Smoke Signals Look Good for Biopharma

The smokeless backrooms of politics in Washington 2009 are looking like a good environment for the biopharma industry -- better even than the deals that emerged from the smoke-filled rooms of lore.

This could very easily have been a year of multiple political threats to the industry with the drug business portrayed as a scapegoat for out-of-control health costs, but it is emerging instead as a year offering reasonable compromises and proposals to protect pharma pricing and give the industry access to significant new markets.

The first signs that the biopharma sector may have crawled out of the bulls-eye as a target for health reform are (1) the Obama Administration's decision to turn back to the tobacco industry as the number one health villain and (2) relatively small financial contributions expected from the biopharma sector to pay for health care reform.

As we have written recently, tobacco regulation is next on Capitol Hill agenda for the Democrats. Getting rid of cigarette smoke has become a core issue for the new administration despite the fires incinerating the other parts of the economy. The campaign against smoking is more accurately a "Corr" issue for the administration, supported by the HHS Deputy Secretary-designate, William Corr, a long-time ally of House Energy & Commerce Chairman Henry Waxman (D-CA) and long-time critic of the tobacco industry.

No matter how the anti-smoking campaign found its way into the packed Obama agenda, the fact that it is there means that pharma immediately becomes a lesser evil on the list of industries affecting US health care.

Pharma is well aware of the smoke-screen and regulatory/political cover that the tobacco industry presents. Even before the 2009 legislative season was underway, Pharmaceutical Research & Manufacturers of America President Billy Tauzin was expressing full support for the government to go aggressively after tobacco regulation.

"Any work" the government could do "to prevent people from smoking is good work," Tauzin declared, saying "tobacco is not our friend." It is a point not lost on a political pro like former House Energy & Commerce Chairman Tauzin that pharma experienced its best years of growth and new product introductions while the Food & Drug Administration was absorbed in its fight against the tobacco companies in the late 1990's.

The anti-smoking position allows Tauzin to talk positively about health reform. He took his prevention rhetoric to the White House Summit where he talked about the importance of healthier lifestyles. He claimed that 67 percent of cancers could be avoided if people did not smoke, ate properly and exercised.

Tobacco regulation can be a distraction for FDA's senior management and take up a lot of the agency's resources, but it creates a less pressured atmosphere for drug regulation.

The second sign of a developing positive atmosphere for biopharma is the relatively small $29 billion that the industry will be expected to contribute to the $634 billion down payment fund for Obama's health care reform initiative. That is the amount the federal government will collect from increased Medicaid rebates. Pharma will actually face additional payments to the states of about $12 billion more (for a total of $41 billion). The full negative impact on the industry including cost reductions in the private market is estimated at $70 billion over ten years.

Compare that to $117 billion that the health insurers are being asked to give up from reductions to Medicare Advantage payment rates and you can see why the health insurers are crying "foul" and complaining that the pain of health reform is falling disproportionately on them. It also becomes clearer why biopharma leaders are accepting the proposed payments more stoically: they are being asked for less and have a lot to gain if insurance coverage can be more widely extended to the currently uninsured and under-insured -- a potentially large new market for pharmaceuticals.

The fact that cuts to pharma revenues are within the tolerable range combines with the industry's position against smoking to create a good climate for working with the White House, HHS and Congress on two key industry objectives: (1) a well-crafted follow-on biologics bill and (2) control over patient co-pay levels for drugs and biologics.

By supporting Corr's anti-smoking effort, pharma improves it relationship with a key figure for the FOBs bill. Corr was the staff architect for Waxman behind the original Waxman-Hatch generics bill 25 years ago. He is likely to be the driving force behind getting a follow-on deal done this year. He is no friend of pharma; but having the smoking issue as background is very convenient for the industry.

Legislative control over co-pays is getting less public attention but could be the big money issue for pharma in the current legislative season -- especially as specialty drugs and biologics become more important to the industry.

Both BIO and PhRMA have identified efforts to restrict the amount of out-of-pocket expenditures that patients will have to make for drugs as important to their policy agendas. This is an access issue for patients that offers an indirect price protection to the industry. If pharma can avoid high co-pays, that will permit them more flexibility for high prices.

The objective is to make sure that health insurers and Part D Medicare plans cannot set co-pay levels so high as to act as a de facto barrier against patient use of the products. The drug industry senses that controls on co-pays are politically viable in a Democratically-controlled Washington because they can be presented as a patient/beneficiary access issue.

The Democratic victories did not seem like good news for pharma in November and it still could turn out badly, but things have started out pretty well.