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

Lilly/Imclone: Hedging Payor Risk

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

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

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

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

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

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

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

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

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

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

Playing with $6 Billion: CBO Unveils Follow-On Biologics Savings Estimates

The analysts at the Congressional Budget Office have been busy little beavers. As we cautioned earlier, CBO has been actively scoring the possible cost savings of the introduction of follow-on biologics in the US through an abbreviated pathway.

The agency released the estimates June 25 and the numbers certainly will re-ignite the follow-on biologics debate. Using the Senate Biologics Price Competition and Innovation Act to evaluate savings, CBO found FOBs would save $6.6 billion in direct government spending over a 10-year period, beginning in 2009. That's real money. To read the full analysis, click here.

The $6.6 billion comes in higher than some of the lower-end estimates and at about half the amount of the higher-end estimates. Two points to consider:

Timing: Releasing the savings analysis on June 25 begs a few questions to be asked. Were the findings unveiled ahead of the July Congressional recess so they could not be acted upon swiftly by lawmakers looking for a rest? Or does the scoring have a relationship to the Medicare package, which includes the physician payment cut offset, that just passed through the House? After all, the $6.6 billion would serve as a nice bargaining chip for the physician payment fix? Or is it all a coincidence?

Although we don't believe in coincidences, we have not heard from any sources with a stake in the game that FOBs will be attached to the Medicare package, which already has its share of somewhat controversial provisions like e-prescribing and codifying the six "protected" drug classes under Medicare Part D. To read more, click here.

Still, you never know what's going on behind closed-door negotiations, especially considering the exclusive number of Congressional leaders who are crafting the legislation. But the odds are quite small that FOBs gets attached to a must-pass Democratic or Republican offering because it would require serious and immediate action from the Senate HELP and Judiciary Committees, specifically Ted Kennedy (D-Mass.), Orrin Hatch (R-Utah), Hillary Clinton (2nd Place, Democratic nominee for President) and Mike Enzi (R-Wyo.).

How Will House Leadership React: Because the Senate HELP Committee requested the CBO analysis, it is based on the BPCIA, which gives innovators a period of 12 years of data exclusivity. At this point, that's a biotech-friendly period of exclusivity. House Committee for Oversight and Government Reform Chairman Henry Waxman (D-Calif.) and House Energy and Commerce Chairman John Dingell are understood to be looking at eight years of exclusivity and less. So they would, no doubt, hold up any legislation that includes FOBs and 12 years of exclusivity. That's not to say 12 years ends up getting the axe; we're just saying there's no way it stays 12 years without a fight from Waxman and others.

Here's an interesting take from one knowledgeable source:

"It is worth considering that the starkly competing and now “switched” views coming out of the two “sides” of the industry – GPhA essentially saying the score means the current legislation is bad and needs to be fixed (presumably by the next Congress), and BIO essentially saying the score means the current legislation is good and needs to be passed by this Congress – could result in the perception of a “draw” in the clash of the titans, which begs the question as to whether there would be sufficient momentum to get this onto the Medicare package or any other vehicle during the 110^th based upon this score....Of course, stranger things have happened in this and past Congresses."

While we don't think, as of this moment, FOBs will get attached to a Medicare bill, the $6.6 billion in savings and the timing of the release is turning out to be a real bee in our bonnet. Why now? We'll continue to investigate. In the meantime, take a look at the CBO analysis. There's a lot to digest.

The Long Awaited Baucus Medicare Package

The RPM Report recently got hold of the likely Medicare package legislation that could be introduced shortly. Of course, we had to share it with our IN VIVO Blog readers. Senate Finance Committee Chairman Max Baucus (D-Mont.) sent a summary of the package offer to physicians today.

Here are some of the highlights:

1) Physician payment update: The compromise blocks cuts to the physician payment update formula, otherwise known as the sustainable growth rate (SGR), until December 31, 2009—an 18-month fix. The offer would provide a 0.5% positive update for 2009.

2) Quality: The legislation would extend the physician quality reporting initiative (PQRI), an incentive payment for doctors who submit quality measures information, for two more years. The offer would increase the PQRI bonus to 2% for 2009 and 2010.

3) E-prescribing: The legislation would provide incentives for physicians who use e-prescribing beginning in 2009. The positive incentives would be as follows: 2% for 2009-2010, 1% for 2011-2012, and 0.5% for 2013. There are also punitive measures within the bill for physicians who have e-prescribing systems but do not use them. To read The RPM Report’s story on e-prescribing, click here.

4) Kidney disease: The offer would establish Medicare payment and coverage for kidney disease patient education services furnished by qualified practitioners. The Baucus legislation says the provision is part of broader end stage renal disease (ESRD) reforms that requires the establishment of a fully bundled payment system for ESRD services by 2011.

To read a full summary of the Baucus Medicare bill, which has been under discussion for months, click here.

Listen for the Threat of the Medicare Rebate

Here we are shamelessly tooting our horn for calling the politics and action around pharmaceuticals and Part D correctly in 2007 and blowing a clarion call warning for 2008.

Tooting The RPM Report horn: In January a year ago, price negotiating and eviscerating the Medicare Advantage section of Part D were watched widely as two of the early objectives for the health leadership in the new Democratic Congress.

In the thick of the media obsession with those stories, The RPM Report pointed out how unlikely Congress would be to deliver on those goals in 2007 and why. (See here, and here and here, for clear foresight in retrospect).

Call to alert for 2008: This year, some in the media (for example, an interesting wrap-up piece in the Wall Street Journal January 23) are expecting a high-profile dangerous year for pharma.

Elections are always tough years for pharma in the news, but this one does not look to us like a year for major legislative initiatives against the drug industry.

Even the prospect of Democratic sweep in November may not be as threatening to Big Pharma as the Journal story suggests. The Democratic front-runners certainly do support action on pharma pricing that industry opposes--but their overall message is more nuanced and makes health care reform sound much less threatening to industry than it did 15 years ago. (You can read more here.)

There is one new threat, however, in a proposal that is generally beneath the radar for most observers: rebates to the government on Medicare Part D drug purchasers (see here).

We understand that rebates to Medicare sound pretty boring, wonky and not nearly as worthy of a headline as government price negotiation, but rebates could add up to big dollars from pharma. And the technical fix is just the type of tweaking to Part D that draws a real shiver from pharma execs.

The movement on Capitol Hill is just beginning for this way to recapture some of the alleged windfall that pharma reaped by moving Medicaid rebated drugs to Medicare. Listen for the distant horn.

The Values Debate: How Much is Your Drug Worth?

What is the right price for a medical breakthrough?

That is a question that pharmaceutical and biotech companies spend a lot of time working on.

It is obviously a business critical question.

But it is also a political question, a fact that industry may not like but cannot afford to ignore.

The federal government is already the biggest payor for prescription drugs in the US, albeit through a patchwork of programs and contractors. And the US Congress is always ready to weigh in and substitute its judgment for the private sector's.

What does all this mean? Well, that's a question we can help you with. Or at least, we can find some real experts to help you. We've invited a bunch to speak at the FDA/CMS Summit for Biopharma Executives on December 6 and 7 in Washington DC. Speakers include top government officials (like HHS Deputy Secretary Tevi Troy and Centers for Medicare & Medicaid Services Coverage Group head Steve Phurrough), thought leaders from industry (like Hoffmann-La Roche Inc. CEO George Abercrombie, Amgen VP Josh Ofman, and Merck VP Ian Spatz) and plenty of other influential policy professionals. (Want to read more? Here is our press release.)

And remember, this is just one theme of this year's summit. We'll have plenty more content on the new drug safety rules, the pressures on drug development, off-label promotion, follow-on biologics and much much more.

See you next week!

Amgen Feels the Effects of CMS’ Long Shadow

To no one’s surprise, sales of Amgen’s flagship anemia product darbepoetin (Aranesp) dropped sharply in the third quarter, 23% worldwide, and 36% in the US. Given the tough new restrictions put on coverage of Aranesp and J&J’s epoetin brand Procrit in the key Medicare market, a big hit was inevitable.

Still, it is worth looking at the full impact of the Centers for Medicare & Medicaid Services coverage decision on Amgen’s third quarter results. (If you haven’t been following this, you can catch up by clicking here.)


Given the tight coverage policy, it is no surprise that EPO use is way down in the Medicare market directly controlled by CMS.

But the coverage policy is casting a much bigger shadow than that.

First, there is a spillover effect into the private insurance market for chemotherapy patients. Amgen EVP-commercial operations George Morrow reported that use of EPO in chemotherapy induced anemia patients is down 30%-40%--even though no private payors have adopted payment policies that are as restrictive as CMS’.

“Clinics and hospitals are struggling with 2-tier medical practice,” Morrow explained. “They do not want to treat all of their patients to the lowest common denominator—and here I am talking about the NCD with a hemoglobin of 10. On the other hand, they find it ethically discomforting and administratively burdensome, to implement one treatment protocol for Medicare patients in another widely diverging protocol for all other patients.”

Morrow is optimistic that the picture will brighten over time. “We are also seeing a steady increase in the adoption of differential treatment protocols, by largely more sophisticated clinics and hospitals, as oncologists reluctantly adapt themselves to the new reimbursement environment.”

There is another possibility: that private payors will begin to move more in line with CMS’ restrictions. That is the usual pattern: CMS leads and private payors follow.

The spillover from the coverage policy doesn’t stop there. Amgen is also seeing an impact on use of EPO in myelodysplastic syndrome, even though the company successfully persuaded CMS not to put new restrictions on that indication. “Even though reimbursement remains in place, physicians have reduced utilization,” Morrow reported.

It doesn’t stop there. “We are seeing some modest spillover of the ESA reimbursement concerns for colony stimulating factors or CSF. In other words, there is a generalized fear of not getting reimbursed leading to more cautious utilization.” That was a factor in holding back growth of pegfilgrastim (Neulasta), Morrow said. Sales were up 8% for the quarter, but underlying demand was flat.

“We are actively investigating and addressing any clinical or reimbursement issues that are inappropriately impacting Neulasta utilization,” Morrow said.

That impact comes on top of the effect Amgen already acknowledged from a loss of promotional support for the brand while the sales force addressed the concerns about EPO.

Amgen is still hoping it can find a way to force CMS to reconsider its position on EPO, but it acknowledges that to be a long shot. “As physician groups continue their dialogue with CMS, we hope a compromise can be reached that gives doctors sufficient latitude to make the best decisions, consistent with their understanding of the available science and their own clinical experience, while also meeting important CMS objectives,” Amgen CEO Kevin Sharer said.

Asked what kind of “compromise” he envisions, Sharer replied. “Its hard to say. Our financial plan is to manage the company on the assumption that the NCD will stand.”

That seems like a safe assumption. A Reuters interview with CMS Chief Medical Officer Barry Straube suggests that the agency isn’t going to budge any time soon.

J&J sure seems to be moving on. Amgen acknowledged during the call that reimbursement wasn’t the only issue affecting Aranesp this quarter: the product also lost market share against Procrit—a development that would have dominated the discussion of Amgen’s prospects a year ago when Aranesp was relentlessly taking over the market Procrit used to own.

Amgen CFO Bob Bradway explained that the share loss came in Public Health Service hospitals, “where our competitor offers some very steep discounts, discounts that we felt that we weren't going to match.”

Amgen isn’t happy that J&J is recapturing share in the EPO market, but there may be some comfort to the company in being able to talk about those issues. After a year dominated by regulatory and reimbursement issues for its flagship franchise, a year where the company was forced to consider what else it might turn to besides EPO, Amgen surely longs for the days when it only had to worry about the competition.

Schering-Plough's Wake Up Call

Separated at birth? Sugammadex versus Suge Mug Shot

Talk about a real sleeper. Wall Street analysts are starting to buzz about one Phase III project Schering-Plough will be acquiring as a part of its $14 billion acquisition of Organon. But this is definitely not the kind of product that usually merits spotlight coverage in research notes.

The unlikely pipeline star? The neuromuscular blockade reversal agent sugammadex, a product used post-surgery to counter the effects of neuromuscular blocking agents in anesthesia. The buzz started earlier this year with the publication of an article in Anesthesia & Analgesia suggesting that it would revolutionize anesthesia care. And it continued with the release of data at this week’s American Society of Anesthesiologists meeting. (You can bet no one sleeps through the plenary sessions at that one.) [ed. note: hey-o!]

Credit Suisse’s Catherine Arnold, for one, liked what she saw. “Sugammadex continues to impress,” she wrote in an October 16 note reiterating her “outperform” rating on Schering.

“We continue to feel that this is an exciting product that could revolutionize the practice of anesthesia,” Arnold writes.

“It has clinical advantages: providing faster, more consistent reversal of neuromuscular blockade induced by a variety of agents and no anticholinergic side effects as compared to the current reversal agents. Further, it has a pharmacoeconomic advantage: allowing patients to be transferred out of the
operating room or recovery room more quickly post-op… We continue to feel that investors are under-appreciating sugammadex’s potential.”

Sounds like a great opportunity. So how big will it be? Arnold estimates it will reach sales of $700 million in 2015.

Huh? All this buzz over a product that won’t reach a billion dollars in revenues eight years from now? Has Wall Street lost its mind?

We don’t think so. Instead, sugammadex is exactly the type of mini-buster Big Pharma is going to have to rely on in the future as the entire industry adjusts to the post-blockbuster world. There haven’t been a whole lot of products bigger than $700 million at peak coming out of Big Pharma in recent years—and the new FDA drug safety law means there will be even fewer. (Why? Start here.)

Given that reality, submarkets that pharma has bypassed for the past decade are starting to look more attractive. That is a key part of sugammadex’ appeal: it will be sold exclusively to hospitals. That has not been a major focus for most of Big Pharma, but Arnold notes that it has a big virtue—it can be served with a relatively small commercial infrastructure. (For good measure, Arnold observes, Schering isn’t the biggest of Big Pharmas either, so $700 million goes farther. She points out that it takes only $16 million in net income to add a penny to SGP’s EPS.)

During Windhover’s Pharmaceutical Strategic Alliances conference last month, I pointed out another reason it is smart for Schering to move into the hospital market: it relies on a completely different payment system than the primary care market. [This presentation will be available to download as a podcast from IN VIVO Blog shortly.]

For years that has been a big reason most Big Pharma’s stayed out of the hospital sector. Hospital payments are essentially capitated by the Medicare Part A program, making it extremely difficult to launch premium priced products. That’s why sugammadex’ pharmacoeconomic data will be so critical. If Schering can show it saves hospitals money, uptake will be simple. But if sugammadex costs too much upfront, or puts hospitals at risk of losing money on routine surgical procedures, no amount of superior clinical data will help it.

For more than a decade, most companies have preferred pricing flexibility over demonstrating pharmacoeconomic advantages. But now they don’t really have a choice, not now that the government and its private plan surrogates are starting to exert more influence over outpatient drugs through Medicare Part D.

It is no longer a question of whether to operate in a government influenced market, but instead a question of which one: the “old” Medicare, administered directly by the feds; or “new” Medicare, run by private intermediaries. There are plenty of reasons to choose one market over the other, and Big Pharma in particular has lots of reasons to prefer the Part D system which at least fragments the market to ensure there are no make-or-break coverage decisions coming out of Washington.

But why choose? Uncle Sam’s money is paying the bills both ways, so the smart play is to dip into both streams.

Headline Risk: Drug Prices on Capitol Hill

Do you want to know how big the drug pricing issue will be for the rest of this year and into 2008?

Just watch the headlines and level of outrage over the next few days in twelve congressional districts following yesterday's release of Chairman Henry Waxman’s House Oversight and Government Reform Committee report on Part D prices.

Waxman rounded up a dozen representatives to sign onto the report, “Private Medicare Drug Plans: High Expenses and Low Rebates Increase the Costs of Medicare Drug Coverage” (see table). The 12 Democrats cover a geographical region from Maryland to Minnesota and Iowa, Tennessee to Vermont.

If the report can break through and dominate local news in those reasons, expect Waxman to move forward with an effort to bring the drug pricing and Part D programs back into the political spotlight, with a hearing or further request for information from Part D plans. Waxman’s oversight committee staff extracted the pricing information for the October 15 study from private plans by threatening to subpoena the information last spring. A hearing on the report was scheduled for Thursday, October 11 but was postponed.

Dennis Kucinich, one of the Part D report co-sponsors and a politician with national recognition as one of the pack of presidential candidates chasing Senators Clinton and Obama and former Senator Edwards, headlined the release of the report: “Private Medicare Drug Insurers Are Driving Costs Through The Roof.”

The biggest political vulnerabilities for the Part D plans are charges that the administrative cost of the private system is exceeding a government-administered program and that the plans are not offering seniors savings on drug costs during the coverage gap (donut hole).

Using private data and bidding information provided by 12 large Part D companies (representing 318 drug and Medicare Advantage plans), Waxman calculated that each Medicare beneficiary pays $180 a year to cover overhead and profits to administer the program: $107 for administration; $30 for sales and marketing; $43 for profits. Spread over the entire Part D beneficiary population of 24.1 million, that creates an administrative cost estimate of $4.3 billion.

The donut hole pricing may be especially timely as a political issue as the fall season marks the point at which many beneficiaries move out of the federal subsidized drug costs and into the 100% patient-pay coverage gap. The report notes that the Medicare Modernization Act called for beneficiaries to get the plans discounted prices for drugs in the coverage gap.

“Despite the requirements of the law,” the Waxman report charges, eleven of the 12 insurers which provided information to Waxman “will not pass the drug rebates they receive in 2007 through to beneficiaries in the form of lower prices at the pharmacy counter.”

Waxman estimates that the rebates on donut hole out-of-pocket expenditures by beneficiaries will contribute $1 billion in profits to the plans. The report notes that plans say that the rebate dollars are used to reduce premiums, but the report notes that several plans “conceded” that they retain a portion of rebate payments as profits.

The full report can be found here.

Buyer’s Remorse: No Love for Medicare Part D on the Campaign Trail

So Many Happy Faces! None are Running for President in 2008

The Medicare prescription drug benefit known as Part D has been an unmitigated blessing for Big Pharma at a time when good news has been hard to find. It has greatly expanded drug coverage for senior citizens, providing a boost in prescription volumes. And it has shifted a large chunk of the market out of the price controlled Medicaid program, giving a healthy margin bump for many blockbuster brands.

It is also a political orphan, one that will face an especially harsh winter as the primary phase of the Presidential campaign moves towards its climax.

The Democrats make no secret of how they feel about Part D. Remember price negotiation? The idea may have died in the Senate, but it will be reborn this fall once Congress finishes its serious legislative work. Expect hearings and reports criticizing Part D prices—with the themes trumpeted by the Democratic candidates on the campaign trail.

None of the front runners in the Democratic party supported Part D, though the thinking here is that they secretly love it. After all, the program pumps hundreds of billions of taxpayer dollars into federal health benefits while allowing the candidates to bash Republicans for catering to the profiteers in Big Pharma and the insurance industry.

The problem is, as Jeffrey Young writes in The Hill, even the Republican contenders have nothing nice to say about Part D. Its not that they are turning on the pharmaceutical industry per se, its just that they don’t see anything to gain from talking to conservative voters about a massive expansion to federal health care entitlements.

Its no different than the 2006 Congressional campaign, which featured Democrats around the country attacking Part D—and Republicans changing the subject. Supporters of Part D, like former CMS Administrator Tom Scully, claim that the Republican Party should have embraced the program during last year’s campaign, instead of running away from it. It certainly is hard to believe the GOP would have fared any worse in the elections if they had.

Still, if the Republican legislators who enacted Part D refused to brag about it in 2006, you can expect the Republican Presidential contenders to stay even farther away from it. As The Hill’s Young points out, one of the top tier GOP candidates—John McCain—actually voted against the law creating the program. Another, Fred Thompson, voted against earlier plans to create a drug benefit, but left the Senate before the Part D law passed in 2003. The rest of the leading Republican contenders were not in Congress when Part D passed and hence have no stake in defending the program.

So expect a winter of Democratic attacks on Part D, with little or no response from the Republican campaigns.

Once the Presidential campaign shifts gears to focus on the general election in November 2008—the party nominations could be locked up as early as the first week of February—the dynamics may change.

The Democratic nominee is sure to keep attacking Part D. But the Republican nominee may be more eager to counterpunch. With the nomination locked up, fear of alienating small-government conservatives may be less important than the opportunity to cast Part D as model for public/private partnerships in expanding health coverage across the US.

Until then, don’t expect too many kind words about Part D on the campaign trail.

The Other Surge

If there is one thing the Democrats can’t stand, it’s a Bush Administration sponsored surge, one that they feel reflects ideology triumphing over common sense. No, I’m not talking about Iraq. I’m talking about the recent spike in enrollment in the Medicare Advantage program, under which senior citizens and the disabled can opt out of the government run Medicare program to join a private sector managed care plan.

Okay, I know I know. There is no comparison between the Iraq war and the Medicare Advantage program.

But they do have some things in common. After all, they are both a matter of life and death. That may be more obvious in the case of the Iraq war, where soldiers are putting their lives on the line every day. But it is no less true of the Medicare program, which by its very nature is the health care plan most Americans will rely on to care for them at the end of their lives.

Both are costing the Treasury billions of dollars a year. Everyone knows the Iraq war is expensive. (The Defense legislation pending in Congress would set aside $140 billion to fund operations in Iraq and Afghanistan for fiscal 2008). But did you know that Medicare Advantage plans will collect about $95 billion from the Treasury the same year?

And the long term costs are staggering. CBO says that the Medicare Advantage side of Medicare will consume well over $1 trillion in federal spending over the next 10 years.

But what really sets the Democrats off is the feeling that the money is being wasted. The wisdom of the surge in Iraq is a debate I’m happy to leave to the politicians. But in Medicare Advantage, there is no real debate over one fact: the per capita cost for a Medicare Advantage enrollee is higher—by 10% or more—than the cost of covering the same person in the traditional Medicare program.

That certainly seems to fly in the face of the logic of privatizing Medicare. After all, private plans are supposed to be cheaper and more efficient than big government right?

The two surges have something else in common: however easy it may be to argue that the money is being wasted, it is very difficult politically to do anything about it. No one wants to be accused of failing to support the troops in battle. And no one wants to be accused of penny pinching when it comes to health care for America’s senior citizens. The fact is that Medicare Advantage plans spend a lot of money on better benefits for seniors, so any cuts are likely to be very unpopular with voters.

But the Democrats aren’t giving up. In May, there were no fewer than 9 hearings on ideas to improve the Medicare program. They topics covered ran the gamut, but shared a common theme: all would in some way or the other put the brakes on the growth in the Medicare Advantage program.

Okay, so why should pharmaceutical companies care? In the June issue of The RPM Report, we tease out the implications of the Democratic attack on the Medicare Advantage surge. (You can read the story for free by clicking here.)

If the new leaders in Congress are successful, it means tougher times ahead for pharma companies. Why? Managed care plans will have no choice but to squeeze drug prices even more—or get out of the Medicare business altogether. That, frankly, is what a lot of Democrats probably want. Because that means they get to design the Medicare drug benefit they always wanted—one that you can be sure will include much tougher control of drug pricing.