Oct. 1, higher deductibles and copays are becoming more the norm rather than the exception. The most affordable of those plans have high deductibles and copays.

Additionally, expenditures in consumer-directed health plans, or CDHPs, have grown at a slower rate than other types of plans, according to a recent survey of employers by benefits consultant Aon Hewitt. Such plans have higher deductibles and copays, paid by the employee through a personal fund, which grows every payday through pre-tax contributions. Indeed, consumer-directed health plans could be the most common type of coverage offered by companies with 500 or more workers in the next three to five years. In its annual survey of over 800 large and mid-size employers in the U.S., Aon Hewitt found that 56% now offer CDHPs. Another 30% said they're considering offering one in the next three to five years. At present, 10% offer a CDHP as the only option and 44% are thinking about making it the only choice.

Just at a time when consumers are having to bear more of the freight for healthcare costs, scientific advances, especially in gene-based drug discovery, have allowed biotech and pharmaceutical companies to develop personalized biologics, therapeutic vaccines and targeted small molecule drugs that work better than ever, but carry ultra-high price tags.
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