Lilly/Imclone: Hedging Payor Risk

Imclone’s Erbitux is a quintessential example of a high priced cancer medication of the type routinely cited by advocates for some form of national comparative effectiveness project in the US.

So it may seem odd to argue that Lilly’s decision to step in and buy Imclone away from Bristol reduces the company’s exposure to a potentially tougher pricing climate in the US.

But in one important sense it does: It gives Lilly about $400 million in annual revenues that are sheltered from any impact of the upcoming debate over price negotiation under the Medicare Part D program in the US.

Like most Big Pharma companies, Lilly’s product line is heavily tilted towards the types of products paid for under the new Part D program: chronic, oral medications like Zyprexa and Cymbalta. And, like most Big Pharma’s with mature product lines, that means Lilly has benefited from a de facto price increase, thanks to the transfer of a lot of use of those medicines out of the price-controlled Medicaid market and into the managed care plan-administered Part D program.

And, like most Big Pharma companies, Lilly is concerned that the US government is about to do something about that.

Here is what Lilly SVP-corporate policy and strategy had to say during FDC-Windhover’s Pharmaceutical Strategic Alliances Conference about the potential impact of a price negotiation model in the US.:

“Eliminating the non-interference clause in the Medicare program could have a significant impact….When the government starts to enter into direct negotiation and they pay for the majority of the drug in the county, inevitably the political pressure and budget pressure will end up damaging the ability of the industry to continue to innovate. So I do have a concern, and I’m not sure that the whole of the biotech industry is perceiving that danger. But we, the big large companies that have experience in working in those countries where indeed there are price controls, I think we have a better perception of what that will mean. And in my opinion it might hurt the willingness of investors to continue to put money into research.”

Erbitux, like most infused biologics, is paid for under the Medicare Part B program. Now there are plenty of opportunities for the government to meddle then—but it isn’t on top of the agenda at the moment.

Interestingly, a lot of Big Pharma companies are modeling the impact of government price negotiation under Part D as about a 3%-4% hit in the US. Lilly’s US business is about $10 billion. How nice to have about $400 million in new revenue coming from a product that isn’t touched by price negotiation…

For some background reading on how price negotiation may translate into real price pressure, start here. For more on how companies approach the two different payor models in the US, start here.