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Merck: Health overhaul to cost roughly $320M

Fri, 04/23/2010 - 1:17pm
LINDA A. JOHNSON - AP Business Writer - Associated Press

The drugmaker Merck & Co. said Friday the federal health care overhaul will reduce its revenue by about $170 million this year and by roughly double that amount next year — less than the impact some rivals have reported. Its shares rose on the news.

Merck also expects to take a non-cash charge of about $150 million in the first quarter, due to elimination of the tax benefit for providing prescription drug coverage to company retirees.

Merck said new rebates to the Medicaid program, required in the federal health care legislation passed last month, and other changes will reduce its revenue by about $35 million in the first quarter and $170 million for all of 2010. In 2011, the company said it expects unfavorable sales impact of about $300 million to $350 million.

Despite those costs, Merck said that it is still aiming to produce compound annual growth in the high single digits excluding one-time items through 2013 compared with its 2009 results.

"The impact is less than what we might have otherwise guessed," analyst Dr. Timothy Anderson of BernsteinResearch wrote in a note to investors.

Anderson calculated that based on the percentage of Merck sales coming from the United States, the legislation's earnings-per-share impact would be about 1 percent this year and about 2 percent next year. He previously estimated those hits would be roughly 4 percent and 6 percent for 2010 and 2011, respectively.

Merck shares rose $1.69, or 5 percent, to $35.46 in trading Friday. Other U.S. drugmakers also saw their shares rise significantly.

Merck, based in Whitehouse Station, is the maker of asthma and allergy drug Singulair and cholesterol drugs Vytorin and Zetia. It is slated to report its first-quarter results on May 4.

Numerous other major U.S. companies have been taking large charges for the lost prescription drug tax benefit as the first-quarter corporate earnings season proceeds.

On Monday, when drugmaker Eli Lilly & Co. reported its first-quarter results, it took one-time charges totaling 12 cents per share: $85 million related to retiree prescription drug coverage and $60 million for higher Medicaid rebates. It expects Medicaid-related rebates to shrink revenue by $350 million to $400 million this year.

Shares of drugmakers generally dropped the next few days as investors worried about the potential impact of the health overall on the pharmaceutical industry.

On Tuesday, Johnson & Johnson, which makes medical devices and prescription and over-the-counter drugs, said government rebates under the health care overhaul would reduce its 2010 revenue up to $500 million and its profit by about $300 million, or 10 cents per share. J&J did not take a charge related to retiree prescription benefits, however.

On Wednesday, Abbott Laboratories said the bigger Medicaid rebates had slashed its sales by about $60 million at the end of the first quarter. It also took an after-tax charge of $60 million related to the lost tax benefit for retiree prescription drug coverage.

Johnson & Johnson Chief Executive William Weldon said Tuesday he expects the health overhaul to cost the pharmaceutical industry about $4 billion this year, $11 billion next year and a total of $100 billion to $115 billion over the next decade.

Pfizer Inc., the world's biggest drugmaker, and another major U.S. drugmaker, Bristol-Myers Squibb Co., have not disclosed what impact they expect. They are set to report their first-quarter results on May 4 and April 29, respectively.

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