Prescription For Upheaval

How the Medicare drug program is tightening the screws on Big Pharma

It's quite rare for a pharmaceutical company to pit its own drug against a rival product to prove its superiority. Never mind that such drug trials can easily cost hundreds of millions of dollars. The bigger risk is that the company sponsoring the trial might find that its drug isn't actually any better than what's already out there. That can mean death at the pharmacy counter.

Nonetheless, it's a risk that Eli Lilly & Co. (LLY ) has decided it needs to take. The company is plowing more than $300 million into a trial designed to determine whether its new anti-clotting drug, called prasugrel, will work better than blockbuster Plavix, which generates $4 billion in sales for Bristol-Myers Squibb Co. (BMY ) If Lilly's drug doesn't win the trial, it'll likely be dead on arrival when it hits the market in 2008. "Lilly is either going to get zero or multibillions" of dollars in sales, says SG Cowen & Co. (SCGLY ) analyst Stephen M. Scala.

Why would a drugmaker take such an enormous gamble? The answer lies, in part, in a simply named plan that is forcing massive changes across the pharmaceutical industry: Medicare Part D, the new prescription drug program set to launch in January. In essence, the new Medicare plan will lead to survival of the fittest -- or at least, survival of the most cost-effective. It's simple economics. Overnight the program will turn the government into an unmatched force in the drug industry, responsible for 40% of all U.S. drug purchases, according to consulting firm Campbell Alliance Group Inc.


Under Medicare Part D, insurers and pharmacy benefits managers will offer a variety of prescription plans to seniors on behalf of Uncle Sam. Insurers will get a fixed subsidy from the government for each person they cover. So to avoid losing money on these plans, payers will be looking harder than ever for medications that are both effective and inexpensive. And while the need to prove a drug's worth is perhaps the most dramatic change drugmakers will face, it is far from the only one. Drugmakers will see second-wave "copycat" brand name drugs, a key source of growth in the last decade, become less profitable as government plans move more people to generics. Companies will also need to become nimbler about shifting marketing and salespeople around the country depending on whether their drugs are covered in plans in that region. Says Anthony C. Hooper, president of U.S. pharmaceuticals at Bristol-Myers Squibb: "We are approaching a quantum change in the way that we do business."


At first, the new Medicare plan will be a boon to drugmakers' bottom lines. Richard T. Evans, an analyst at Sanford C. Bernstein & Co., expects the Medicare drug benefit to give a 2% to 3% boost to drug company earnings in the first two years of the program. That's because, he figures, insurers will offer plans that cover many brand-name drugs in the early years to attract people to sign up. That will trigger an increase in the use of drugs by seniors with little in the way of price pressure.

But in the long run the betting is that the drug benefit has more downside than upside for the likes of Bristol and Lilly. After the first two years, Evans expects insurer plans to become more restrictive, forcing drug companies to slash prices on products in order to keep them covered. That's why, starting in 2008, he expects the bottom line-boosting dynamic to reverse, and for the program to start cutting earnings by 3% or more annually.

Many drug industry executives agree that the going will only get tougher as the government and private insurers grapple with the mounting cost of the Medicare drug program. There's a much higher hurdle for success now. In the go-go days for drugmakers in the 1990s, the need for them to prove that their drugs were worth the price wasn't so acute. That's because managed-care companies had limited success restricting patient access to -- and prescribing by doctors of -- new drugs. The result: Drugmakers routinely turned "me too" products into blockbusters. So in a pre-Medicare Part D era, if Lilly's drug was shown to be at least as good as Plavix, the company still would have had a good shot at building a big franchise by using its massive sales force and savvy marketing.

But those days are long gone. Now Lilly feels strong pressure to prove that it has a superior product. The decision sparked some internal debate. Dr. J. Anthony Ware, the trial's leader and vice-president of Lilly's research labs, says some insiders initially warned against trying to prove prasugrel was better than Plavix. They worried that it would be too high a hurdle and argued that the company should just prove that the drugs are comparable.

However, Ware believed Lilly had no choice. Cheap generic versions of Plavix would hit the market no later than 2011. If prasugrel wasn't shown to be better than Plavix, why would anyone pick it over a generic Plavix? So last summer the group recommended to Lilly Chief Executive Officer Sidney Taurel that the company take Plavix head-on. While acknowledging the risk, Taurel adds that "from what we've seen [in early studies] we are hopeful."


Under its 13,000-patient trial, which Lilly is doing in partnership with Japanese pharmaceutical giant Sankyo Co., patients who have a variety of cardiac problems, from unstable angina to a recent heart attack, will be given prasugrel or Plavix. They will then be followed for one year to see which drug better reduced the number of heart attacks, strokes, and deaths. Certainly Plavix has shortcomings -- an estimated 20% of patients don't respond well to the drug, according to some cardiologists, for reasons that are not entirely clear. But no one will know until the data are in whether prasugrel has an edge. And because many cardiologists use Plavix at doses higher than that being given in the prasugrel study, Bristol may argue that the deck was stacked in Lilly's favor.

Bristol executives won't speculate on the outcome of the prasugrel trial. But they point to Plavix as an example of how they are readying the company for the new age of Medicare. Already Bristol has published a number of studies on Plavix that analyze what the cost-benefit tradeoff is for the drug. One recent paper found that for people with certain heart problems, the drug, in effect, costs about $6,300 for every year of life it adds for patients. In the world of health-care economics, anything below $20,000 is seen as a good buy.

That focus on cost-effectiveness is now being pushed back into earlier stages of product development. Trials for new Bristol drugs will not only show how a drug halts the progression of a disease but may also be designed to prove how the product affects death rates or hospital stays. Generating that data often involves larger and longer clinical trials, which could put even more upward pressure on drug company research and development budgets.

This approach is a fundamental change in the company's mindset, say Bristol execs. Before they had to prove to doctors and patients that their drugs were valuable. Now they need to prove their cost-effectiveness to big payers as well -- including those who will be offering plans on behalf of the federal government. "Companies like ours have not been very good at [that]," concedes Dr. David Boyko, Bristol's senior vice-president of global medical affairs. Expect that to change fast.

By Amy Barrett in Philadelphia and Michael Arndt in Chicago, with Arlene Weintraub in New York

— With assistance by Arlene Weintraub

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