Obama’s reforms could bite Lilly

When it comes to health care reform, Eli Lilly and Co. has its derriere exposed more than its drugmaker peers.

That’s according to a recent report by Jason Napodano, a senior pharmaceutical analyst at Chicago-based Zacks Equity Research.

In an April 9 report, he examined potential negatives in President Barack Obama’s health care reform outline. While Napodano downplays the potential bite of the reforms, his research shows Lilly could get the deepest teeth marks.

First, Lilly derives a larger share of its sales from the government than any other major American drugmaker. Lilly’s best-seller, the antipsychotic Zyprexa, has been prescribed to lots of Medicare and Medicaid patients. Medicare, Medicaid and payments from other public programs make up 18 percent of Lilly’s revenue, Napodano estimated.

Obama wants to increase mandated Medicaid discounts from 15 percent to 21 percent. That likely will shave about 1 percent off profits.

Generic biotech drugs also could hurt Lilly, which prides itself on ranking as the fifthlargest maker of biotech medicines, with $5.4 billion in yearly revenue. Other firms have a bigger stake, but nearly half of Lilly’s late-stage pipeline drugs are in the biotech arena, which explains why Lilly executives have been making frequent flights to Washington to bend ears on Capitol Hill.

The biggest hit, Napodano said, could come from Obama’s proposed changes to corporate taxes. By taxing foreign profits at U.S. rates and cutting tax credits for research and development, Obama’s plan could raise drugmakers’ effective tax rates to about 30 percent, Napodano said. Lilly has been paying corporate taxes at a 21-percent rate—lower than all but three other major American drugmakers. Two positives of health care reform—more research funding and more people covered by health insurance—likely would mitigate some of the negatives, Napodano concluded.

Lilly spokesman Ed Sagebiel said Lilly opposes some Obama initiatives but sees benefit in efforts to expand coverage for the uninsured.

"While details are few, Lilly is optimistic about the prospects for health care reform and the positive impact it will have on vulnerable populations," Sagebiel wrote in an e-mail.