Pink Sheet is part of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC’s registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

This copy is for your personal, non-commercial use. For high-quality copies or electronic reprints for distribution to colleagues or customers, please call +44 (0) 20 3377 3183

Printed By



Executive Summary

The financial community has not been paying enough attention to the potential impact of the outpatient drug coverage provisions in the pending catastrophic health care legislation, Nomura Securities analyst Hemant Shah told a Jan. 22 session of the National Association of Pharmaceutical Manufacturers annual meeting. "In our opinion," Shah declared, "the catastrophic bill is probably going to have a much greater positive impact on the generic industry -- and a negative impact on PMA companies -- than the [Waxman/Hatch] Patent Term Restoration Bill, because here you are going to create a huge, one-person buying group, which is the Federal government." Shah further predicted that the government will eventually turn to a price-control type of system similar to the Diagnosis Related Groups (DRGs) used for hospital procedures. "I think that DRG's are going to be inevitable in the drug industry," Shah said, adding, "eventually therapeutic substitution is inevitable." Shah's assessment of the catastrophic bill as a first step toward price controls reflects some of the early arguments against outpatient coverage by the research-based segment of the industry. This may be a case in which the cries of dire consequences early in a policy debate will color the final public perception of legislation. The research-based segment, in fact, may have forestalled some of the worst price control aspects of the outpatient drug program through the lobbying on the Senate version of the bill. Language in that bill would make it more difficult procedurally for HHS to establish formularies or other price-setting mechanisms for the outpatient program ("The Pink Sheet", Nov. 2, p. 15). The Senate protections against formulary provisions will be one of the key points to be decided in the upcoming House-Senate conference on the bill this session. Shah's comments on the relative lack of awareness about the outpatient drug bill on Wall Street indicate that both the generic and brandname segments need to do more work to prepare analysts for the likely passage of the bill later this year. If the legislation arrives as an unknown quantity to the Street, the generic industry could lose some of the potential good news from the bill, and the brandname segment could be affected by too sharp a scare reaction. Shah pointed to the catastrophic care bill as a timely opportunity for generic drug companies to seek a higher public visibility and to parlay that visibility into easier access to the public markets for financing. The Nomura Securities analyst urged "generic drug industry executives . . . [to] exploit the catastrophic bill. They have not so far." The increased role of Medicare as a purchaser of generic drugs, Shah said, will "result in probably a dramatic increase in generic use. And that message has not been relayed to Wall Street effectively. If you properly play all these factors, then your price/earnings ratio is going to be maybe a 100% premium to the market." Shah called the catastrophic bill a "golden opportunity for generic drugs" and suggested that privately-held generic houses look ahead to the possibility of public offerings. The passage of the bill, Shah said, "is also going to be very helpful to those other small companies which have not gone public because of the market conditions. They may be able to do so at a very significant high price/earnings ratio." Generic firms, however, may have difficulty taking advantage of the opportunity because they have not taken the effort to build credible relations with Wall Street, Shah told the NAPM meeting. A key factor in dealing with the financial community, Shah told the meeting, is "management credibility." He contended that "some of the management in this business have completely lost credibility because they have not been truthful to Wall Street or they have lied to Wall Street." Without identifying companies by name, Shah praised a Chicago firm and a Long Island firm for openly discussing FDA regulatory problems with the financial community. LyphoMed (located outside Chicago) and Bolar (located on Long Island), both have addressed recalls in recent years. In contrast, Shah criticized one manufacturer who "had a major recall and did not communicate with Wall Street." In addition to regulatory information, Shah exhorted generic manufacturers to make more information available on the pricing of generics. He observed "there is not a whole lot of information available about what . . . the prevailing prices are, what kind of discounts . . . certain customers [may be getting]." While advising the companies to be careful to protect their competitive plans, Shah suggested keeping Wall Street informed of projects by "relaying that in some indirect way, like 'we have 10 ANDAs or 20 ANDAs' or 'we are working on so,' or 'we have this kind of R&D budget'." The analyst said "that would be very helpful." Shah also stressed the importance of developing consistency in operating results to attract investment. Acknowledging that "for the generic industry, obviously, it is not possible" because of the unpredictableness of FDA approvals, he urged the generic firms to "try to streamline your operations and streamline your expenses in such a way that you can try to achieve the best consistency possible, and decrease the volatility."

You may also be interested in...

Part D Discount Liability Coming Into Focus: CMS Releases Drug Cost Data

Newly released Medicare Part D data sheds light on the sales hit that branded pharmaceutical manufacturers will face when the coverage gap discount program gets under way in 2011

FDA Skin Infections Guidance Spurs Debate On Endpoint Relevance

FDA appears headed for a showdown with clinicians and the pharmaceutical industry over the proposed new clinical trial endpoints for acute bacterial skin and skin structure infections, the guidance's approach for justifying a non-inferiority margin and proposed changes in the types of patients that should be enrolled in trials

Shire Hopes To Sow Future Deals With $50M Venture Fund

Specialty drug maker Shire has quietly begun scouting deals with a brand-new $50 million venture fund, the latest of several in-house investment arms to launch with their parent company's pipelines, not profits, as the measure of their worth




Ask The Analyst

Please Note: You can also Click below Link for Ask the Analyst
Ask The Analyst

Your question has been successfully sent to the email address below and we will get back as soon as possible. my@email.address.

All fields are required.

Please make sure all fields are completed.

Please make sure you have filled out all fields

Please make sure you have filled out all fields

Please enter a valid e-mail address

Please enter a valid Phone Number

Ask your question to our analysts