Eli Lilly's Costs From Health-Care Law Set Stage for Drugmakers' Profits

Eli Lilly & Co. said costs for Barack Obama’s health-care law were 12 times higher than one analyst estimated. That result may be the first of such surprises from pharmaceutical companies this earnings season.

The Indianapolis-based drugmaker said first-quarter earnings were trimmed by 12 cents a share because of the new rules signed into law last month. Seamus Fernandez, an analyst at Leerink Swann & Co., had estimated a potential reduction of 1 to 2 cents a share in an April 15 research note.

Now analysts may revise projections for Bristol-Myers Squibb Co., Pfizer Inc. and other drugmakers yet to report first-quarter results, anticipating a larger-than-expected impact from the health-care law. Measures in the bill expanded the number of hospitals serving low-income populations eligible for lower prices on medicines, boosted discounts to Medicaid and made subsidies for retirees’ prescriptions taxable, Lilly said today.

“What was a surprise was the magnitude of the impact,” said Linda Bannister, an analyst with Edward Jones & Co., by telephone today. She said she had estimated an average hit to earnings of 1 to 2 percent from the health-care overhaul, with Lilly coming in higher than others because a greater portion of its sales comes from Medicaid patients. “Given what we heard today from Lilly we’re thinking we may be a little bit low.”

10 Percent of Profit

Lilly’s 12-cent hit from U.S. health-care overhaul accounts for more than 10 percent of its first-quarter profit of $1.13 a share, or $1.18 a share adjusted for restructuring and research and development charges. Bannister said her 1 percent to 2 percent estimate also included the benefit of more people gaining insurance and having access to drugs, which won’t take effect for a few years.

Lilly rose 4 cents, or less than 1 percent, to $36.58 at 4:15 p.m. in New York Stock Exchange composite trading. Pfizer declined 1 cent to $16.79, and Bristol-Myers gained 33 cents, or 1.3 percent, to $25.81.

The company gets roughly 10 percent of its revenue from patients in the Medicaid program, one of the highest in the industry, Fernandez said. New York-based Bristol-Myers and AstraZeneca PLC, in London, may be the only other drugmakers with similar levels of exposure, he said today in a note.

Some of these companies’ biggest-selling products are sold mostly to Medicaid patients, such as schizophrenia medications, said Tony Butler, an analyst with Barclays Capital in New York. In Georgia, 6 percent of the Medicaid population was diagnosed with schizophrenia compared with about 1.1 percent of the population as a whole, according to a 1998 study in the Oxford University medical journal Schizophrenia Bulletin.

Severely Ill

“Unfortunately individuals who have severe mental illness may not necessarily be productive in the workforce, so by definition their net income may be substantially smaller,” Butler said in a telephone interview today. “A number of these individuals could also be in hospitals.”

Bristol-Myers’s antipsychotic Abilify generated $2.6 billion in revenue last year, 14 percent of the company’s total sales. AstraZeneca’s Seroquel for schizophrenia and bipolar disorder accounted for 15 percent of its 2009 revenue with $4.9 billion in sales. Lilly’s antipsychotic Zyprexa also brought in $4.9 billion last year, accounting for 23 percent of the company’s revenue.

Butler said he had estimated Lilly’s exposure to Medicaid at about 8 percent of sales. He places Bristol-Myers at 10 percent, and said the figure may be slightly lower because it co-promotes Abilify with Otsuka Pharmaceutical Co. Abbott Laboratories and Merck & Co. come in at 5 percent, with Pfizer at 4.5 percent, according to Butler’s estimates.

“You have to think about who, on a relative basis, has the most exposure to Medicaid,” Bannister said. “That’ll give you the answer about who will be mostly impacted.”

To contact the reporter on this story: Meg Tirrell in New York at mtirrell@bloomberg.net; Shannon Pettypiece at spettypiece@bloomberg.net.

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