Please ensure Javascript is enabled for purposes of website accessibility

Health-Care Reform Hits Drugmakers' (and Your) Pockets

By Brian Orelli, PhD – Updated Apr 6, 2017 at 12:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Some companies take bigger hits than others.

Patients won't see many of the benefits of health-care reform for years -- mandated coverage for pre-existing conditions doesn't take effect until 2014, for instance -- but drug companies begin paying for the reform this year. In fact, some of the new required discounts are retroactive to the beginning of the year.

Now that drug companies have released their first-quarter financials, we have a good idea of how much the reform is costing them.


2010 Lost Revenue Because of Reform (in millions)

Percentage of 2009 U.S. Revenue

Percentage of 2009 Total Revenue

Eli Lilly (NYSE: LLY)

$350 to $400

2.8% to 3.2%

1.6% to 1.8%

Biogen Idec

$70 to $90

4.3% to 5.5%

1.6% to 2%

Gilead Sciences (Nasdaq: GILD)




Abbott Labs (NYSE: ABT)




Amgen (Nasdaq: AMGN)

$200 to $250

1.8% to 2.2%

1.4% to 1.7%

Bristol-Myers Squibb (NYSE: BMY)

$350 to $400

2.9% to 3.4%

1.9% to 2.1%

Pfizer (NYSE: PFE)




Merck (NYSE: MRK)




Sources: Company press releases and conference calls.

* Not meaningful because Pfizer did not report on a pro forma, combined-entity basis following the Wyeth merger.

** Merck reported pro forma, combined-entity total revenue, but not U.S.-only revenue following the Schering-Plough merger.

Most of the lost revenue comes from Medicaid, which is now entitled to a 23.1% discount off the average selling price of drugs, up from 15.1%. The number of entities entitled to the discount also increased by about 2,000 because hospitals treating certain patients -- children and those in rural areas, for instance -- now get a break on the price of drugs.

Some companies will also take a one-time hit to their GAAP earnings because they're no longer receiving a tax benefit for providing drug benefits for their retirees. But that's a non-cash charge, and the lack of a tax break certainly won't break the companies.

More ahead
Next year, additional costs are expected to hurt drugmakers when Medicare cuts kick in. Seniors enrolled in a Medicare drug program get coverage for a certain amount of drugs, and then they're on their own -- commonly referred to as the doughnut hole -- until catastrophic coverage kicks in. As part of the reform, drugmakers are required to give discounts to seniors while they're in the doughnut hole.

The discount isn't a complete loss for drugmakers, though. Some seniors simply stop taking medications when they have to start paying the full price on their own. From those patients, some revenue, even at a reduced gross margin, is better than nothing. There's also the potential of gaining full-priced sales when seniors leave the doughnut hole on the other side and the government picks up the cost again.

Run away
It's tempting to say that investors should focus on companies that have a large presence abroad, but that's not necessarily the answer, either. European governments often set the price of drugs, and with their budget woes, the price of drugs is headed in the wrong direction there, too.

The obvious solution to get around pricing discounts is to avoid the government -- all governments -- as much as possible. That's not easy for pharmaceuticals, but there are plenty of drugmakers that have expanded into related fields.

Over-the-counter products may not bring in a lot of revenue individually, but added up they can have a meaningful effect on revenue. The diversification, including launching an over-the-counter version of its allergy drug Allegra, was one of the reasons sanofi-aventis purchased Chattem.

Drug companies also have non-medical products on the store shelves. Merck and Johnson & Johnson sell sunscreen. And Abbott and GlaxoSmithKline sell nutrition products, which might be subject to a snack tax but are safe from price controls.

And there are plenty of drugmakers helping out four-legged patients. Pfizer's animal-health division got bigger after the acquisition of Wyeth, and Merck is so in love with Merial that it reacquired half of the company after letting it go to complete its acquisition of Schering-Plough.

How much should you really be worried?
At this point, I'm not sure that changes in government pricing are a reason to pick one drugmaker over another; new drug approvals will still rule the revenue growth charts. It's better to find a drugmaker that's growing revenue by 10% and taking a 4% hit from reduced drug prices than one whose diversification has helped deaden the hit to 2% but leaves revenue flat.

But Fools do need to keep an eye on pricing, especially in the U.S., where high margins are the norm. If forced discounts spread from government programs to private payers, you'll want to run from the sector as quickly as possible.

Pfizer is a recommendation of the Inside Value newsletter. The Inside Value team scours high and low to bring you the best value stocks available. Check it out for free with a 30-day trial

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Johnson & Johnson is an Income Investor choice, and Motley Fool Options has recommended a buy calls position on the stock. The Fool owns shares of GlaxoSmithKline. The Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Eli Lilly and Company Stock Quote
Eli Lilly and Company
$334.38 (7.48%) $23.28
Pfizer Inc. Stock Quote
Pfizer Inc.
$44.43 (0.77%) $0.34
Bristol Myers Squibb Company Stock Quote
Bristol Myers Squibb Company
$72.06 (2.42%) $1.70
Amgen Inc. Stock Quote
Amgen Inc.
$230.98 (2.21%) $4.99
Abbott Laboratories Stock Quote
Abbott Laboratories
$98.72 (0.40%) $0.39
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
$86.78 (1.09%) $0.94
Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
$63.93 (2.08%) $1.30

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.