Drug firms to get profits windfall

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Fri, 24 Feb 2006 22:22:21 -0500

[sSRI-Research] ContraCostaTimes (Walnut Creek, CA) Drug

firms to get profits windfall

 

 

 

 

http://www.contracostatimes.com

 

Drug firms to get profits windfall

 

By Tony Pugh

KNIGHT RIDDER

 

WASHINGTON - The new Medicare drug benefit will give drug companies as

much as $2 billion in extra profits this year because they're no

longer required to pay rebates on drugs bought by the government for

the elderly poor.

 

The hefty windfall raises new concerns that the Bush administration

won't fully realize its promises of lower drug prices in the troubled

new program.

 

The boost in profits comes from a shift in the drug coverage of 6.4

million poor and elderly people from Medicaid to the new Medicare drug

benefit.

 

Unlike Medicaid, which requires drug companies to charge their lowest

or " best price " for medications, the Medicare program relies on

competition among private drug plans to keep prices low.

 

By eliminating the need to discount drugs for the government, the

industry can now pocket the savings.

 

" The net effect over 10 years is probably closer to $40 billion in

extra profit, " said Stephen Schondelmeyer, a pharmaceutical economics

professor at the University of Minnesota.

 

A little-known study by the Prudential Equity Group from June 2005

estimated that the makers of three anti-psychotic medications stand to

benefit most from the change, taking in roughly $1.1 billion in new

profits on products used by the 6.4 million who are Medicare's most

poor and frail patients.

 

Experts say drug prices in the Medicare program will be higher this

year than prices under Medicaid because the private Medicare drug

plans won't likely match the price discounts achieved by Medicaid, the

joint state and federal health program for the poor.

 

But the new profit estimates and the higher drug price projections

have rekindled accusations that the Medicare drug benefit enriches

drug companies at the expense of U.S. taxpayers.

 

Medicare administrator Mark McClellan questioned Prudential's findings.

 

In testimony before the Senate Special Committee on Aging on Thursday,

he said Medicare plans are covering people at a cost average of 15

percent less than expected, which has helped push the average plan

premium down to $25.

 

As a result, the cost of the drug plan likely will be $30.5 billion in

2006, down from an earlier estimate of $38.1 billion, McClellan testified.

 

And the program's 10-year cost estimate has likewise dipped from $926

billion to $797 billion.

 

 

" The drug plans are negotiating aggressive discounts and rebates that

are being passed along to beneficiaries and taxpayers, " McClellan said.

 

According to Prudential, the medications that will gain the most and

the profits they're likely to reap are Seroquel by AstraZeneca ($521

million); Lamictal by GlaxoSmithKline ($298 million) and Zyprexa by

Eli Lilly ($285 million).

 

Those figures reflect Prudential's estimates that Medicare drug plans

will negotiate discounts amounting to only 5 percent of what the drug

companies paid in rebates to Medicaid on those products.

 

An AstraZeneca spokesperson questioned the study's methodology, saying

the profit estimate for Seroquel, a schizophrenia medication, was too

high. AstraZeneca gave no alternate figures.

 

A GlaxoSmithKline spokesperson wouldn't discuss projected earnings for

Lamictal, a treatment for bipolar disorder.

 

A Lilly spokesperson said the company expected only a " modest

short-term benefit to sales " for Zyprexa under the Medicare program,

but wouldn't give specifics.

 

Zyprexa, also a schizophrenia treatment, is Lilly's top-selling

product, with U.S. sales of $2.04 billion in 2005. Lilly's earnings

per share could rise by 6 percent in 2006 just by escaping the

rebates, the Prudential study estimates.

 

With U.S. sales of $2.76 billion in 2005, Seroquel's increased

Medicare profit could boost AstraZeneca's earnings per share by 8

percent, the report found.

 

Company policy prohibits Prudential analysts from discussing reports

with non-clients, said company spokesman Jim Gorman.

 

 

Tony Butler, managing director and pharmaceutical analyst at Lehman

Bros., an investment bank in New York, agreed with the report that

Medicare would probably have higher drug prices than Medicaid.

 

Butler estimated the sales windfall for drug companies under Medicare

to be between $1.8 billion and $2 billion.

 

He said profits would likely increase in coming years as more

businesses cut retirees' drug benefits and steer their former

employees into the Medicare drug plans.

 

Rep. Henry Waxman, D-Los Angeles, the ranking minority member of the

House Committee on Government Reform, has asked the Government

Accountability Office to investigate the profits as a waste of

taxpayer money.

 

In a Jan. 27 letter to GAO Comptroller General David Walker, Waxman

wrote, " There appears to be no rational policy justification for

providing this immense hidden subsidy to the drug industry. ...

 

" It appears that the only party benefiting in this arrangement are the

drug companies that give millions to the Republican leaders who

drafted the legislation. "

 

 

Waxman and other Democrats say that Republicans withheld vital cost

information about the program, allowed drug industry lobbyists to

draft the proposal and fought efforts to have the government use its

leverage to negotiate lower drug prices.

 

During the Senate committee hearing Thursday, Sen. Rick Santorum,

R-Pa., defended the Medicare drug plan as a flawed but worthy product

of a political dogfight.

 

" It was the best we could accomplish given a very divided atmosphere

here in Washington, D.C., " Santorum said.

 

" So it is somewhat remarkable to expect that something that's the

product of deep division, lots of haggling, lots of changes that

occurred throughout the legislative process, is going to result in a

perfect system

 

Committee members Sen. Herb Kohl, D-Wis., and Sen. Hillary Clinton,

D-N.Y., discounted McClellan's cost projections as premature.

 

Brand-name drugs purchased under Medicaid are discounted by at least

15 percent and they increase to up to 30 percent when inflationary

rebates are added.

 

Discounts negotiated by the private Medicare drug plans are expected

to save 15 percent in 2006 and to peak at 25 percent in 2011,

according to government estimates.

 

Those projections are based on enrollment assumptions and reflect the

Bush administration's belief that competition among hundreds of

different Medicare drug plans will ultimately drive down drug prices.

 

Medicare officials say that's already happening. " Based on the prices

we've looked at, we believe the drug plans are getting better net

prices than those paid under Medicaid, " said Medicare spokesman Gary Karr.

 

 

He said governors across the country have reported the same thing.

 

But Schondelmeyer said that's not the norm. He studied about 40 plans

in one area of Minnesota and found that prices in each plan on 25

different drugs were within four percentage points of the regular

retail drug prices.

 

And most of the Medicare plan prices were 20 percent to 30 percent

higher than the cost under Medicaid.

 

Schondelmeyer doesn't envision the Medicare program getting better

prices than Medicaid at any point in the future because dozens of

private plans won't have as much negotiating clout as a government-run

program.

 

" The argument that more plans will be more competitive doesn't appear

to be true. More players doesn't result in lower prices if they have

much smaller volumes and much less leverage, " Schondelmeyer said.

 

 

© 2006 ContraCostaTimes.com and wire service sources. .

http://www.contracostatimes.com