Analysts give their take on Medicare reform

Related tags Pharmacology

The prospect of a prescription drug benefit for the elderly in the
US has led to share price hikes in Euro pharma companies; SG Cowen
analyses the impact.

The news that Republican and Democratic congressional leaders had come to an agreement in principle on Medicare reform, including a prescription benefit for the US elderly, has ignited the US and European drug majors, according to analysts at SG Cowen.

The plans by the US Government could increase spending on healthcare for the elderly and disabled and Senate majority leader Bill Frist believes work will be completed on the bill by 21 November.

The Medicare reform package, which includes the prescription drug legislation, is aimed at improving access by the elderly to drug treatments by adding a prescription drug benefit into the federal insurance system.

At the end of last week it was reported that 95 per cent of the detail in the bill has been hammered out to the satisfaction of both Republican and Democrat members of Congress.

SG Cowen's index of the share prices of European pharmaceutical majors put in a 10 per cent rise on the news, and the analysts point to two possible reasons for this. The first is that it removes political uncertainty ahead of the 2004 Presidential election campaign, and the second is an anticipation of the increase in drug sales growth in the US in 2006 and beyond.

At present, the Medicare system does not extend to reimbursement of prescription drugs, and pharmaceutical companies in the US, as well as their European counterparts that rely heavily on sales into the American market, are banking that passage of the bill will boost the volume of drugs consumed in the country by expanding the patient base.

SG Cowen is currently tipping growth in the pharma industry to be around 7 per cent in 2004, dropping to around 5 per cent in 2006 and 4 per cent in 2007, but notes that if the Medicare reform can lift growth by 1 per cent, this would equate to an additional $3.6 billion in sales in 2007. An additional $10 billion in worldwide sales would return growth in the industry to the 7 per cent mark.

However, there are also concerns that if the hike in volumes does occur, a swelling burden on the US Government to fund pharmaceuticals could in the future lead to price controls.

Related topics Drug Delivery

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