Novartis hopes to see some immediate benefit from the Medicare prescription drug law from a Centers for Medicare & Medicaid Services pilot program to study expanded coverage of oral chemotherapy drugs.

"Between 2004 and 2006, we will have a portion of the oncology patients which will take advantage of a credit which the government has given - hundreds of millions of dollars - to cover some of the cancer drugs which were not covered before," Novartis CEO Daniel Vasella told investors during the company's 2003 earnings conference Jan. 22 in Zurich.

"We hope that some of our oncology portfolio will profit from that," Vasella said.

The 2003 Medicare law sets aside $200 mil. for a CMS demonstration project to pay for oral cancer therapies (¹ Also see "Medicare Oral Cancer Rx Demo Awaits Input On Drugs To Be Covered" - Pink Sheet, 19 January, 2004., p. 6). Novartis markets Gleevec (imatinib) for first-line chronic myeloid leukemia.

Vasella highlighted the demonstration project as a specific aspect of the law that would be positive for Novartis, despite his overall assessment that it would be slightly negative for the pharmaceutical industry.

"We believe there will be a higher utilization by patients because they can afford to buy the drugs, especially in the lowest income level," Vasella said.

"On the other side, there is no doubt we will see an increased price pressure from different pharmacy benefit management companies."

"We do not yet know how this new legislation will work in practice," he noted. "How patients will use it. What kind of mechanism of price competition will be installed in the market?"

"We believe that, bottom line, it will be somewhat negative for the industry," he said.

However, "I think we are much better off to have a moderately negative effect and patients being treated adequately than to stick to a regime which is very negative for patients."

Vasella's analysis is in keeping with the public comments of most pharmaceutical companies about the Medicare law, highlighting the tradeoffs between utilization and price while emphasizing the uncertainty of the long-term impact.

The position taken by pharmaceutical companies reflects both a desire to avoid public declarations of victory that could prompt a political backlash and a realistic assessment of the uncertainties inherent in the implementation process (² Also see "Medicare Rx Becomes Law Dec. 8; Firms Analyzing Bill, PR Approaches" - Pink Sheet, 8 December, 2003., p. 3).

Vasella is the first CEO to declare that he anticipates that impact to be on balance negative; most companies are predicting slightly positive or neutral impacts.

However, Vasella's analysis carries two important caveats. First, he noted a specific aspect of the bill (the oral cancer demonstration project) that would make the bill more positive for Novartis than for other companies.

Second, he used the investor conference to signal Novartis' renewed interest in finding a U.S. merger partner, and Novartis' purchasing power would be enhanced if U.S. investors become more concerned about the impact of Medicare.

During the first wave of year-end conference calls, companies are continuing to follow the basic outline of the tradeoffs in the legislation - but, like Novartis, they are pointing out different details to investors (see ³ Also see "Wyeth Medicare Rx Benefits: Retiree Health Plan Savings Expected" - Pink Sheet, 26 January, 2004.).

Johnson & Johnson CEO William Weldon told a Jan. 20 conference call that the Medicare prescription drug legislation will be neither "a positive or negative."

"We view it as an area where if we do have some price pressures, it will be offset by volume of patients going into the marketplace. So it's really a neutral."

However, Weldon's analysis of the specific positives and negatives implied a different message: the bill itself will be positive, helping to offset a negative (pricing pressure) that is already a fact of life in the industry.

The Medicare legislation will mark an end to price-driven growth for pharmaceutical companies, Weldon predicted. However, he added, the impact of pricing on growth rates has already declined significantly.

"If you went back and looked over the history, price increases in the early 90s and the mid-90s played a very substantial role," Weldon noted. "But you'll see pricing really mitigate as a factor over the last few years in many of the businesses."

"In the past few years, we haven't seen great pricing opportunities anyway," Weldon said. "It was more in the early to mid-90s that pricing played such a substantial role."

For J&J specifically, the impact of the Medicare outpatient benefit may be less pronounced; two of the company's key franchises ( Procrit and Remicade ) are already covered by Part B.

The sections of the legislation that change the Part B payment methodology will have a direct impact on J&J, but the net result will depend on how pricing dynamics play out between Procrit and Amgen's Aranesp and between Remicade and competing rheumatoid arthritis brands (including Amgen's Enbrel ).

For 2004, Procrit will be reimbursed at 87% of AWP, two percentage points higher than the standard 85% formula set in the law (⁴ Also see "J&J Procrit Medicare Reimbursement Will Be 87% Of AWP Under Final Rule" - Pink Sheet, 5 January, 2004., p. 10). Aranesp is getting the standard 85% of AWP.

Amgen was making significant inroads against Procrit under the old payment formula. Procrit U.S. sales in the fourth quarter decreased 16% to $671 mil.; sales for the year were down 8% to $2.8 bil. Pricing strategies J&J employed for Procrit in 2003 have stabilized the EPO product, Weldon stated.

Amgen has said it expects only a "minimal" impact from the AWP reimbursement cut in 2004, but potentially more significant difficulties when the payment formula changes to average sales price plus 6% in 2005 (⁵ Also see "Medicare AWP Reform Plan May Be “Politically Untenable,” Amgen Says" - Pink Sheet, 22 December, 2003., p. 9).

During Amgen's Jan. 22 conference call, Exec VP-Global Commercial Operations George Morrow stressed that the company plans to help oncologists understand the impact of the changes.

"I think they're somewhat confused at this point," Morrow said. "They're trying to sort through things. Obviously, the government hasn't issued rules on every aspect of the bill so far, so they're waiting to see."

"We're going to be as helpful as we possibly can be in helping them sort through these issues," Morrow said. "I'm going to spend a lot of time with my team out on the road this year just helping them get comfortable with where we are as a company and where the legislation is going.

Novartis Applauds Medicare Rx Pilot; Overall Bill “Somewhat Negative”

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