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.

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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!

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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.

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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.

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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.

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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.

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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.

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