Status quo keeps US pharma happy

Related tags Drug industry Pharmacology

The news that US President George Bush will be residing at the
White House for a further four years has been greeted with some
measure of relief by the pharmaceutical industry, which had been
worried about drug price curbs in the event of a John Kerry

In the event, fears of a Democrat victory were misplaced. Bush defeated Kerry by a comfortable margin, winning 274 Electoral College votes to 252, while the Republicans tightened their hold on the Senate, with 55 seats versus the Democrats' 44, and now has a powerful 233 to 201 majority in the House of Representatives.

The extent to which the market views the Republicans as the party that will support the drug industry is apparent from the sector's share price movements around the election.

On the eve of the election, pharma shares nose-dived as investors bailed out, fearful that a Kerry victory would put pressure on the drug industry's profitability. Much of this concern rested on three issues: Kerry's desire to curb spending on drugs by taking control of prescription drug benefits; repealing laws forbidding the US federal government from negotiating price discounts directly with pharmaceutical manufacturers; and supporting the parallel trade in re-imported drugs from Canada and elsewhere.

But once Bush had been confirmed in his second term, pharmaceutical stocks rose higher than any other sector on the US stock market, and analysts have predicted a rally lasting for a year or more. And the primary reason is that the current free-market system, where demand drives price, will continue, according to Barbara Ryan, a pharmaceuticals analyst and managing director at Deutsche Bank Securities.

Medicare reform

Pres Bush has already passed the main piece of legislation affecting the drug industry over the next few years - the Medicare Prescription Drug Improvement and Modernisation Act - into law, and Kerry would have been unable to go back on this bipartisan agreement.

The Act brings in a prescription drug benefit for seniors and the disabled, and has been widely tipped to swell the overall market for prescription drugs. However, while the original cost of this was put in the region of $400 billion over 10 years, more recent assessments have hiked this to $574 billion or more.

But while Kerry was looking for short-term control influence of drug prices to counteract this cost, some have argued that the new Medicare legislation will, in fact, meet the same aim of increasing federal control of drug prices in the long-term. It is estimated that once it is fully implemented in 2006 the federal government will be paying half the entire bill for prescription drugs in the US, and this enormous spending power will allow it to curb upwards price rises by the drug industry.

Furthermore, other analysts, including Tony Butler of Lehman Brothers, are saying that re-importation of drugs will be back on the table very soon, although only from Canada as drug counterfeiting issues have raised concerns about sourcing from overseas.

And the fundamentals affecting the pharma industry at present - declining profitability, problems with R&D productivity, increased generic competition and increased regulatory oversight and the costs of compliance - will remain.

In the long-term, say observers, the US drug industry could also be impaired by Bush's ban on stem cell research, which will make them lose ground to companies in Europe and Asia, where such research is permitted.

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