The government is preparing to embark on its largest reform of Medicare since the program's creation in 1965. Who will be the winners among companies that develop, manufacture and sell drugs?
While the plan is designed primarily to coax seniors into the arms of private health care providers through a system of subsidies, its most immediate impact on publicly traded companies could be the result of one of its tangential provisions. Generic drugmakers such as
would see their competitive positions greatly enhanced by passage of rules in both the House and Senate bills that would limit the amount of patent redress to which brand-name manufacturers are entitled.
Big pharmaceutical companies have in the past delayed the onset of generic competition by repeatedly seeking 30-month patent extensions by claiming to have found new science in old medicine. Under the proposed changes, brand-name drug manufacturers would be allowed to seek a 30-month patent extension just once.
Once Is Enough
"The 30-month patent stay will help bring generic medication to the marketplace," said Greg Howard, a spokesman for the Generic Pharmaceutical Association, an industry lobbying organization.
Big pharma itself is widely seen as reaping an immediate (though perhaps fleeting) benefit from the overhaul, different versions of which were passed two weeks ago by the House and Senate. While the chambers must now work out a compromise, the government is generally expected to spend $400 billion over the next 10 years to pay for prescription drug coverage for the elderly through Medicare or other private plans.
The details are complex, but analysts say it stands to reason that anything facilitating that much extra access to prescriptions will benefit the likes of
Johnson & Johnson
-- at least at first.
"Ten million Medicare beneficiaries would gain access to drug benefits," said Paul Heldman, an analyst at the Schwab Washington Research Group, adding that a senior citizen with drug insurance fills 32 prescriptions a year, on average. An elderly person without it fills 25 a year.
"In the short term, the Medicare bill is going to benefit drug companies," said Heldman.
Over the long run, however, the advantages for big pharmaceutical companies are less certain, and in fact the measure could turn out to be very costly. As soon as Medicare reform gets under way, the government is expected to pay increased attention to drug pricing.
"Pharmaceutical companies could end up being losers," said Heldman. "The prescription benefit program is going to cost more than the $400 billion that lawmakers are anticipating right now. Traditionally, when costs get out of hand, the government reacts by lowering prices."
Another sector that stands to lose is biotech. While companies such as
could get higher fees for administering their drugs, it's unlikely that private insurers will look as favorably on their treatments as the government has. That could put dents in some of their Medicare-dependent blockbusters.
In theory, the reforms' subsidies and risk-management measures would make insuring elderly Americans profitable enough that private providers would step in and take over some of Medicare's role. Private firms would also offer a prescription drug benefit to seniors who opt to remain in Medicare -- potentially through pharmacy benefit managers, or PBMs, such as
That represents a new role for those firms, which are now essentially distribution syndicates for the major pharmaceutical companies. It remains far from clear whether they would step in.
"Historically, Congress has proven to be bad at creating new markets," said Dan Mendelson, president of Health Strategies Consultancy in Washington. "Now, they're trying to create a market for drug-only insurance programs, and I have deep reservations about whether they can succeed in this ... the whole idea of drug-only insurance programs is very unlikely to work in the long run."
But even if that portion fails to win backing, the extra volume created by the prescription reform stands to be a boon for PBM companies.
"Overall, both packages are great for PBMs," Mendelson said. "Although the long-term plan is flawed, PBMs will be well-positioned to work out the problems with the government over time, and they will benefit from the final result. They'll have a good amount of time to figure all of this out."
One sector that would almost certainly benefit is that of pharmacy operators, whose low-margin business is helped by any increase in volume. The biggest, such as
, would cash in on a rise in prescription volume. They would also benefit if proposals passed that would allow for 90-day prescriptions. Right now, drugstores are restricted to filling 30-day scripts.
Overall, health care experts are confident that President Bush will sign a Medicare bill into law by next fall. The president has been suggesting that health care reform is a key to his re-election in 2004.
"Republicans are eager to set a precedent for privatizing the program," said Rami Armon, a health care analyst at Lehman Brothers Washington Research. "Meanwhile, Democrats want to expand the size of benefits administered under traditional fee-for-service Medicare."
Ultimately, of course, the impact of new legislation on Wall Street will depend on its final outcome.
Nat Worden contributed to this story.