Merck Health-reform Costs Below Rivals
Merck & Co said on Friday its costs related to recently approved U.S. healthcare reform will be about $170 million this year and $300 million to $350 million in 2011, which is a far smaller percentage of total company sales than rival drugmakers.
Merck, whose shares rose 5%, said costs this year will be due largely to higher price rebates it will be required to give patients in the Medicaid insurance program for the poor. The company, which has annual sales of about $46 billion following its recent merger with Schering-Plough Corp, said it will take a first-quarter charge of about $150 million related to elimination of a tax benefit for retiree drug coverage.
It reports first-quarter results on May 4.
Costs are expected to escalate next year, when drugmakers are obliged to offer big discounts to patients in the federal Medicare insurance program for the elderly who have experienced a gap in coverage nicknamed the "doughnut hole." Merck's projected healthcare-reform costs for next year amount to less than 1% of its global annual sales, and to roughly 1.5%of its annual U.S. sales of about $21 billion.
By contrast, rival U.S. drugmaker Eli Lilly and Co - whose sales are more concentrated in the U.S. - on Monday shook investors by disclosing it would incur $700 million in costs next year from health reform. That translates into about 3% of its global annual sales. Lilly and other U.S. drugmakers, including Abbott Laboratories, cut their 2010 profit forecasts because of the costs related to the reforms.
But Merck on Friday said it continues to target high single-digit compound annual earnings growth for the newly combined company, excluding special items, from 2009 to 2013, when compared with Merck's 2009 earnings.
Sanford Bernstein analyst Tim Anderson said Merck's expected costs from healthcare reforms are surprisingly small, and might have been expected to clip its earnings by about 4% this year and 6% in 2011.
"Bristol-Myers Squibb appears the most likely to have a Lilly-like earnings-per-share clip from reform," Anderson said in a research note. Bristol-Myers, which has a higher percentage of U.S. sales than Merck and some other large drugmakers, reports first-quarter earnings on April 29.
