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1、06 March 2009Americas/United StatesEquity ResearchMajor Pharmaceuticals/MARKET WEIGHTUS Major Pharmaceuticals,Research AnalystsCatherine J.Arnold212 538 6225catherine.j.arnoldcredit-Michael Faerm212 538 1771michael.faermcredit-Vamil Divan212 538 5394vamil.divancredit-,COMMENTTax Reform Lacks Detail,
2、Worst Case ScenarioMaterially NegativeThe Market is left confused regarding the specific intent of PresidentObamas budget proposal reference to implement internationalenforcement,reform deferral and other tax reform policies.There could be,many important nuances to the plans which are projected to g
3、enerate$210Bnover 10 years.The worst case scenario that we could imagine is a complete elimination ofthe foreign profit tax deferral and a 35%consolidated tax rate for all companies.This would be a material negative for all of our names(Exhibit 1)with 2010earnings decreasing from 6.8%for PFE/WYE pro
4、 forma to 22.2%for SGP.Ofcourse,this negative would hurt many other important sectors in the U.S.Market.The risk is that the revenue projections from reforming tax deferral are large andpopulist politics are against the companies.On the flipside,raising taxes in arecession is controversial and corpo
5、rations could threaten to relocateheadquarters outside the US,which would bode poorly for employment.In Obamas campaign he said it was his desire to broaden the corporate taxbase and eliminate special preferences.He specifically mentioned reforming taxdeferral to end the incentive for companies to s
6、hip jobs overseas.The one-lineris his budget proposal is very vague,implying little detail and possiblysignificant future debate.The projections go from$15Bn to$20Bn to$25Bnand then increase by$1Bn/year.These broad estimates have the appearanceof placeholders,put in to meet the deadline with details
7、 to be determined later.Two possible examples for reforming tax deferral are the recentlyreintroduced bill by Senator Dorgan and the Rangel Bill(expected to bereintroduced this year by the House Ways&Means Chairman).The Dorgan Bill proposes eliminating deferral attributable to products ofUS subsidia
8、ries produced elsewhere and imported into the US.No savingsestimates are available for the Dorgan Bill.Rangels proposal offered$107Bn over 10 years and would delaydeductions allocable to foreign expenses until repatriation of foreign income,thereby encouraging companies to voluntarily forego the def
9、erral.Further insight into Obamas intentions are expected in the coming weeks,or byearly April when a more detailed budget proposal is submitted to Congress.A transcript of a recent conference call we held with Health Policy Expert GeorgeOlsen,where we discussed tax deferral reform and other key asp
10、ects of thePresidents budget proposal,is included in the back of this note.DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,INFORMATION ONTRADE ALERTS,ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS.FOR OTHERIMPORTANT DISCLOSURES,visit www.credit-researchdisclosu
11、res or call+1(877)291-2683.U.S.Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report.Investorsshould consider this repo
12、rt as only a single factor in making their investment decision.Customers of Credit Suisse in theUnited States can receive independent,third party research on the company or companies covered in this report,at no costto them,where such research is available.Customers can access this independent resea
13、rch at www.credit-orcall 1 877 291 2683 or email equity.researchcredit-to request a copy of this research.,2,06 March 2009Exhibit 1:35%Consolidated Tax Rate Would Lead to 7-22%Negative Impact on 2010 Earnings,CompanyAbbottBristol-MyersEli LillyJohnson and JohnsonMerckPfizerSchering-PloughWyethPFE/WY
14、E Pro Forma,Current CSTax RateEstimate(2009)18.0%24.0%22.0%24.5%23.5%30.0%16.0%30.0%30.0%,Current CS2009 EPSEstimate($)$3.70$1.93$4.15$4.45$3.18$1.83$1.77$3.76$2.14,Adjusted 2009EPS($)*$2.93$1.53$3.47$3.83$2.70$1.70$1.35$3.49$1.99,2009 EPSImpact($)-$0.77-$0.40-$0.68-$0.62-$0.48-$0.13-$0.42-$0.27-$0.
15、15,2009 EPSImpact(%)-20.8%-20.7%-16.4%-13.9%-15.1%-7.1%-23.7%-7.2%-7.0%,Current CSTax RateEstimate(2010)19.0%25.0%22.0%23.5%24.0%30.0%17.0%30.0%30.0%,Current CS2010 EPSEstimate($)$4.21$2.22$4.43$4.95$3.21$2.11$2.07$3.84$2.37,Adjusted 2010EPS($)*$3.35$1.83$3.69$4.19$2.73$1.95$1.61$3.56$2.21,2010 EPSI
16、mpact($)-$0.86-$0.39-$0.74-$0.76-$0.48-$0.16-$0.46-$0.28-$0.16,2010 EPSImpact(%)-20.4%-17.6%-16.7%-15.4%-15.0%-7.6%-22.2%-7.3%-6.8%,Notes:Assumed 35%corporate tax rate for all companies.Source:Company data,Credit Suisse estimatesUS Major Pharmaceuticals,3,06 March 2009Transcript from March 3 Confere
17、nceCall with George Olsen,Operator:Catherine Arnold:,Good morning.My name is Brandy and I will be your conferenceoperator today.At this time Id like to welcome everyone to theCredit Suisse Health Policy conference call with George Olsen.All lines have been placed on mute to prevent any backgroundnoi
18、se.After the speakers remarks there will be a question andanswer session.If you would like to ask a question during thistime,simply press star than the number 1 on your telephonekeypad.If youd like to withdraw your question press the poundkey.Thank you.Ms.Arnold,you may now begin your conference.Tha
19、nks Brandy and good morning everybody.On behalf of the,Credit Suisse Healthcare Team Id like to welcome you to ourconference call.As you know today weve planned to review thehealthcare investment implications of the Presidents budgetproposal and towards that end weve invited Health Policy Expert,Geo
20、rge Olsen.George is the President of Williams&Jensen.Headvises and represents clients throughout the healthcare valuechain.As you may know from past calls,hes been involved withmajor legislative efforts including the role making process ofthese laws.For example,he was involved with Medicare Part D,t
21、he FDA Modernization Act,COBRA,Health Insurance Portabilityand Accountability,and Medicare Catastrophic Coverage,just toname a few.Now George joined us for a call about six weeks to preview theObama health agenda and certainly a lot has transpired sincethat time.Of course,SCHIP passed and we know ha
22、ve a budgetproposal that prioritizes healthcare reform.I think the message from the Obama camp is clear,the change inhealthcare delivery system is seen as an essential part of thisnew administration.In fact,Peter Orszag,Director of the Office ofManagement and Budget was quoted on ABC saying,“TheUS M
23、ajor Pharmaceuticals,4,06 March 2009President is still determined to get health reform passed this yearthat he would propose another revenue source if Congressblocked some of the ideas that are in his current plan.”Certainly theres a lot of details that are not provided in thebudget proposal but wer
24、e asking George today to review whatwas included and what we should expect next.After George isdone the team here will quickly highlight the key takeaways bysector and then wed like to open it up for your questions.With that Ill turn it over George.,George Olsen:,Thank you very much Catherine and I
25、enjoy the opportunity again,to speak to all of you.What Im going to try to do this morning,and its a prettyambitious agenda,sort of like the Presidents budget proposal,but Im going to try to accomplish a couple of tasks.One is to givean overview of the budget process so that we have anunderstanding
26、of what it is and what it is not of as well as theprocess and timing of that.Secondly,to talk about some generalobservations about the budget proposal.Third,to review some ofthe specifics in the proposal which may be of particular interest toyou.Fourth,to talk about tax and revenue provisions,inpart
27、icular the tax treatment of offshore earnings and deferral.Fifth,to comment briefly on the upcoming White House summiton healthcare reform and then finally,some quick observationsabout the nominees,Kathleen Sebelius for HHS Secretary andNancy Ann DeParle to head the White House office of healthrefor
28、m.So thats,as I said,a very aggressive agenda for anhours period of time so I will tarry no longer.Lets talk about the budget process.The President,as you know,sent his budget up to Congress at the end of the week,last week.The budget proposal does not carry the force of law.It is insteadan expressi
29、on of the Presidents views as to his budget priorities,the ways in which he wants to achieve those priorities and itsalso an opportunity for him to lay out any new initiatives that hisadministration may want to proceed.US Major Pharmaceuticals,5,06 March 2009,The submission of the budget then trigge
30、rs a multi-step,congressional process.The first step in that process is that thecongressional committees will submit,what they call,views andestimates of the spending and revenue provisions of the budgetthat are within their jurisdiction and those views and estimates willbe given to the House and Se
31、nate Budget Committees.,For example,the Ways&Means Committee would submit itsviews on such matters as the Medicare program and the HouseEnergy and Commerce Committee would submit its views andcomments on such issues as Medicaid and the Food and DrugAdministration.,The next step in that process is th
32、at the House and SenateBudget Committees would hold hearings on a proposedcongressional budget resolution that takes into account thePresidents proposal,the views of the committees of jurisdictionand information that it has gathered from a myriad of sourcesincluding the Congressional Budget Office a
33、nd the Office ofManagement and Budget.And those hearings,in fact,arestarting today and tomorrow when Dr.Peter Orszag the head ofOMB appears before the House Budget Committee today,theSenate Budget Committee tomorrow,to discuss President,Obamas budget proposal and there will be subsequent hearingsove
34、r the next four or six weeks on the budget resolution.,After these series of hearings are completed the budget,committee in each of the bodies will prepare a concurrent budgetresolution for that body.In other words,theyll be a House budgetresolution and a Senate resolution and that resolution will b
35、emarked up by each of the respective budget committees and thenreported to the floor in each body for action.And,of course,someamendments to the resolution can be offered in those committeemarkups.,The resolutions then would be voted on by either body.Its asimple majority vote.If there are any diffe
36、rences in the,resolutions that are passed by the House and the Senate,House,US Major Pharmaceuticals,6,06 March 2009,and Senate negotiators would work out those differences andthen the compromise resolution would be agreed to.,Now,this budget resolution,when it works is all the way throughthe congre
37、ssional process,that doesnt carry the force of laweither.Instead it is an agreement between the two legislativebodies that establishes the budget priorities and sets terms forother spending activities by Congress.,For example,the Appropriations Legislation that they will have toundertake will be sha
38、ped within the framework of that budgetresolution.Now,the budget resolution will not contain the kind,isnot expected to contain,the kind of detail that we see in thebudget proposal that the President set up.,I think the expectation would be some of the highline numberswould be included.For example,t
39、he possibility that they wouldinclude the$634 billion Health Reform Reserve Fund but notnecessarily all the particulars of how they would get to the$634billion recognizing that thats the kind of work that would beundertaken by the substantive committees once the budgetresolution is agreed to.,So,wha
40、t is the timing of all of this?Well,its all controlled by theCongressional Budget Act and that sets a timeframe whereby thePresident is supposed to submit the budget to Congress the firstMonday in February.Well,obviously that didnt happen and in thecase of a new President it really cant happen.I mea
41、n he was justsworn in January 20.Its hard for him to submit a budget by thefirst of February.So,by convention that process slips some.,The Senate Budget Committee,under the Budget Act,is,supposed to report a budget resolution by April 1 and action onthe resolution is supposed to be completed by Apri
42、l 15.They mayaspire to those timeframes and they may push for it but I think itis unrealistic,at this point,to assume that those timeframes willbe met.But this budget process now will,in fact,unfold overMarch and probably well into April.,US Major Pharmaceuticals,7,06 March 2009,The situation is com
43、pounded somewhat this time around byPresident Obamas promise to send a more detailed budgetproposal to Congress sometime early in April and its unclear atthis point exactly how that will dovetail with the CongressionalBudget Resolution Process but I expect well know more aboutthat in the coming days
44、.,So,that is the budget resolution process.It is not binding as amatter of law.It doesnt create new Medicare programs.It doesntreduce funding for any program.But it is an expression of ablueprint and an overall approach that Congress will take.,Let me talk about a couple of observations about the Pr
45、esidentsbudget.One is that it adheres pretty closely to his campaignrhetoric.Those things that energize the electorate to vote for himare reflected in both the rhetoric and the budget document as wellas a number of the specific proposals that he has included in it.,Secondly,he makes a big point of s
46、aying that,“Well weve got toreturn to the PAYGO rules.If we spend it weve got to find a wayto pay for it either by new revenue sources or by savings inprograms or by a combination of the two.”,Third,were seeing,this time around,something fairly unusual.Usually as we have looked at Medicare and Medic
47、aid legislationin the past to the extent that there are additional costs to theprogram,for example,from a new benefit,though the costs ofthat are paid for internally by Medicare and Medicaid savings.This time around with the creation of the Health Reform Reserve,Medicare and Medicaid are contributin
48、g to offsetting the costs ofhealthcare reform generally reaching over into the private market.So it will be interesting to see how all of that plays outconceptually.,And then I would just note,finally,that it was the Presidentsapproach not to get incredibly detailed in this budget submissionand that
49、s in part why we had that creation of the Health ReformReserve Fund.He wanted to create a sort of large number thatCongress could work with and leave it up to his work with,US Major Pharmaceuticals,8,06 March 2009,Congress over time to shape the program and policies that wouldunderpin healthcare ref
50、orm.,So,with those observations in mind then lets turn to the budgetproposal itself and I will not spend time with some of the globalnumbers-youve all seen them in the paper in terms of thespending and the deficit and the like-and instead concentrate onsome of the specifics.,I have mentioned the Hea
