The transfer of seniors who currently receive drug benefits under Medicaid into the new Medicare drug benefit may mean that private managed care purchasers will have enhanced leverage in price negotiations with manufacturers, Lilly CEO Sidney Taurel suggested.

At an analyst meeting in New York Dec. 3, Taurel suggested one potential downside to the handling of so-called "dual eligibles" in the bill.

"The Medicaid best price system...has created a floor for pricing, so it's very difficult for private customers to extract a huge discount from you that's going to create a new best price," Taurel said.

However, "once a lot of" the Medicaid population shifts to Medicare, "it's more a freefall" for prices, he explained.

With the passage of the Medicare bill, the Medicaid population will become a smaller share of the total prescription market. One estimate is that 60% of Medicaid's current covered lives could shift to Medicare (¹ Also see "Medicaid Best Price Reform: Dual-Eligible Move To Medicare May Be 1st Step" - Pink Sheet, 27 October, 2003., p. 4).

For products used principally by seniors, the transfer of the dual-eligible population to the Medicare benefit will effectively end the best price system. The potential for that change to lead to a "freefall" in pricing is one long-term uncertainty posed by the legislation, Taurel said.

Lilly was one of the first companies presented with an opportunity to discuss the Medicare legislation with analysts and investors.

The company's comments illustrate one happy dilemma posed by the bill: how best to communicate to investors the potential positive impact of the legislation without triggering a political backlash that could lead to changes in the bill (see ² Also see "Medicare Rx Becomes Law Dec. 8; Firms Analyzing Bill, PR Approaches" - Pink Sheet, 8 December, 2003.).

Taurel's discussion of the potential for the dual eligible changes to lead to deeper discounts in the future appears to be an example of searching for a black cloud behind a silver lining.

The immediate impact of the Medicaid changes will be to significantly reduce the impact of rebates and state preferred drug lists.

For products with best-in-class profiles, the transfer to the Medicare benefit is likely to mean a de facto double-digit price increase with the elimination of the mandatory 15% rebate to Medicaid.

Both Lilly's biggest product, the antipsychotic Zyprexa , and its fastest growing new launch, the ADHD agent Strattera , are unlikely to be discounted significantly to private purchasers.

Taurel concluded his discussion of the impact of the changes to Medicaid with an understated declaration: "We can live in that environment."

Overall, Taurel's message to investors about Medicare underscored short-term positives and long-term "uncertainties."

"Our expectation is that there will be, over the short, medium term some net positive impact of volume versus price," he said.

"While the Medicare drug benefit is not a perfect law...it does give all seniors access to a drug benefit and with a structure which is based on delivery through the private sector," he noted. "And at the same time, as you know, the bill avoided any bad decisions regarding importation, anything really bad regarding intellectual property."

Taurel highlighted language in the bill explicitly prohibiting the federal government from getting involved in Medicare price negotiations.

"I think that's the good effect of, again, having free-market advocates control this process and ensure that an obvious risk, i.e. the government setting prices, is obviated in the law from the beginning," Taurel declared.

The "non-interference" cause has already become a political flashpoint, with Democratic opponents of the bill suggesting the language be repealed.

Lilly also may be able to take advantage of some money set aside in the bill to fund disease management demonstrations in diabetes.

"Yes, there is some money for disease management demonstrations in the area of diabetes," Taurel noted. "I don't know what our exact plans will be to take advantage of that. We already have a number of disease management programs underway."

In the long-run, however, Taurel cautioned investors to expect changes to the legislation. While the bill "gives the industry a significant reprieve" in the short term, "there are some uncertainties as to its long-term future."

"The donut hole will need to be addressed, probably, and this is just a first step," Taurel said.

Filling in the "donut hole" - the gap between the basic drug benefit and a catastrophic payment cap - would be, in and of itself, another positive for industry by further reducing out-of-pocket spending by consumers. However, efforts to enhance the benefit will reopen issues related to cost-containment, Taurel noted.

"Over time...the pressures...on budgets will lead to some potential bad ideas, and that will keep all of us in the industry very busy between now and then, both working with politicians and also with the general public to explain how detrimental price controls would be," Taurel said.

Taurel also expressed disappointment that the bill as written could delay or even prevent an integrated drug benefit design in Medicare.

"What I don't like is that the move to an integrated benefit is not only pushed back but maybe will never happen. It's a demonstration project with a lot of provisos which make it a little difficult. So that's what I like least about the bill," he said.

"And there a few minor provisions," including language on AWP that is "not very likable," Taurel added (³ [A#00650470005], p. 8).

The AWP sections are one of a number of issues in the Medicare bill likely to be revisited in coming years.

Although Taurel characterized the Waxman/Hatch reforms included in the Medicare bill as fundamentally acceptable, he noted that Lilly would still like to see strengthening of intellectual property rights.

"What I'd like to see over time is a system where you have much more certainty on your period of exclusivity," Taurel said. "We talk about exclusivity of your data like you have in Europe. You have a 10 year period of exclusivity, and have intellectual property protected that way primarily, rather than just by patents and with this system we have today where you have abuses on both sides," he said.

"So I'd like to see that eventually change to a system of data protection for whatever, 12 years, 14 years, whatever we agree upon."

However, "we have talked about it and have found over the last three years that clearly the climate is not favorable to that. I don't see in the short-term future that we're going to be able to change that."

The combination of the bill and FDA's recent rule on generic filings will prevent some abuses of the exclusivity system, Taurel said. "I think the...abuses that we saw from pharmaceutical companies are going to become impossible thanks to the new regulations by the FDA, and also the Medicare law has a few provisions which basically eliminate those loopholes."

Taurel was asked whether brand companies should consider "giving away" products to generic firms to eliminate the 180-day exclusivity incentive for first-to-file generic products.

"For this to really work, you'd have to have the whole industry do that systematically each time a patent expires so that you truly eliminate the incentive in the calculation that generic companies would make," Taurel responded. "We cannot agree to do that as an industry" because of antitrust concerns. But "it's a very interesting and intriguing idea," Taurel added. "Food for thought."

Lilly does not intend to follow the practice of entering "authorized" generic agreements, Taurel added. "You have the agreements between a pharmaceutical company...and generic companies, which typically were the result of blackmail, I guess. There's no other word for that."

Those are agreements which "I personally find distasteful. So we have never engaged in those," Taurel said. "They can be seen from a public policy standpoint as a way to delay generic entry and therefore slow generic competition," he maintained. Taurel said he doubts the practice is good "for the public, and I'm not sure it's good for innovation either."

The Federal Trade Commission, however, appears to have no problems with "authorized" generic deals (⁴ Also see "GSK/Par Paxil Generic Deal Upheld In Court; FTC Closes Patent Investigation" - Pink Sheet, 10 November, 2003., p. 19).

Lilly Analyzes Medicare Rx; Medicaid Changes May Be Big Plus

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