Health Care Reform: New Fees are New Factor For Partnerships

When GlaxoSmithKline and Pfizer established the HIV-focused joint venture Viiv in April 2009, it sent a bold statement about the commitment of the new partners to new business models and their commitment to creative business development activities. (See “The GSK/Pfizer HIV Venture: Another Sign of Change?” IN VIVO, April 2009.)

Heck, we liked it so much we nominated it for Deal of the Year.

Now that health care reform has been signed into law, it looks even smarter. Viiv turns out to be a brilliantly timed strategy to blunt some of the impact of the up-front costs of reform for biopharma companies.

Thanks to a new formula for calculating Medicaid rebates and the interaction of that formula on prices paid by State AIDS Drug Assistance Programs that cover HIV therapies, that class of medicine is taking a pretty big hit from reform in 2010. (See “Taking Lumps from Health Care Reform," just published on TheRPMReport.com.)

The impact was felt most acutely by Gilead Sciences, whose product line is very highly concentrated in HIV therapy. The company estimates the impact in 2010 at $200 million, or about 5.7% of its US pharmaceutical sales in 2009.

That ranks as, proportionally, the biggest reported impact from health care reform from any of the publically traded pharmaceutical companies tracked by The RPM Report.

And, naturally, it drew a lot of interest from investors during Gilead’s first quarter conference call April 21. Investors were particularly concerned about the ramp up in the impact on the company through the year; Gilead said the new Medicaid rebate rules reduced sales by $29 million in the first quarter, suggesting a significantly larger liability in the coming quarters.

The reason, Gilead explained, is that the pricing mechanism for drugs purchased by ADAPs lags behind the Medicaid rebate, so the bulk of the impact comes in the last quarter or two of the year.

And the sheer size of the adjustment surprised investors, given that Gilead already provides substantial price concessions to the ADAPs. “In early parts of the healthcare reform discussion, from a distance, we wondered like a lot of companies whether additional rebates would be applied to the payers where we have discounts already in place that are greater than the current 15% now moving to the 23% that have been mandated,” EVP Commercial Operations Kevin Young explained. “It is quite clear from the legislation that irrespective of the discount that you have in place to these federal players, an additional 8% has to be added and I think that’s the clarity that’s now come in the legislation.”

For Pfizer and GSK, on the other hand, the impact on the new Medicaid rebate on antivirals was close to a non-issue. Viiv is about half as large as Gilead in the HIV market, and so might be expected to face an impact of approximately $100 million from reform.

But for Pfizer, which only records income from the joint venture, the impact didn’t merit a mention. GSK records the revenue, but could describe it almost offhandedly in the context of an overall discussion of the manageable size of the reform. CEO Andrew Witty noted in response to a question on the relative exposure of the company to Medicaid and Medicare that “Viiv is a little more exposed than the average.”

Still, the new company did post a sales decline of 7% for the quarter—a result that might have been expected to prompt some comment if it were a $2 billion-plus brand reported by GSK, rather than an innovative HIV therapy joint venture.

That is a nice early return from the joint venture, but it does underscore the likelihood that features of health care reform will start to have an impact on business development.

Take, for instance, Bristol-Myers Squibb’s discussion of the importance of its relationship with Sanofi Aventis for Plavix in considering how the company will be affected in 2011, when a new 50% Part D discount program and market share fee take effect.

“Remember that the sales impact would be relatively higher than earnings due to the accounting treatment for Plavix, where we record 100% of sales, but share profits with Sanofi,” CFO Charles Bancroft noted.

For Viiv, that will not be as challenging an issue. Medicare Part D does cover HIV medicines, but the vast majority of AIDS patients in Medicare are dual eligibles who will not receive the donut hole discount. The market share fee is another matter, however; any sales through Medicare or Medicaid (but not the ADAP sales) will count towards the fee. The rules have yet to be determined, but as the partner recording sales, GSK is likely to be the entity that records the impact of the fee as well.

As the rules of the new Part D program and the calculation of the market share fee are fleshed out, business development executives should pay attention. Treatment of those items is likely to be an important consideration in future partnership agreements.