Tuesday, December 08, 2009

2009 Big Pharma DOTY Nominee: Dollars for Donuts

It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger.
This is a no-brainer. The biggest deal for Big Pharma hands down in 2009 is the $80 billion deal struck by the brand name trade association PhRMA as its contribution to health care reform.

We call it "Dollars for Donuts" because a key element of the deal is the industry's commitment to offer a 50% discount on drugs purchased by Medicare beneficiaries in the Part D coverage gap, a.k.a. the "donut hole" in the prescription drug benefit for seniors and the disabled.

Okay, okay, its not a traditional biz dev opportunity, we admit. But if Big Pharma dealmaking is about anything, it is about paying up front for access to new commercial opportunities downstream. And this deal fits that model perfectly.

We've covered the deal itself extensively in The RPM Report, but in a nutshell, PhRMA agreed to the donut hole discount, to pay bigger rebates on drugs purchased by the Medicaid program for low-income families, to accept a pathway for follow-on biologics and to an excise tax on prescription drugs dispensed in the US. That is the $80 billion.

Of course, like any good deal, that top number includes a lot of biobucks. The $80 billion is tied to how the Congressional Budget Office scores the legislation, and includes some creative accounting. So the donut hole discount is scored as saving money for the government (even though it directly saves money for Part D beneficiaries). And PhRMA gets credit for the savings from follow-on biologics, even as its members salivate over using the new process to jump start their investments in biologics.

This also counts as an options-based deal, since Congress will have the final say on exactly what ends up in the legislation--and we figure that $80 billion price tag will go up to at least $100 billion when all is said and done. But, despite what you read, this really is part of the deal. PhRMA may hope to hold the line at $80 billion, but knew darn well that there would be pressure to add more. And, assuming the extra money comes in the form of rebates on Part D to help close the donut hole altogether, it only means that industry will end up paying more to get more.

And what did PhRMA buy? A bigger market in the US.

First off, filling in the donut hole is good for business. Generic drug dispensing in Medicare Part D is running above 70%, and manufacturers at least are convinced that they are losing business because of the real or perceived impact of the coverage gap. Obviously PhRMA would prefer not to pay rebates or offer deep discounts, but eliminating that gap is worth paying for. That's why we're convinced that dollars-for-donuts will happen even if health care reform itself collapses.

But for now at least health care reform looks inevitable. And health care reform means more people will have insurance (like 30 million more) and those with insurance will have better insurance (no more lifetime caps, more predictable copays, better coverage for products like vaccines). And companies don't need much of a boost from that coverage to recoup their investment in support: by our math, it will only take four new monthly prescriptions a year per newly insured life to make up the entire price. (Read our analysis here: it's hot off the presses.)

But like any classic drug development deal, the payoff is a few years away. The new coverage doesn't kick in until 2014--just when Big Pharma will be coming out the other side of the patent cliff. So think of this like the Pfizer/Wyeth deal: a big upfront investment that helps to position Pfizer for life after Lipitor. Only this investment will help position the entire industry for life after reform.

So Dollars for Donuts is a very big deal--and a very good one to boot.


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Chris Morrison said...

people! try to stay on the topic of the post, OK? for general feedback you can email me or blog [at] windhover [dot] com.