Deals Of The Week: Whose Mind Is On Deals Anyway?

To rehash The Event of this week: the Supreme Court ruled 5-to-4 to uphold the constitutionality of the Patient Protection and Affordable Care Act June 28, including the mandate requiring individuals to have health insurance.

The decision seems favorable to the pharmaceutical industry, and may have surprised a few who already were scheming of ways to get back the billions spent on that excise tax to the federal government in 2011. We look forward to sorting out the implications for the pharmaceutical and biotech industries in the weeks and months ahead. Our sister publication, “The Pink Sheet,” DAILY did an initial review here, making the point that many changes already were set in motion by the passage of the act itself. And we'll have much more to say in the days and weeks ahead.

The pharma industry stands to benefit from the expected increase in insured patients. The Centers for Medicare & Medicaid Services project about 22 million newly insured patients, and that spending on prescription drugs by public and private payers will increase 8.8% in 2014 over 2013 – the year major coverage expansions under the ACA are scheduled to begin – compared to 4.1% growth if it had not passed.

Still, there’s no guarantee of the volume trends newly insured patients will deliver when it comes to pharmaceuticals. “The actual volume upside may be lower and more modest then some expect,” noted Barclays Capital analyst Anthony Butler in a same-day note. A significant portion of the uninsured are believed to be young people who may not use health care services or pharmaceuticals. “The addition of these segments into the coverage pool through the individual mandate may be a smaller net positive from the volume perspective for the pharma sector than some have expected,” Butler said.

There will be plenty of uncertainties as we navigate through health care reform, but for now isn’t it about time to celebrate the federal government’s executive, legislative and judicial branches in action, by heading to the beach for July 4? – Jessica Merrill

Merck Serono/Compugen – The corporate venture arm of Germany’s Merck Serono is collaborating with Compugen to establish a new company, Neviah Genomics, to discover, develop and market novel biomarkers for drug toxicity, with the aim of bringing a product to market within a few years. The Neviah collaboration, announced June 25, is the first investment under Merck Serono Ventures’ Israel Bioincubator program, established by Merck Serono in 2011 with initial funding of €10 million over seven years. Compugen, a Tel Aviv-based biotech with a pipeline of preclinical protein therapeutics and monoclonal antibodies, will bring its predictive discovery technologies to the partnership. The deal is structured so both Merck Serono Ventures and Compugen will be shareholders in Neviah, which will have its own board that will determine how any product profits will be distributed. Compugen also will earn royalties from product sales. Further financial details were not disclosed, including the amount of Merck Serono’s initial investment. The companies have worked together as part of a 2008 partnership to co-develop CGEN855, a GCPR peptide investigated in inflammatory disease. – Joseph Haas

Lilly/PrimeraDx – Massachusetts-based PrimeraDx has entered into a multi-year collaboration with Eli Lilly to develop companion diagnostics for several unspecified clinical candidates, initially focusing on oncology. Neither terms nor timelines were disclosed. PrimeraDx, will develop multiplexed assays using its proprietary ICEPlex system, which is capable of simultaneous detection and quantification of numerous target types such as mRNA, miRNA, SNPs and DNA. Founded in 2004 and formerly known as Primera Biosystems, Inc., the company sells instrumentation, software, assays and consumables. Primary customers are clinical labs at large academic research centers and reference laboratories and biopharmaceutical companies. PrimeraDx is backed by venture investors including Abingworth, InterWest, CHL Medical, MPM Capital, Burrill & Co., and the Malaysian Technology Development Corporation. It last raised a $20 million series C in September 2009. – Mike Goodman

Celgene/Inhibrx – Drug-discovery firm Inhibrx has signed a notable partner, announcing June 27 that Celgene has licensed a preclinical antibody program. The target of the program was not disclosed. The potential value of the deal is $500 million, including upfront, clinical and regulatory milestones. Inhibrx, based in La Jolla, Calif., is focused on the discovery and development of novel drugs for cancer and inflammatory disease. – J.M.

Merck/AstraZeneca – Merck and AstraZeneca announced an agreement to extend their longstanding partnership June 27 after coming to terms that could benefit both parties. The original partnership dates back to 1982 when Sweden’s Astra AB tapped Merck to market its proton pump inhibitor drugs in the US. Nexium (esomeprazole), which is expected to post dwindling sales once losing patent protection in 2014, and Prilosec (omeprazole), which is now sold as an over-the-counter medication, remain the only drugs still under the agreement. AstraZeneca now will have the option to buy the remainder of Merck’s stake in the drugs in the first quarter of 2014 for $347 million plus an amount equal to 10 times Merck's average 1% annual profit allocation in the partnership, which AstraZeneca estimates to be about $80 million. The price paid by AstraZeneca also could include the net present value of up to 5% of future U.S. sales of the painkiller Vimovo (naproxen/esomeprazole). While the extension of the deal will have no immediate effect on AstraZeneca’s earnings, it will help Merck deal with the patent expiration of the blockbuster allergy drug Singulair (monteklast) by adding $200 million in revenues to the 2012 top line. – Lisa LaMotta

Biogen Idec/Isis – Antisense drug-discovery platform operator Isis Pharmaceuticals has partnered prolifically over the years. Its latest deal with Biogen Idec is the second collaboration between the two companies, an arrangement to develop and commercialize a treatment for myotonic dystrophy type 1. The disorder, also known as Steinert disease, is a form of muscular dystrophy that afflicts adults. Biogen Idec will pay $12 million up front to enter the collaboration, but could pay much more over time if it licenses the drug at the end of Phase II. The deal includes $59 million in milestone payments prior to licensing, as well as up to $200 million for a licensing fee and and further clinical milestones. The companies will attempt to develop a drug that repairs a repeating defect in the coding of the dystrophia myotonia-protein kinase gene that results in abnormally long strands of RNA, leading to buildup in cells. Isis and Biogen already have an alliance in spinal muscular atrophy, revealed in January. – Paul Bonanos

Sanofi/Oxford – The UK's Oxford BioMedica announced June 29 that it has earned a $3 million option exercise payment from Sanofi, which has decided to acquire worldwide license to a pair of Phase I/II gene-based treatments discovered by Oxford. Under terms of an agreement signed in 2009, Sanofi has acquired rights to develop, manufacture and commercialize StarGen for Stargardt disease and UshStat for Usher syndrome type 1B. Oxford discovered and developed both candidates using its proprietary LentiVector platform technology. – Joseph Haas

Photo credit: Wikimedia Commons

The Optics of Health Care Reform

Going over a cliff is one thing. Seeing over it should be much easier.

But, at least for now, Wall Street isn’t ready to take in the view. How else to explain the drumbeat of headlines about the negative impact of health care reform on pharma during the 2011 year-end conference call season?

“No one is really looking beyond the cliff today,” Sanofi Aventis CEO Chris Viehbacher declared during his company’s year-end earnings call at the start of February. “I haven't sensed anybody in the investment community really trying to figure out who's going to win in 2014 and '15. That's just not there.”

Viehbacher made those comments in explaining why he intends to wait until mid-year to offer a longer term outlook, until the company is more completely over its own patent cliff. In Sanofi’s case, that means a full-year of Lovenox generics, resolution of the uncertain status of generic Taxotere, and the end of the line for Plavix. (For more on the company’s overall performance, read "The Pink Sheet" DAILY story, here.)

“I would suspect as we get through a bigger chunk of the patent cliff, and we get closer and closer to 2012 and 2013, I think we're going to have more of a receptive audience to that, and that's why I think we want to do it then. I just think we'd be shouting in the wind a little bit if we tried to do it today.”

It’s not that the patent cliff is unexpected or dramatically worse than predicted. “Two years ago I stood up in front of a lot of you and said 20%-25% of the sales of this company are going to disappear between now and 2013 because of generic competition,” Viehbacher noted.

Rather, there is an overall negative sentiment, he believes.

“This is an industry that tends to focus on the negative. People start worrying about patent expires the day after you launch a new product. If you're any good in R&D, they're not going to give you any value for it in your portfolio. And if you're not any good at it they're not going to like you either.”

That negativity may be overstated, but there is no denying that investors have taken a decidedly glass-half-empty approach when it comes to the impact of health care reform on biopharma companies.

To be fair, the up-front costs of the law are significant—and a real crimp on the profitability of an already challenged sector. (See “Taking Lumps From Health Care Reform,” The RPM Report, June 2010.)

The health care reform implementation also includes a number of elements that further accentuate the negative. It isn’t just the size of the impact from bigger rebates, the new “market share” fee and the Medicare Part D donut hole discount. It's what they do to the P&L statement.

The health care reform impact, essentially, hits the trifecta for what analysts don’t want to see in a quarterly report:

(1) Lower gross margins. The increased Medicaid rebate and the donut hole discount represent an off-the-top reduction in revenues, with no associated reduction in costs. The same number of units are sold, just at lower prices. That makes for reduced gross margins across the board.

(2) Higher SG&A expenses. The market share fee (which begins in 2011) is accounted for as a sales cost and recorded on the expense line. At a time when manufacturers across the board are trying to show their seriousness about cost-cutting, the fee offsets some of those savings. While that is no different in profit terms from an off-the-top-line revenue adjustment, it further clouds the picture for companies trying to show that they are delivering on past promises to downsize.

(3) Higher taxes. The market share fee is (by law) not tax deductible. That means most pharma companies will report an effective tax rate that is at least a percentage point higher than it was in 2010. Again, that doesn’t change the magnitude of the hit, but it makes yet another closely watched variable look worse instead of better. Viehbacher observed wryly that another industry headwind—European price cuts—at least include an associated reduction in tax liabilities. (On the other hand, with corporate tax reform on the table in Washington, this isn't such a bad time for companies to report higher effective tax rates.)

Lower gross margins. Higher expenses. A higher effective tax rate. You can see why Wall Street isn’t loving health care reform right now.

Still, the impact of reform pales in comparison to the impact of the patent cliff. And, unlike a cliff, there is an upside to reform. All those discounts, rebates and fees helped buy an innovator friendly intellectual property system for biologics and biosimilars, improvements in insurance coverage (especially for high drug cost seniors who fall into Medicare’s “donut hole”), and, eventually, a much larger insured population to buy pharmaceuticals.

It is just that that all that happens on the other side of the cliff.

When investors are ready to look that far forward they may be in for a surprise. At least for some companies, what looked like a cliff may turn out to be a valley, with real growth prospects on the other side of the patent expiry period.

image from flickr user andrea trassati used under a creative commons license

The Health Policy Divide: East Coast vs. West Coast (Part 1: The Reform Law)

The annual JP Morgan health care conference drew thousands of health care industry executives and investors to San Francisco this week, offering a nice chance to contrast the views of health care policy inside the Beltway and (far) outside.

We will start with today’s headline from Politico: Investors see health reform's potential. “As Republicans push forward on repealing health reform, planning the law’s demise, a different conversation is happening among thousands of health care investors gathered in San Francisco for this week’s J.P Morgan Health Care Conference: how to capitalize on health reform’s new business opportunities,” writes Sarah Kliff.

Indeed, presentations by insurers, PBMs, retail pharmacy and other service companies all touched on the potential benefits—yes, benefits—of the reform law on their prospects for growth. Now, that doesn’t mean investors are thrilled at the idea that insurers’ profit margins will (in effect) be regulated by the feds or that Medicare Advantage is facing steep cuts. But the outlook is decidedly optimistic.

Of course, that was not supposed to be the Politico headline today. But for the horrible events in Tuscon this weekend, the big health reform news would have been coming out of DC, where the House vote on repealing the law was supposed to happen January 12. That vote has been delayed, but not for good.

Indeed, as former Sen. Judd Gregg told the JP Morgan conference during a January 12 keynote, the vote to repeal the law will likely be the first of several staged votes to keep the anti-reform pressure on. Gregg expects the GOP to follow-up the first vote with a series of more targeted votes to repeal items like the individual mandate, the MA cuts, and so on, with each vote intended to dramatize the message that it will take a GOP sweep in 2012 to get rid of the law for good.

Gregg, incidentally, worries that the staged votes might “poison the well” on opportunities to do more “substantive legislation” in health care, focused squarely on what he sees as the overarching priority for the new Congress: deficit reduction. He believes there can and will be progress on areas like tax reform, social security reform, and cuts in discretionary spending—but argues that deficits can’t be avoided without more meaningful steps to address health care costs.

Still, the repeal votes will come soon enough. But it will be interesting to see whether the message from San Francisco this week starts to change the politics of health care reform in DC.

2010 Exit/Financing DOTY Nominee: Castlight

It's time for the IN VIVO Blog's Third Annual Deal of the Year! competition. This year we're presenting awards in three categories to highlight the most interesting and creative deal making solutions of the year. The categories are: M&A Deal of the Year, Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (four or five 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™.

Castlight's $60 million June Series C wasn't the biggest venture round of 2010. (That honor belongs to Archimedes, which pulled in a stunning $100 million from new and existing investors in March). In fact according to Elsevier's magic eight ball (also known as Strategic Transactions), Castlight's financing -- certainly a large sum -- wasn't even enough to merit a top five ranking, inched out by the raises of European companies Immatics and AiCuris, and on the U.S. side by Relypsa, Cerenis, and Pearl Therapeutics. Why, then, does it merit your vote for IN VIVO's DOTY in the Exit/Financing class?

Call it a vote for the new world order.

You probably know that earlier this year Congress passed a small piece of legislation called the Patient Protection and Affordable Care Act. We at IVB thought about nominating health care reform for DOTY, but after a couple of years of running this competition, we knew better. HCR is too big, too vast, too encompassing a topic to capture the voting public's imagination. You, dear reader, want something more tangible that you can point to and say yes, here's a deal that embodies a larger trend at work.

And if ever a financing represents the new business and market opportunities now in play because of health care reform, surely it's the Castlight deal. Castlight, founded in 2008 as Ventana Health Services, aims to solve one of the thornier wickets of health care delivery: the issue of pricing transparency for medical services.

Downloadable smart phone apps such as TheFind can tell you whether Amazon or WalMart or Best Buy has the best price on the fancy new GPS system you want to buy your girl friend with the poor sense of direction. But it can't tell you where to get the best price on a colonoscopy or a dental cleaning or an MRI. And with the advent of high deductible health care plans and an ever larger percentage of costs being passed on to the consumer (er, patient), that's valuable information to have.

Castlight aims to illuminate this murky arena, creating an algorithm that allows users to search a database of providers to determine out-of-pocket costs for various procedures. Its business model is simple: the company aims to sign contracts on a monthly per-employee fee with businesses that self-insure or are encouraging their own employees to make smarter--i.e. more cost-conscious--health care choices. But it's easy to imagine the model could evolve over time to an open access system where pricing is based on a per-use fee and anyone can sign up to use it. To date, Castlight already has one customer: the grocery store giant, Safeway, which employs about 200,000 workers.

Castlight has plenty of competition too. Small start-ups such as Change: Healthcare, along with insurers such as Aetna, or even information service providers like Thomsen-Reuters, are getting into this game. Though Castlight is small compared to some of those established players, it boasts an impressive roster of founders and backers, which include not just traditional venture backers such as Maverick Capital, Oak Investment Parnters, and Venrock, but also the Wellcome Trust and the Cleveland Clinic.

It certainly helps that one of Castlight's founders, CEO Giovanni Colella, is no neophyte in the health care services arena. He sold his previous firm, Relay Health, which enables doctors to communicate with patients via secure web-based technology, to McKesson in 2006. An added bonus is surely the involvement of investor Alan Garber, a professor of medicine at Stanford who also happens to run that university's Center for Health Policy.

Analysts have long said the only way to rein in skyrocketing health care costs is to make patients understand what they are paying for and why. But for most of us health care is heavily subsidized by our employer. With some one else footing most of the bill, there ain't a huge incentive to ask the neurologist treating your headaches if an expensive MRI is must-have data that will change his or her treatment plan for you. If it's not, knowing the costs of the MRI versus a 10-pill prescription for generic sumatriptan become valuable data points that help guide decision making--especially if you have to pay a portion of the tab.

It's perhaps surprising that with the passage of health care reform, VCs aren't talking up the opportunities in actually delivery of care with greater enthusiasm. Conventional wisdom is such technology plays are risky--unlike drugs or devices, these tools can be commoditized and don't have the same intellectual property protections that limit the playing field.

But the IP protection enjoyed by drugs and devices is a red herring. Health care reform means comparative effectiveness will be the rule not the exception and that means biopharma and medtech companies face increasing competition not less as payers, physicians, and patients evaluate the costs and benefits of various therapeutic options. Already companies have pivoted, talking about differentiation and unmet need as being important drivers of innovation.

By that definition, doesn't the information Castlight provides represent innovation with a capital "I"?

And that's why Castlight deserves your vote for the exit/financing deal of the year. It's a vote for innovation -- maybe a different kind of innovation than you are used to --but innovation nonetheless.

Heceta Head Lighthouse courtesy of flickrer dezz, courtesy of a creative commons license.

Merck CEO-Designate Frazier and the Importance of Washington to Pharma

The announcement that Merck's global pharmaceutical head Ken Frazier will ascend to the CEO slot in January is hardly a shocker: he was viewed as the front-runner in a one-man race to succeed Richard Clark next year.

But this stable, planned succession is still an important marker about the climate for Big Pharma. Much will be made of Frazier background as chief counsel at Merck (he will join Jeff Kindler at Pfizer as the Lawyer-in-Chief CEO model), but we wanted to highlight Frazier's hands-on role in shaping Merck's public policy efforts throughout his career.

While Clark personally represented Merck in some of the critical events involving the health care reform debate, Frazier was very much on board with the plan -- and gave a thoughtful and compelling explanation for why Merck decided to take the risk of engaging in the reform debate during a keynote address during Elsevier Business Intelligence's FDA/CMS Summit for Biopharma Executives in December 2008.

We reprinted the full address in The RPM Report, here. But we thought Frazier's analysis of the risk of inaction was particularly compelling, and may be newly relevant as he takes over the top spot at Merck heading into the uncertain waters of a newly Republican Congress in 2011. So we've excerpted that section below.

Oh, and by the way, today is the last day to qualify for the "early bird" discount for this year's FDA/CMS Summit. In all modesty, we can't promise you will see tomorrow's CEOs today if you come to the Summit, but, as Frazier's address shows, you just might. What we can promise is that what happens in Washington continues to matter to the Big Pharma business, so you won't want to miss out on the chance to deepen your understanding of the rapidly changing public policy climate. (Click here for more on the Summit.)

Here is what Frazier said two years ago about the risk of inaction, if Merck chose not to support reform:

We understand clearly that we are entering this debate at a time when the pharmaceutical industry’s standing is low and we face challenges from many directions.

For years now, politicians, the media, and industry critics have disparaged our prices, our allegedly excessive profits, and our purportedly wasteful marketing expenditures. Most unfortunately, we have also seen critics challenge the integrity of the scientific research that is at the core of our value to patients and society.

These challenges have led to legislative proposals, here and around the world that could have serious negative impacts on our industry and on our ability to continue to innovate in the interests of patient health. In my new role overseeing the marketing of Merck medicines and vaccines around the world, I’ve seen first-hand the negative impact that some of these ideas have had.

Certainly, major health care reform action in the United States could provide a vehicle for the consideration of several harmful proposals, such as drug importation, price negotiation in Medicare Part D, and changes to the patent protection that is a necessary prerequisite to pharmaceutical innovation.

We’re also seeing these proposals at a time when Merck and other companies are facing unprecedented business challenges. The rapid and appropriate uptake of generic medicines, challenges to our patents, and setbacks in our pipelines are translating into layoffs as well as difficult research investment choices.

This is arguably the worst time for punitive government actions of the type some are proposing.

While the risks of action to us are clear, so are the risks of inaction. First and foremost, people without health insurance coverage have poorer health and, of course, reduced access to our medicines and vaccines. Those without coverage live with a day-to-day fear that most of us in this room can only imagine. It is a fear that... they are only one illness or one accident away from financial ruin or permanent disability.

If that were not enough in itself, as an industry we need to understand that until the nation reforms our health care system, including providing affordable access to quality care, the issues of access to medicines and the price of medicines will remain flashpoints in political and economic discourse. Further, more time without action will only embolden those who advocate anti-competitive approaches such as universal government delivered health care.

French Doctors' Deal Provokes Fuss, so It Must Be Working...

Funny what happens at Halloween. Yours truly was looking up the latest on the French doctors' pay-for-performance scheme, the CAPI (Contrat d'Amelioration des Pratiques Individuelles) and she comes across the Centre for Advanced Paranormal Investigation. Rather spookily Halloweenic.

In the real, mostly pumpkin-free world of biopharma, CAPI represents France's first step towards Anglo-Saxon capitalism: rewarding docs with good old cash when they hit their performance targets--targets aimed at lowering drug costs, boosting generics and improving outcomes. The scheme was introduced last year as part of a host of changes aimed at cutting the mega-deficit. (Read about other more recent measures here.)

As one has come to expect of our French neighbours, there was outrage when CAPI came along. Outrage from physicians' councils ("...contrary to ethical guidelines!"), and from the drug industry association ("...this will be a brake on innovation!").

A year on, however, the scheme is undoubtedly working. (In tough times, money speaks louder than principles.) After a strong start in mid-2009, it had pulled in almost 15,000 doctors by September 2010, according to Le Quotidien du Medecin.

And most of those are apparently doing what the scheme--which is voluntary, by the way--wants them to do: prescribe more generics, do more screenings and vaccinations. Two thirds of CAPI doctors have met their one-year objectives and received, on average, €3,101--or their "thirteenth month"'s salary, as the assurance maladie describes it.

But there's always a reason to complain, it seems. This time, the anger's with the one third of CAPI-affiliated docs (about 1700) that didn't get their money. It's a scam, say some. Others claim the measures on which docs are assessed are inappropriate and unreliable. And besides, they ask, how can the same body that sets the objectives for the scheme be the one to measure whether those objectives have been met?

We'll spare you most of the details (you can read about some of them, in French, here). One complaint that seems fair, though, is that the authorities, in setting the scheme's objectives (in terms of numbers of diabetics remaining compliant, number of mammograms carried out, for example) didn't control for the prevalence of these particular diseases in particular areas. So for some doctors it might be much easier to clock up the figures than for others.

But all this misses the more important point that CAPI is working. It's making doctors prescribe more generics (generic prescription targets are set at 90% for antibiotics, at least 80% for PPIs and 70% for statins) and it's making them more aware of long-term outcomes. So assuming that happy doctors with a bonus continue to outweigh unhappy ones without (and encourage the unhappy ones to try harder rather than to have a tantrum and pack it all in), CAPI--the non-paranormal version--may yet prove an important component of France's ongoing attempts to rein in the deficit. Spooky.

image from flickr user ...antonio... used under a creative commons license.

Novartis Gilenya Launch: The Importance of Health Care Reform

Since literally the day the Pharmaceutical Research & Manufacturers of America reached an agreement to contribute $80 billion-ish to health care reform, we have been calling the "dollars for donuts" deal a real coup for industry. We haven't let anything deter us. Not published estimates that the true cost is well north of $80 billion over 10 years, nor a series of big charges announced during quarterly earnings reports after the reform law was enacted.

We are ready to start feeling vindicated.

Exhibit A: Novartis' new oral MS therapy Gilenya, which, Bloomberg reports, is being launched with one of the most ambitious patient copay support programs yet attempted in the industry. In our view, the strategy Novartis is pursuing perfectly illustrates the advantages of the PhRMA deal.

How so? Because it shows off perfectly the two key advantages of the reform deal: pharmaceutical companies maintain control of their launch prices while simultaneously consumers are sheltered from attempts to impose price sensitivity on them.

Those twin advantages, in our view, more than make up for the deeper rebates, new Medicare discounts, and market share fee imposed on industry as part of the deal.

According to the article, Gilenya will be priced at $48,000 per year (or about $4,000 per month). That is a hefty premium to the injectable beta interferons widely used for MS, more in line with the pricing of Biogen Idec's Tysabri, which is limited to patients sick enough to risk PML associated with the therapy.

Gilenya may cost more than Avonex, but it won't feel that way to patients: Novartis will be covering copays for all Gilenya users (except in states where that is not permitted), up to $800 per month.

Suppose every commercial managed care plan decides to slap an $800 (20%) copay on the brand? That will reduce Novartis' net price to something more in line with Avonex--while avoiding any meaningful cost-sharing on behalf of the patient that might provide an incentive to chose the older therapy.

That's pretty nifty, but what does it have to do with health care reform?

Well, at the risk of stating the obvious, Novartis can set its own price for Gilenya because there are no federal price setting mechanisms in the US. That easily could have been part of the reform law; after all, a breakthrough drug pricing board was one key element of the Clinton health care reform proposal two decades ago. So Novartis doesn't need to tie its price to existing therapies, benchmark to overseas prices, negotiate on QALYs or anything else.

True, the health care reform law ratchets up the one price control that already exists in the US (Medicaid rebates). But if manufacturers control launch prices, they can build in the deeper mandatory discounts to that program. And Medicaid remains completely free of consumer price sensitivity, since there are only de minimis copays for drugs.

In addition, health care reform limits the ability of plans to respond to Novartis' attempt to protect patients from high copays. One response by payors might be to set an extremely high copay to absorb the company's $800 per month and still create price sensitivity among consumers. Not gonna happen. Thanks to health care reform, there are limits on cost-sharing that health plans can impose.

Last but not least, there is the validation of Novartis' copay support plan for the centerpiece of the PhRMA deal, a 50% discount on brands in the Medicare Part D "donut hole." Copay support programs are prohibited in Medicare and other federal programs (except via bona fide, third-party charities). So Novartis' program isn't available under Part D.

Instead, the company will be required by law to offer a 50% discount for beneficiaries exposed to the donut hole.

Low-income Medicare beneficiaries already have essentially no copay under Part D, and the discount doesn't apply to them. But those who do face the Part D cost sharing will be exposed to much less out of pocket spending, thanks to the discount program and the already generous catastrophic coverage of Part D.

At $4,000 per month, Gilenya patients will blow through the donut hole quickly, but the discount program will save them about $1,800 while they do. The net patient cost will be on the order of $5,000 for a year's therapy--not cheap, but not unbearable for a highly effective oral MS drug.

And, given that Novartis is offering commercial patients $9,600 per year in copay support, it is hard to argue that the 50% donut hole discount is a hardship to the company. In fact, we are willing to bet that Novartis' only regret about that aspect of the deal is that the company can't give a 100% discount in the donut hole.

Of course, as health care reform phases in, the taxpayers will start to kick in additional coverage in the donut hole.

We said it before and we will say it again: there is a lot for Big Pharma to love in health care reform.

What’s In A Name? The Semantics of Comparative Effectiveness

Somewhere, Senate Finance Committee Chairman Max Baucus (D-Mt.) is smiling.

Baucus may be making inroads on his effort to relabel comparative effectiveness research as something a bit more patient – and industry – friendly.

As congressional debate on creating a public/private entity to conduct such research was heating up, Baucus decided that the term "comparative effectiveness research" was becoming too much of a lightning rod for controversy and changed the term in health care reform legislation to "patient-centered outcomes research."

CER, it seems, had become too linked to issues such as whether research data would limit physician's latitude for prescribing and whether costs might play a determining role.

HHS apparently jumped on the terminology bandwagon with its Sept. 1 announcement of grants to build up research capabilities in health facilities, with a focus on diverse populations. The announcement says the $17 million in awards will go toward "patient-centered outcomes research" or PCOR. Interestingly, the entire release eschews the loaded CER terminology, save for a link for more information on "about patient-centered and comparative effectiveness research" in the second to last sentence.

CER/PCOR stakeholders are now eagerly watching for HHS to name the first board members of the Patient-Centered Outcomes Research Institute, created as part of the health reform initiative. One key issue facing the group is how to effectively disseminate research findings. Who knows? Perhaps research branded as PCOR will be more effective than that branded as CER.

PCOR may hold one advantage over CER – it won't be easy to sub in "cost" for "centered" in the same way opponents of CER fueled resistance for the approach by calling it "cost-effectiveness research".

Not everyone has gotten with the new lingo, of course. A variety of health policy groups are sticking with CER, including the New England Healthcare Institute. And the HHS Agency for Healthcare Research and Quality "Effective Health Care Program" today announced an upcoming conference featuring topics such as "The Role of CER in Health Care Improvement" and "Examples of Incorporating CER Into Clinical Practice."

Only time will tell if Baucus will have the last laugh and get everyone to adopt his vision of patient-centered outcomes research.

- Gregory Twachtman

Image courtesy of flickrer dullhunk used with permission via a creative commons license.

Synagis' Special Status Under Health Care Reform

It is every marketer's dream to have a product that is in a class by itself.

AstraZeneca/MedImmune's respiratory syncytial therapy Synagis (pavilizumab) can claim that distinction in an entirely new way as the Centers for Medicare & Medicaid Services implements new rebate provisions for the Medicaid prescription drug program under the Affordable Care Act: Synagis is the only drug that will benefit from a new, lower mandatory rebate on drugs that are "approved by the Food & Drug Administration exclusively for pediatric indications."

Recall that the health care reform law raised the minimum Medicaid rebate percentage from 15.1% to 23.1% for most brand name drugs. But the law sets a lower rebate amount (17.1%) for two classes of drugs : clotting factors and pediatric-only drugs. (For a complete analysis of the Medicaid rebate changes, see here.)

If that isn't complicated enough, the new rebate amounts were effective retroactively to Jan. 1 (the law was signed at the end of March), but CMS didn't provide any guidance on which products were covered until now.

For clotting factors, the list of covered products was pretty simple, since the new rebate provision specifically cites products that already receive a separate furnishing payment from Medicaid. So that list of affected drugs is no surprise. (Manufacturers who benefit include Bayer, Aventis Behring, CSL Behring, Novo Nordisk, Baxter, Talecris, Grifols and Pfizer/Wyeth).

But it was by no means clear what products were covered by the "pediatric-only" exemption. Now we know: Synagis. (The official "list" is here.)

It turns out that Synagis is the only product approved by FDA all of whose indications are explicitly limited to pediatric use (from birth to age 16). That, at least, is what CMS determined. (The agency does invite anyone who is "aware of other drugs that meet the pediatric definition specified" by CMS to email mdroperations@cms.hhs.gov .)

We note with amusement that CMS' explanation of how it came up with the "list" runs a full page. For that matter, the section of the law that CMS is interpreting [Sec. 1927(c)(1)(B)(iii)(II)(bb) for all you Medicaid rebate wonks] is longer than the list of covered drugs. Wouldn't it have been easier just to say "the minimum rebate on Synagis is 17.1%?"

Okay, that's not how legislation works. And we suspect AstraZeneca is just as happy that the provision flew beneath the radar screen a bit; there is enough controversy about the pharmaceutical industry's "deal" on health care reform--a deal, we might add, negotiated by the Pharmaceutical Research & Manufacturers of America when it was chaired by David Brennan, CEO of AstraZeneca.

But a bit of perspective here. We assume AZ is pleased that the minimum rebate on Synagis is lower than for most brands, but it is not like AZ will reap some kind of windfall as a result.

First, the new minimum rebate is still two percentage points higher than the old 15.1% minimum rebate. According to MedImmune's 2006 10K filing (the last filed by the firm before it was acquired by AZ), every percentage point increase in Medicaid rebate liability translates into roughly an $11 million hit to sales for the brand.

Then there is the separate provision of the health care reform law extending Medicaid rebates to managed care plans. While that affects a relatively small segment of the overall Medicaid prescription drug market, the impact per unit sold is large (in this case, no rebate to 17.1% minimum).

Last but not least, there is a provision in the new rebate rules that attempts to recoup rebates on new formulations of products. The idea is that, if a sponsor changes a formulation and sets a new price point, it should still pay the same amount in rebates (or more) as it did under the old formulation.

We think that provision affects Synagis as well, since (as MedImmune disclosed in the 2006 10K filing), "during the fourth quarter of 2005, we successfully transitioned to the liquid formulation of Synagis in the US from the lyophilized formulation, which has resulted in a reduction in allowances for government rebates and an increase in net realized price during 2006."

That provision, however, is even less clearly defined in statute than the pediatric-only rebate--and CMS hasn't issued guidance on interpreting it yet. (We've written about the line-extension rebate in The RPM Report, here.)

So, net-net, AZ is paying much higher rebates on Synagis than it would have without health care reform. But, thanks to its special treatment under the law, they aren't quite as high as they might have been.

Is the PhRMA Search Over?

The buzz in Washington is that the Pharmaceutical Research & Manufacturers of America is preparing to make an announcement about its new CEO. It is just that no one seems to know WHO the pick is.

We published our own suggestions shortly after Billy Tauzin announced his intention to step down (here and here). But frankly, we thought PhRMA would wait until after election day to finalize its choice, both because it obviously makes a huge difference who is calling the shots on Capitol Hill, but also because the pool of available candidates could change dramatically too.

If the rumors of an imminent announcement are correct, obviously that thinking was wrong. And so is our thinking that PhRMA could NEVER keep the pick secret for this long. (We hear there have been very clear warnings issued about the consequences for anyone who talks out of school on the search, but still...This is Washington, DC!)

If PhRMA is ready to make the pick, it will surely be someone with management experience (rather than a "big name" political figure). We would also assume it will be someone who won't have trouble working with Republicans, since PhRMA can probably count on reasonably good access to the White House at the CEO level given the heavy lifting industry did in support of health care reform.

So who is it? Someone out there knows--and you can comment anonymously below!

Musical Chairs on CER: Industry Picks in Tune, But Who Will Represent Government?

There is plenty of interest in industry in the question of who, exactly, will be overseeing the launch of a new federal comparative effectiveness research effort in the US.

Under the health care reform law, that effort will be overseen by a public/private partnership called the Patient-Centered Outcomes Research Institute.

With the June 30 nomination deadline past, it turns out that the pharmaceutical industry's two biggest trade associations--the Biotechnology Industry Organization and the Pharmaceutical Research & Manufacturers of America--are on more-or-less the same page when it comes to who should serve.

As we report in "The Pink Sheet" DAILY, BIO and PhRMA each nominated the same four candidates, with BIO's slate including two additional choices to serve on the board of governors of PCORI.

Of course, they won't all get seats: by law, PCORI will have three industry reps, and they are supposed to represent the pharmaceutical, biotech and device sectors. So figure on two of the six PhRMA/BIO nominees actually getting seats.

The choice, incidentally, is to be made by the Comptroller General of the US, otherwise known as the head of the Government Accountability Office. That is currently Gene Dodaro, who has been acting CG since David Walker stepped down in March 2008. Congress is supposed to send a bipartisan list of nominees to the President for selection of a successor--but Congress couldn't agree on a list and now it isn't clear when or if Obama will pick a permanent head. That should make everyone in BIO and PhRMA proud that they were able to agree on a relatively short list of nominees.

Settling on the industry reps will be fun, but there is an even more interesting choice to be made in rounding out the board of governors.

PCORI's 19 member board has only four slots reserved for government officials, and two of those are filled by statute (National Institutes of Health Director Francis Collins and Agency for Healthcare Research & Quality Administrator Carolyn Clancy). That leaves only two open slots for the board--and way more than two interested government agencies.

Remember: the Federal Coordinating Council for Comparative Effectiveness Resarch that was formed a year ago had 15 representatives, all from government. The FCC was dissolved upon enactment of the health care reform law. That means that when the music stops, 11 members of that team will not have seats on the PCORI board.

Who gets the two vacant seats for government agencies? Easy. The Food & Drug Administration and the Centers for Medicare & Medicaid Services, right?

Not so fast. We are hearing that the Department of Veteran's Affairs is sure to take one of the slots. That may not be intuitively obvious to us regulatory-centric types, but it is perfectly logical: VA operates a massive, fully integrated health care system and claims to have pioneered the field of CER.

So that leaves one slot open, and 10 people still standing. Should be an interesting choice....

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.

Notes from BIO: Heal Thyself

The motto of the biotech industry's trade organization is "Heal, Fuel, Feed the World," and the group could start by getting us all a neck massage. Some genius decided to put the display screens in many if not all breakout sessions either far right or far left of stage, leaving audience members in their front-facing chairs to twist either their entire bodies or their necks to read slides. Sit through two or three breakouts a day, furiously scribbling notes, and it adds up to a lot of PowerPoint pain.

Oh, but we're not done. Normally IVB would be a great promoter of walking whenever possible, which at the McCormick conference center means marathon-length outings from one end to the other. But with so many attendees also toting laptops, binders full of presentation material, and pressing cell phones to one ear, the ergonomics of the long McCormick march are soon thrown out of whack.

Topping it off, we're in Chicago, which means various species of beef and booze are the mainstays of local cuisine. The most reliable food outlet in the McCormick Center, other than vending machines, is a McDonald's. (We, ahem, had a chicken snack wrap and fries.) We'd fret less about this if we could finish the day with a brisk walk back to the hotel. With the conference far south of the Loop and most hotels about four miles north as the crow flies, however, nearly all conferees grab cabs. Some even make fun of those who try valiantly to walk but give up half-way, sweaty outside Soldier Field and hopelessly late for a cocktail meet-up. We won't name names.

Next year, we're bringing our own neck pillows, jet packs, and salads.

Photo courtesy of flickr user paraflyer.

“Authorized” Generics Will Owe Brand Discounts in Donut Hole, CMS Says

The Centers for Medicare & Medicaid Services is facing a bit of pressure to close a potential “loophole” in its implementation of the donut hole discount program. CMS’ draft policy for the program in 2011 basically says there is no penalty if manufacturers fail to offer the “mandatory” 50% discount.

As we explain here, we suspect this will end up being a tempest in a teapot, and those discounts will be mandatory after all.

But was also noticed another loophole that CMS acted to cut off before it began: the implementation policy treats “authorized” generics as brand name drugs for purposes of the discount program. The agency’s definition of covered drugs includes “authorized generics,” defined as a drug that “is marketed, sold, or distributed directly or indirectly to retail class of trade under a different labeling, packaging (other than repackaging as the listed drug in blister packs, unit doses, or similar packaging for use in institutions), product code, labeler code, trade name, or trade mark than the listed drug.”

How big a deal is that? Well, consider the list of “authorized generic” launches likely for 2011: Seroquel, Zyprexa, Plavix, Lipitor…

That’s a lot of dough in the donut hole.

Donut Hole Discount Program Begins Jan. 1—Or Does It?

There’s a bit of buzz in Washington, DC about a “loophole” in the brand name pharmaceutical industry’s 50% discount for Medicare beneficiaries in the coverage gap (better known as the “donut hole”).

The discount is supposed to begin Jan. 1, offering some more-or-less immediate relief for the elderly and disabled Medicare beneficiaries who run up high prescription drug costs—a fact highlighted by the White House at every opportunity in selling the reform law.

Except that—um—it might not.

As we point out in “The Pink Sheet,” the Centers for Medicare & Medicaid Services issued a proposal for implementing the discount program last week, and the agency’s initial position is that there is no practical way to punish companies who fail to offer the discount next year. The bottom line, CMS says, is that Part D formularies are already submitted, while the 50% discount agreements won’t be done before this summer at the earliest. So it isn’t possible to exclude products that aren’t covered by the rebate from the program in 2011.

As CMS puts it: "This could mean that some of the brand-name drugs on plan formularies will not be discounted in the coverage gap unless all manufacturers of Part D drugs enter into agreements for 2011 by our deadline in 2010. If this situation occurs, CMS will provide clear public guidance on why discounts are not available for some formulary brand name drugs. Only applicable drugs with labeler codes identified by CMS as having manufacturer discount agreements in place for 2011 shall be discounted in 2011."

In other words, the “mandatory” discount is basically optional.

Okay, this has all the makings of a tempest in a teapot. After all, the 50% donut hole discount was the pharmaceutical industry’s idea, the centerpiece of the “deal” struck by the Pharmaceutical Research & Manufacturers of America on health reform last year.

Surely no company would decline to offer the discount—and risk the wrath of Congress and the White House that would ensue?

On the other hand, not every pharma company is a member of PhRMA. In fact, most are not. And wouldn’t a CEO that really believes the discount will adversely affect his company’s business have an obligation to refuse to sign an agreement?

Maybe. But now that the buzz has begun, we expect this matter to be resolved. One way or another, we expect CMS will find a way to make sure that every pharmaceutical company sees the discount as mandatory after all. It is just a draft policy, after all.

So we expect this “loophole” to be closed and quick. In our next post, though, we point out a different “loophole” that CMS anticipated and cut off before it began: “authorized” generics will be subject to the 50% discount.

Lilly's $1 Billion Investment in Health Care Reform (Part 2): Remember the Upside

In part one we did our best to explain the relatively huge cost Lilly put on the impact of health care reform in 2010 and 2011, pointing out that the company is in effect a victim of its own success in defending Zyprexa from pricing pressure in the past.

But we also think Lilly's estimates about the cost of reform don't tell the whole story

Take the company’s forecast for 2011, with revenue guidance cut by $600 million to $700 million. There, in addition to the ongoing impact of the Medicaid rebates (so about $400 million or so), Lilly sees another $200-$300 million impact from the new market share fee in the US and from the start of the donut-hole discount program.

Now there is no escaping the fee, though as Lilly noted the exact amount is still tough to calculate. However, we figure Lilly’s share will be in the $100-$130 million range. That’s a real hit.

The donut hole discount, however, is another matter. There is no doubt that the 50% discount will show up in Lilly’s reports as a deduction from revenue (along with Medicaid rebates, chargebacks, etc.). It is just that the discount is also likely to induce wider use of brands in the lucrative Part D population.

But Lilly is not baking in any benefit from behavioral change in response to the donut hole discount. The company did say it is counting the potential benefit for products like Forteo where there is a relatively high percentage of patients who stop therapy in the donut hole, but noted that is a small amount.

It is very hard to predict whether prescribers and patients will start to use more brands knowing that the cost of the donut hole will be lower. Lilly's initial read is that a 50% discount won't be enough. Maybe they are right--but they may be wrong too.

The Congressional Budget Office certainly saw things differently: CBO estimated that the net impact of the donut hole discount in 2011 would be to increase federal spending on pharmaceuticals by something on the order of $1.0 billion. (The exact amounts are difficult to break out of the CBO score).

Could there be another Part D surprise upside in 2011? We will see.

And Lilly definitely didn't even attempt to quantify the intangible benefits of the law. For instance, the new 12 year data exclusivity granted to biologic products. That immediately makes Lilly’s pipeline more valuable, at a time when the company notes that “biotech molecules represent half of our late-stage Phase II and Phase III assets and over a third of our overall clinical portfolio.”

That’s not top-line revenue or bottom line earnings, but it is real.

And then there is that backloaded stuff in the bill. You know, the part where the federal government kicks in a share of the donut hole, basically paying back the market share fee in the form of coverage for Medicare Part D. And the 32 million new lives expected to gain insurance.

Thanks to reform, the federal government will be spending a lot more subsidizing health care in the years to come. ($934 billion more, according to CBO.)

Some of that money will pay for pharmaceuticals. Ten percent, say? That is a lot of dough. So Lilly will spend $1 billion over the next two years in hopes of big payoff in the middle of the decade.

Say, isn't that exactly what Lilly does? $1 billion is just one quarter's worth of R&D for Lilly, and we'd wager this billion is much more certain to deliver an attractive RoI than the average incremental billion spent by Lilly on R&D the past decade.

This is an industry used to making large investments over several years in hopes of an uncertain payoff. Health care reform requires similar patience—but with a more certain payoff.

flickr image by amy_b used under a creative commons license

Lilly's $1 Billion Investment in Health Care Reform (Part One): It's All About Zyprexa

With our unerring sense of timing, we just published an analysis of the health care reform bill explaining our view that the biopharmaceutical industry did really well under this law, even better, in fact, than we thought they would do when reform was all but done in January.

Then Lilly announces some rather astonishingly large cuts in its 2010 and 2011 revenue guidance--due to health care reform. This year, Lilly says, revenues will be down $350-400 million, and next year the hit will be bigger, $600-700 million. (You can read more in “The Pink Sheet” DAILY.)

Altogether that makes a $1 billion hit from reform. This is good news?

Ah, but it is. Really.

And we figured we should explain our thinking one more time, in the context of Lilly’s announcement (and the wave of follow-up guidance adjustments from biopharma companies big and small).

First off, it bears repeating that the reform bill is, by design, front-loaded on pain and back-loaded on gain.

Medicaid rebates increase this year and market share fees begin next year. Expanded insurance coverage doesn't really kick in until 2014. Industry knew what it was getting into when it decided to support health care reform: there would be a price paid up-front in order to see the new business from insurance expansion later on.

In other words, it isn’t so much a hit from health care reform, as it is an investment in a bigger US market. And we think the math works out wonderfully.

Now, bear in mind that Lilly is probably the company most affected by the front-loaded pain of reform, thanks almost entirely to its extraordinary Zyprexa franchise. The company, in effect, is a victim of its own success in holding the line on prices for its biggest brand.

Zyprexa was at one time almost exclusively covered by Medicaid (estimates were at least 70% of US sales). That profile meant that Lilly had no reason to engage in deep discounting in the commercial market, which would have meant deeper rebates to Medicaid under the “best price” rebate formula. So Lilly presumably paid the minimum rebate (15.1%).

The health care law sets a new minimum rebate amount (23.1%), which in effect increases the size of Lilly’s base rebate payments by about 50%. That probably explains most of the $350-$400 million impact in 2010. (The new law also applies rebates to the Medicaid managed care market; while that isn’t as big an impact it is still pretty big—in essence an increase from zero rebate to 23% or more for the Medicaid managed care sector.)

Other manufacturers probably aren’t as exposed to the change in the minimum rebate amount. Pfizer, for example, is about 50% bigger than Lilly in the US, but its product line is not as heavily covered by Medicaid in the first place, and its biggest product—Lipitor—is discounted in the commercial market and so probably already generates a rebate payment at or above the new minimum. (There will still be an impact on Pfizer, of course, but we won’t know how much until it reports in May.)

Don’t feel too bad for Lilly, though.

The relatively big impact on Zyprexa is primarily a function of the company’s success in staving off earlier efforts to extract deeper discounts on the brand. As Zyprexa’s impact on Medicaid grew early in the 2000s, many states tried to impose supplemental rebates on the brand. Those fights were starting to become more difficult when the Medicare Part D legislation came along, and as of Jan. 1, 2006, at least half of the Medicaid population switched to the new Part D coverage.

That meant an end to the push for supplemental rebates. It also meant a de facto one-time price increase on the brand, since Medicaid rebates also capture an inflationary price adjustment. In fact, Lilly and Zyprexa were probably the biggest beneficiaries from the launch of Part D in 2006. (See “Lilly Makes Part D Pay,” The RPM Report, January 2006.)

All of which underscores another point to remember when considering the estimates of the cost of health care reform: the alternative to the upfront hit from reform would almost certainly be a different sort of hit. So, for Lilly, the higher Medicaid rebate at least helped stave off the push to reclaim the Medicaid rebates on the Part D population.

There is no way to know for sure as an outsider, but we believe the hit from dual eligible rebates would have been bigger for Lilly than the hit it is taking now. All the more so if the dual eligible rebate were enacted solely as a revenue measure, not as part of comprehensive health care reform.

And it is possible to put a little context around the number. $1 billion is less than one-quarter's worth of Zyprexa revenues, and it is also less than the $1.4 billion Lilly paid to settle marketing investigations related to the product in 2009.

Then there is the matter of timing. Lilly sees a huge revenue hit in 2010 and 2011 from health care reform, but of course the bigger hit will come from the patent expiration for Zyprexa itself at the end of 2011. That could be a $2.5 billion drop in revenue in 2012.

Though on the bright side Medicaid rebates will go down...

Okay, we don't seriously expect Lilly to celebrate the loss of Zyprexa. But it does provide a useful reminder of what the company has to look forward to after 2011 as health care reform picks up steam. We'll explore that theme in Part Two.

image by flickr user ansik used under a creative commons license

Who Will Run PhRMA? AZ’s Chip Davis, For Now

The Pharmaceutical Research & Manufacturers of America is buying some time to find a replacement for departing CEO Billy Tauzin. The trade association has named AstraZeneca VP-Corporate & External Relations Chip Davis to serve as “senior operating officer” and—we suspect—as interim CEO in waiting.

Davis is taking a leave of absence from AstraZeneca to join PhRMA “to help with the association’s leadership transition.” For now, that means he will be reporting to Tauzin, who is stepping down as CEO June 30. In other words, Davis’ first job will be to step in for PhRMA’s number two executive, EVP Mimi Simoneaux Kneuer, who will be leaving the trade association in May.

But we expect Davis is really there to buy some time for PhRMA to find a replacement for Tauzin. PhRMA says Davis will stay on “until a replacement for Tauzin is named,” and—since we understand the search for a new CEO is really just beginning—that probably means a period as interim CEO.

Davis is a perfect choice for the job. He has been AZ’s liaison to PhRMA and played a key role in guiding the association’s work on health care reform during the chairmanship of AZ CEO David Brennan. With Davis at the helm, PhRMA should be able to maintain and develop some of the critical alliances that helped the association do so well in the reform debate, particularly its partnerships with organized labor.

Brennan’s term ended in March, but he is chairing the search committee for Tauzin’s replacement.

At the same time, because Davis is so close to Brennan, he is sure to be temporary. Pfizer CEO Jeff Kindler isn't likely to let the past chair--in effect--run the association for his term.

Why the delay in replacing Tauzin permanently?

Well, for one thing, circumstances have changed radically since Tauzin announced his resignation in February, at a time when the prospects for health care reform looked dim. Now, the health care bill is law—and, as we note in The RPM Report—the final bill is essentially a complete tactical victory for PhRMA. In other words, what looked like a potentially crushing setback has become an amazing victory.

There are also strategic reasons for PhRMA to wait a bit on naming a replacement, if only to broaden the pool of candidates. After the flap caused by the negotiations to hire Tauzin while he was still in Congress, for instance, it would be best if PhRMA waits before talking seriously to any sitting members of Congress.

More to the point, it behooves PhRMA to wait and see how the elections go this fall. Best to read the tea leaves (or maybe the Tea Party?) before making the next CEO choice.

One other reason for PhRMA to take its time: the search might take longer than you think. After all, CEO of PhRMA may not exactly be a dream job.

Imagine PhRMA came to you with this offer: "We just scored an across-the-board victory on the biggest piece of domestic policy legislation in a generation, so naturally we didn't want our old CEO to stay. We're sure you can do better. Oh, and by the way, we are going to be slashing our budget pretty radically now that all that health reform stuff is over. And, on top of that, figure on our top 10 members merging into our top 5 in the years to come. When can you start?"

So clearly it is far too early to talk about who will take over PhRMA permanently. There is no short list. But never fear: we won't let that stop us from speculating. Look for our list of names in the next post...

Comparative Effectiveness Research and Alternative Medicine: Bring it On

The debate over a federal comparative effectiveness research institute in the US was one of the big issues for biopharma companies early in the health care reform debate, and one of the first flash points for hyperbolic, partisan disagreement over the direction of reform. (Before the “death panels,” there was the “rationing” debate.)

Like so much in the final health care reform law, the outcome of CER was pretty much as good as industry could hope: a federal institute relying on a public/private partnership model rather than a federal agency akin to the UK National Institute for Health and Clinical Excellence. (You can read much more on the background of this debate here.)

Still, it is fair to say that the potential impact of CER on biopharma companies makes plenty of people in industry nervous. It is all-too-easy for a pharmaceutical sponsor to imagine a federal study pitting its biggest product against something else head-to-head in a setting where the sponsor has no input or control—and maybe the deck is stacked against the drug to start with.

But is that really how it is going to work out?

After all, love ‘em or hate ‘em, pharmaceuticals at least have mountains of evidence to work with. There is plenty of room to argue about whether a given drug works better than something else, but at least—thanks to those pesky regulators at FDA—you can basically be sure that the drug works for something.

Isn’t it at least possible that CER will focus on determining whether other commonly used therapies meet even that baseline standard?

So rather than thinking of CER as a threat to big pharmaceutical brands, maybe there is an alternative vision for how it might work. Literally: as a tool to test the value of so-called “alternative” medicine.

We were struck by how HHS Secretary Kathleen Sebelius responded to a question during her appearance at the National Press Club April 6. Sebelius was asked about the role of alternative medicine in health care reform—whether things like acupuncture or homeopathic remedies will or should be covered.

Sebelius diplomatically avoided taking a stand on the value of alternative medicine, and stressed that private plans—not the feds—will decide what to cover.

“I anticipate there will be plans offered in the new exchanges, which will give patients a wide variety of choices,” she said. “While there's likely to be a definition of what is a preventive care plan, insurers are likely to compete based on having a more wide range of choices for consumers.”

Fair enough. But then she continued by noting the role for “our comparative effectiveness research.”

“I think our comparative effectiveness research will continue to look at variety of alternatives for expensive care, whether or not earlier interventions, or more homeopathic therapies, or a variety of choices, are ones that really do lead to better health outcomes at a lower cost. And I think those are often consumer choices, and also wise healthcare choices.”

Now, that may sound pretty ominous. There is no doubt that plenty of alternative medicines are “less expensive” than, say, Avastin. And it is certainly possible that a federal center could conclude that acupuncture is in fact more effective than opioids for some forms of chronic back pain, or something like that.

But don’t let Sebelius’ astute political sensibility cloud the issue too much: politicians have learned that you don’t get very far by questioning the value of alternative medicine as a whole.

Government scientists are less reticent when you get specific. Here is what HHS has to say about alternative therapies when it comes to the H1N1 flu pandemic.

"The first and most important step to prevent the flu is to get vaccinated. Vaccination stimulates an immune response using a killed or weakened virus that uses the body’s own defense mechanisms to prevent infection. CDC's current
recommendations to protect against 2009 H1N1 virus do not include natural
remedies as a sole prevention method. If you want to use a natural remedy to
reduce symptoms, CDC recommends that you talk to your healthcare provider about options.

“Alternative medicine should not be used as a replacement for proven conventional care, or to postpone seeing a doctor about a medical problem. The National Institutes of Health (NIH) provides information…on specific alternative options, including scientific information, potential side effects, and cautions for each.

“The Federal Trade Commission (FTC) warns consumers to be cautious about products that claim to prevent, treat, or cure 2009 H1N1 influenza, specifically products like pills, air filtration devices, and cleaning agents can kill or eliminate the virus.

“The U.S. Food and Drug Administration warned consumers to use extreme care when purchasing any products over the Internet that claim to diagnose, prevent, treat or cure the H1N1 influenza virus.”

Those are the types of views likely to emerge in the context of CER run through the new federal center.

The day after Sebelius spoke, a somewhat less politic politician—former Vermont Governor Howard Dean—made similar points during a panel discussion at the DTC Perspectives national conference in Washington. (We'll have more on Dean's presentation in an upcoming post).

Dean, a critic of pharmaceutical DTC, was asked whether he thinks other forms of medical communication should be restricted. Rather than talk about pharmaceutical marketing practices, he talked about alternative medicine, noting his views as a physician and as a governor.

“Medical doctors and chiropractors fight a lot, and as Governor I had to come to terms with that because there are a lot of people who like chiropractors and think that they should be covered,” Dean began. But “there were two chiropractors who were promoting the idea that children shouldn’t be vaccinated. I just went through the roof.”

“I do think that what is good for the goose is good for the gander,” Dean said. He praised the approach taken by Senate Health Committee Chairman Tom Harkin (D-Iowa), who is an advocate for alternative medicine but who sponsored legislation mandating “a fundamental study of alternative medicines with the view that they wanted to cover alternative medicines if they worked, but if they didn’t then they shouldn’t have to cover them.”

“We need to hold alternative health care to the same standards that we hold ‘regular’ medicine or whatever you call us,” Dean said.

Alternative therapies shouldn’t be dismissed just because “we don’t know why they work. We have to be more open minded. Just because we don’t know why something works, doesn’t mean we shouldn’t let people use it.”

“But I don’t think you ought to be able to advertise stuff that is hocus pocus. Whether it is the medical stuff that is hocus pocus or the alternative stuff that is hocus pocus. There ought to be some standard that applies to everybody.”

That is a vision of CER that biopharma companies can get behind.

image by flickr user KayVee.INC used under a creative commons license

Deals of the Week: Health Care Reformation

Behold the health care reformation. Clearly the biggest deal of the week -- or in the words of our excitable veep Joe Biden, a big f***ing deal -- was passage of the US health care reform bill.

It was certainly an historic moment, a piece of legislation that its backers hope will become as transformational as the 95 Theses of Contention Martin Luther nailed to the door of the Schlosskirche in 1517. At 2,700 pages, quite the doorstop, the bill certainly is heavier than Martin Luther's masterwork. Like ML, however, its authors also had to fight against indulgences, what with the Republicans offering 40 amendments designed to derail the bill, including a comical proposal to restrict sex offenders' access to erectile dysfunction drugs like Viagra.

As we noted earlier in the week, drug makers played their cards wisely, securing market expansions and intellectual property protections beyond what many thought possible, while simultaneously resuscitating their public image. (For now the insurance industry is wearing the bright-red bull's eye.) Even with the challenges of a risk-adverse FDA and lagging R&D productivity, there's plenty of reason for pharma to celebrate.

But we're also guessing certain factions -- the tea partiers and Republicans, for starters -- have not yet begun to fight. Will the November elections be Obama's Diet of Worms? (A sure-fire weight-loss scheme, by the way, but is it reimbursable?) Does Glenn Beck get to be Pope Leo?

Obama already has his game face on. Telling Republicans to "go for it" at an Iowa rally, he warned of an uphill battle for repeal come November as voters begin to feel the benefits of near-universal coverage. Like Luther, who famously uttered before the Holy Roman Emperor "I can and will not retract, for it is neither safe nore wise to do anything against conscience," call it the prez's "Here I stand" moment.

We also say bring it on. Mining the twists and turns of the bill, and all the future amendments sure to spring forth, will keep journos like us occupied -- if not gainfully employed -- for years to come. In the meantime, there's always that little weekly round-up we like to call...



Pfizer/GSK/Global Alliance for Vaccines and Immunisation: On March 23, Pfizer and GlaxoSmithKline signed what other media outlets termed "a landmark 10-year deal" to supply hundreds of millions of pneumococcal vaccine doses to developing nations at reduced prices. It's the latest example of big pharma's desire to do well by doing good. It's also the first deal to debut under a new Advanced Market Commitment scheme that helps poor nations secure vaccines, while guaranteeing a market for the drug companies, by setting a maximum price for the preventive shots. Over the next decade GSK will supply up to 300 million doses of its Synflorix vaccine to GAVI, while Pfizer plans to donate an unspecified number of Prevnar 13 shots. According to the AMC, the companies will charge $7 a dose for the first 20% of supplied vaccine, and then just $3.50 a dose for the remaining 80%. That's far less than the $54 to $108 per-shot fee GSK and Pfizer charge in developed countries. Canada, Italy, Norway, Russia, the United Kingdom and the Bill & Melinda Gates Foundation have collectively offered $1.5 billion to fund this first AMC. (The US isn't participating, but the FDA's priority review voucher is designed to expedite development of medicines for neglected diseases.) If it goes as planned, it will likely be the first of many such tiered pricing arrangements. Pfizer and GSK have both expressed interest in future AMCs. Rotavirus vaccines and a still-experimental treatment for malaria are good candidates for future GAVI tie-ups.

Ipsen/GTx: In need of non-dilutive financing after its selective androgen receptor modulator deal with Merck came to an end three weeks ago, GTx this week revised an existing collaboration with Ipsen. It calls for Ipsen to pay GTx $58 million pegged to Phase III trial milestones for toremifene, which is being tested to reduce fractures in prostate cancer patients receiving androgen deprivation therapy. The money will certainly come in handy, but GTx is paying a heavy price. The Memphis firm will forgo some longer-term payments that Ipsen would have owed had toremifene suceeded, as well as right of first negotiation to the Phase II prostate cancer drug, GTx-758. In an interview with 'The Pink Sheet' DAILY, Rodman and Renshaw analyst Simos Simeonidis said GTx "doesn't have a lot of wiggle room right now." That's because toremifene in November garnered a complete response letter from FDA that requested a second Phase III trial to demonstrate efficacy. With just $49 million in the bank and no more money coming from Merck, GTx calculated near-term cash was more important than downstream financial rewards. It's yet another example of the new math being practiced by cash-strapped biotechs.

AstraZeneca/Xenome: On March 23, Australian biotech Xenome announced AstraZeneca's MedImmune exercised its option, originally inked in 2009, to license four peptides designed to hit an undisclosed target involved in a key pain pathway. Financial terms remain confidential, which probably means they're not very lucrative for the privately-held Xenome, which most recently raised money ($6 million) in 2008. To develop its library of 2000 peptides, Xenome turned to Mother Nature for a little help. Its potentially innovative molecules are derived from cone snail venom. Should any of the recently optioned molecules succeed in the clinic, it wouldn't be the first time gastropod poison has yielded fruit -- er, success. Elan already markets Prialt, a drug for managing chronic pain based on the same venom. It's worth noting the deal comes a few weeks after MedImmune's mothership AZ pared its internal R&D efforts in certain CNS areas such as depression and schizophrenia.

Biovail/Cortex Pharmaceuticals: If there's a prize for revamping one's business via dealmaking, we nominate Biovail. On Friday, March 26th, the company announced its eighth transaction since its 2008 decision to become a CNS specialty pharma. Recent examples include the January deal with Amgen around GDNF rights and the tie-up with Alexza for the NDA-filed candidate, AZ004, for agitation associated with schizophrenia or bipolar disorder. Biovail is paying Cortex $9 million upfront for CX717, in Phase II studies as a treatment for respiratory depression, a brain-mediated breathing disorder. The deal also gives Biovail IP and rights to preclinical ampakine compounds. Biovail will likely pay a $1 million near-term milestone and perhaps $15 million more in milestones tied to clinical success and product approval. With AZ004, the Cortex program could add another product to the detail bags of Biovail hospital specialty-focused sales force.