Australia | Nov 17 2006
By Chris Shaw
In a move designed to save the taxpayer as much as $580m in the next four years and around $3bn over the next decade the Australian Government has announced additional reforms to the Pharmaceutical Benefits Scheme in relation to generic drugs.
As Deutsche Bank notes, the reforms will see the price for generics reduced by a further 25% from August 1st 2008, this coming on top of a previously announced 12.5% discount. Further reductions will be made by 2012, the aim being to bring prices for generics into line with actual wholesale prices.
On the face of it this raises a warning flag as to the earnings outlook for the drug suppliers in the Australian marketplace, namely Australian Pharmaceutical Industries (API), Symbion Health (SYB) and Sigma Pharmaceuticals (SIP), but in the broker’s view the overall impact on earnings is likely to be minimal.
It suggests little will change as while the major threat from the price reductions is pharmacists being offered less of a discount by the generic manufacturers, so squeezing their margins, the government plans to offset this by increases to Community Service Obligation (CSO) payments. As a result, the broker expects little will change for those on both sides of the industry.
The key though is ensuring pharmacists are fully compensated, as if not they are likely to apply pressure on the generic manufacturers for lower prices, so pressuring margins in the sector.
On Deutsche’s analysis the most at risk appears Sigma, as the company’s operations span both the manufacturing of generic drugs and the wholesaling of generic and non-generic medicines. The broker expects little actual earnings impact though, a view shared by Credit Suisse, which is factoring in a less than 1% hit to earnings in FY09, by when the scheme should be fully in place.
GSJB Were maintains it is too early to assess the potential earnings impact from the changes but agrees Sigma appears most at risk from the proposals. Both Australian Pharmaceutical Industries and Symbion are expected to be unaffected if pharmacists are fully compensated, all three brokers noting the increase in funding in CSO payments will offset the likely impact of the generic drug price cuts.
Ratings for the three stocks are unchanged on the news, the FNArena database showing Sigma is the preferred stock in the sector with two Buy ratings and six Hold recommendations and an average price target of $2.86. Symbion is rated Buy once, Hold five times and Sell twice with an average price target of $3.22, while API is rated Hold four times and Sell twice, with an average target of $2.38.
The market seems to agree any impact will be limited as the share prices are little changed in early trading, as at 11.45am Sigma was down 2c at $2.64, Symbion was unchanged at $3.22 and API was down 5c at $2.48.