Could health reform bite Lilly harder than most?-WEB ONLY

When it comes to health care reform, Eli Lilly and Co. has its derriere exposed more than its drugmaker peers.

That’s according to a recent report by Jason Napodano, a senior pharmaceutical analyst at Zack’s Equity Research. In an April 9 report, he examined potential negatives in President Barack Obama’s health care reform outline.

While Napodano downplays the potential bite of the reforms, his research shows that Lilly could get the deepest teeth marks.

First, Lilly derives a larger share of its sales from the government than any other major American drugmaker. Lilly’s bestseller, the antipsychotic Zyprexa, has been prescribed to lots of Medicare and Medicaid patients.

Medicare, Medicaid and payments from other public programs make up 18 percent of Lilly’s revenue, Napodano estimated. Obama wants to increase mandated Medicaid discounts from 15 percent to 21 percent. That likely will shave about 1 percent off profits, Napodano said.

Generic biotech drugs also could hurt Lilly, which prides itself on ranking as the fifth-largest maker of biotech medicines, with $5.4 billion in yearly revenue. Roche/Genentech, Amgen, Novo Nordisk and Johnson & Johnson all rank ahead of Lilly.

But 40 percent of Lilly’s late-stage pipeline drugs are in the biotech arena, which explains why executives have been making frequent flights to Washington to bend ears on Capitol Hill.

Allowing reimportation of prescription drugs from countries with price controls is another Obama proposal. But Napodano estimates that would cost each drug company no more than 2 percent of revenue.

The biggest hit, he said, could come from Obama’s proposed changes to corporate taxes. By taxing foreign profits at U.S. rates and cutting tax credits for research and development, Obama’s plan could raise drugmakers’ effective tax rates to about 30 percent, Napodano said.

Such an increase would hack off as much as 30 percent from each drugmaker’s profits.

Lilly has been paying corporate taxes at a 21-percent rate – lower than all but three other major American drugmakers.

The effective tax rate change has the potential to take the biggest bite out of profits,” Napodano said. But two positives of health care reform – more research funding and more people covered by health insurance – likely would mitigate some of the negatives, he concluded. “What we may end up seeing is a small reduction in revenue growth rates for the largest firms by 2 percent to 4 percent.”

Lilly spokesman Ed Sagebiel said Lilly opposes Obama’s proposal to tax U.S. corporations’ foreign earnings at U.S. rates, which he would achieve by repealing something called “deferral.” But Lilly sees benefit in Obama’s efforts to expand coverage for the uninsured.

“While details are few, Lilly is optimistic about the prospects for health care reform and the positive impact it will have on vulnerable populations,” Sagebiel wrote in an e-mail.

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