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Government Was Kind To Drugmakers In 2006

The government was kind to drugmakers in 2006. A new year, however, brings a new Congress that may bring challenges to its costs, its revenues and its image.

The Medicare drug benefit instituted this year bestowed many consumers with a newfound ability to purchase medicines. Analysts say sales jumped as much as 5 percent.

But the drug companies have been closely aligned with Republicans, and policies under the incoming Democrat-controlled Congress may not be as advantageous.

Incoming House Speaker Nancy Pelosi, for example, has pledged to introduce legislation that would change the Medicare drug benefit in an attempt to drive down drug prices.

And that's not the only policy threat to the industry.

Proposals brewing could increase the number of clinical trials companies must perform and shorten the life of patents, meaning more money spent on studies but less money made on sales before exclusivity expires.

"There is a risk that the new Congress will be hurtful to us," said Ian Spatz, vice president for public policy at Merck & Co., referring to the industry in general. "There is also some exaggeration and hype."

Spatz said it's impossible to gauge the effect without specifics of legislation, but he noted that there also are likely to be more congressional hearings that could hurt the public perception of the industry.

Some analysts said anxiety about the new Congress is keeping some investors away from pharmaceutical stocks. The American Stock Exchange Pharmaceutical Index had been rising this year but has fallen since late October. As of early December, it was down roughly 5 percent from its 52-week high.

"The worst thing that happened to our industry was that we got pushed into one political camp," said Billy Tauzin, a former Republican congressman who is now president and CEO of the Pharmaceutical Research and Manufacturers of America. "We have to support anyone that wants to help patients."

Democrats may have different ideas how to accomplish that, however.

Pelosi has pledged to introduce legislation to allow the government to negotiate directly with drugmakers to buy medicines for Medicare beneficiaries at lower prices. Direct negotiation with drugmakers is prohibited.

The industry considers direct negotiation tantamount to price controls. Jason Napodano, an analyst with Zacks Independent Research, said the prospect of direct negotiation is the biggest risk to owning pharmaceutical stocks.

"The government goes from being an adder to company revenues to a subtracter," Napodano said.

Companies haven't disclosed exactly how much they've benefited from the new drug benefit. Analysts said it differs from one to another, with companies like Pfizer Inc., Bristol-Myers Squibb Co. and Merck likely garnering a bigger benefit because they make more medicines geared to the elderly. Pfizer, for example, makes drugs for cholesterol and blood pressure.

Many experts don't believe Pelosi will succeed in this Congress but say the idea could take hold if Democrats retain control and win the White House in 2008.

The industry is less concerned about proposals with bipartisan support, which would allow consumers to import medicines from Canada and other countries, a hot-button issue that has quieted as the Medicare drug benefit has expanded people's access to drugs. Spatz said he doesn't believe importation would have a significant impact on sales, and other analysts agreed.

The industry and the Food and Drug Administration on renewing the law allowing the FDA to impose fees on drugmakers to hire staff to review their product applications more expeditiously.

Spatz said the agreement, which must be presented to Congress, calls for a "substantial increase" in user fees, with more money going for staff to review drug ads and monitor medicines that have already been approved.

Drugmakers want the FDA to have enough money to review their drugs quickly, but they don't want to have to conduct new trials, studies and post-marketing plans that they consider costly and burdensome.

One bipartisan proposal calls for limits on some drug advertising. It also seeks to require more post-marketing studies to insure drugs' safety when they are on the market and would give the FDA new power to impose civil fines if companies don't conduct the required tests.

At the same time, the industry faces threats to its revenue.

One proposal would limit tools that critics contend drugmakers use to keep generic competition off the market. Another would create a pathway for generic versions of biotech drugs to enter the market, which would create competition and cut the market exclusivity for the often expensive treatments. Currently, there are no regulations that allow for the introduction of generic biotech drugs.

Moreover, the law which gives companies a six-month patent extension for testing drugs on children is up for review and there are calls to shorten it. That could severely cut back a drug's sales.

"It (the extension) has helped industry do the right thing," Tauzin said. "Cutting the incentive in half could have an impact on decisions (to do the test.) It is bad policy."