Drugmakers had to give up a big chunk of their profits when Obamacare, officially known as the Patient Protection and Affordable Care Act of 2010, was enacted. But the companies didn't seem to mind; well ahead of when the final law was written, the drug industry signed on to the law, giving seniors in Medicare Part D prescription coverage a discount on their drugs.
The rebates cover seniors as they hit the so-called doughnut hole after prescription drug coverage runs out but before catastrophic coverage kicks in. In the doughnut hole, senior were responsible for covering the full cost of their prescription drugs, but as part of Obamacare, the pharmaceutical industry agreed to offer seniors discounts.
For brand-name drugs, the discount started at 14% in 2012 and will eventually rise to 75% in 2020. Drugmakers with drugs that primarily treat seniors are disproportionally hurt by the legislation, but pretty much all drugmakers will end up losing profits from the discount to seniors. The only exceptions are drugs such as Dendreon's (NASDAQ:DNDN) Provenge and Regeneron Pharmaceuticals' (NASDAQ:REGN) Eyela that are administered by doctors because they're not covered by Medicare Part D.
Obamacare also increased the discounts drugmakers were required to give Medicaid and an increasing number of entities entitled to the discount, which especially affected drugs such as Gilead Sciences' (NASDAQ:GILD) HIV cocktails that are used by many low-income patients.
Yet the drug industry was largely in favor of implementing Obamacare despite the discounts that cut into drugmakers profits.
Now we know why
As was widely suspected, it appears the drug industry is going to benefit substantially from Obamacare in the long run.
The IMS Institute for Healthcare Informatics ran some scenarios, including a full implementation of Obamacare and a botched implementation leading to a significant decline in health-care utilization, and found that the difference between the two could be as much as $140 billion in 2017.
Under IMS's rosy scenario, drugmakers stand to profit from U.S. drug spending between $420 billion and $460 billion in 2017. Much of that gain comes from "increased enrollment, screening, removal of caps, and management of existing conditions."
In non-insurance speak, that's more patients, better diagnosis, no maximum payouts, and more spending on chronic diseases, which all leads to an increase in spending on drugs.
If Obamacare isn't instituted, the situation is much bleaker. Drugmakers will only share U.S. spending between $300 billion and $320 billion, which sounds like a lot, but it's actually a decline from the $328 billion Americans spent on drugs in 2012.
In the worst-case scenario, IMS predicts that drug spending will decline because insurers will push back on spending for new medications with premium prices.
Somewhere in the middle
IMS's actual prediction is somewhere in the middle. The analysts predict U.S. drug sales will hit $350 million to $380 million in 2017, producing an annual compounded growth rate of 1% to 4% from 2012 levels. The prediction assumes a third of the target levels of enrollment in Obamacare by the uninsured and some pushback from insurers resulting in having drugmakers compete on price.
In that scenario, companies that are developing drugs that treat unmet needs -- Vertex Pharmaceuticals (NASDAQ:VRTX) in cystic fibrosis and Sarepta Therapeutics (NASDAQ:SRPT) in Duchenne muscular dystrophy for example, should be good investment because of a lack of competition and therefore pricing pressure.
Fool contributor Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Gilead Sciences and Vertex Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.