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DRUG MANUFACTURERS ARE GIVING DISCOUNTS OF OVER 25% FROM LIST PRICE TO MAJORITY OF THE MARKET, BOSTON CONSULTING GROUP FINDS IN STATE-OF-THE-INDUSTRY STUDY

Executive Summary

More than half of the U.S. pharmaceutical market received discounts from manufacturers of 25% or greater during 1992, according to a brief environmental study of the industry prepared for Pfizer by the Boston Consulting Group (BCG). Mail-order pharmacy (representing 5% of the market) and managed hospital pharmacy (15% of the market) are receiving discounts of 30% below list price, BCG estimates. A large, 35% block of the market described as "managed retail pharmacy" is receiving discounts off list of 25%. The two segments combined create a total of 55% of the market with discounts of a quarter off list price or greater. BCG estimates that 25% of the market ("traditional retail pharmacy") is paying list price. The weighted average discount for all pharmaceutical purchases in 1992 was 16%, taking into consideration the size of the various discounts and the share of markets represented by each segment. That average figure arrived at by the consulting group is within range of the 19% extra that the Government Accounting Office believes that Medicaid paid above drug acquisition costs to nine pharmacies in Maryland and Illinois ("The Pink Sheet" March 29, T&G-5). BCG based its analysis of the discount structure on a series of interviews. As recently as 1987, only 40% of the market was receiving discounted prices from manufacturers, with the top discounts of 15% going to the 5% of the market controlled by mail-order pharmacy. Managed hospital pharmacy represented a bigger share of the market in 1987 (20%) than currently, according to BCG, but was receiving a much smaller discount (10%). The pace of the change in discounting is indicated in the BCG report by a quote from the director of pharmacy operations of HIP/Rutgers Health Plan. The consulting group quotes Bob Voytovich as noting: "Only a year ago there were three companies who refused to negotiate with me, but one by one they've changed their positions and have come to the table." New product introductions into crowded therapeutic categories are also experiencing very little price flexibility, BCG observed. From an analysis of 24 products approved and launched during 1991- 1992, BCG calculates that "launch prices were on average 14% below the price of the market segment leader for products launched in therapeutic categories where competing products existed." BCG excluded seven products from consideration in its calculation because they were "breakthrough" products and presumably had more leeway in pricing decisions. BCG highlights the discounting patterns as evidence of the increasingly "pricefocused market" in the pharmaceutical business. Pharmaceutical Manufacturers Association Chairman William Steere (chairman of Pfizer) commissioned the environmental report as a background source for his March 30 speech at the association's annual meeting in Boca Raton, Florida. Stressing the danger of layering new government policies onto the new market conditions, Steere said: "I will ask our nation's policy makers to recognize the dramatically altered conditions in our industry and in the pharmaceutical marketplace in which our research-intensive industry competes." Current "conditions," Steere said, "leave us with little margin for error and highly vulnerable to rash or hostile public policies." The "margin for error" throughout the industry, "whether the error of a CEO or public policy makers -- is slight indeed," Steere declared. PMA firms need to confront "head-on the concerns of our fellow citizens about access to, and the affordability of, our products," Steere said. Noting the association's publication of a directory last year to provide information on indigent care drug programs, Steere said "let's go the rest of the way." During the ongoing health care reform debate, Steere urged, "let's devise programs so sturdy and effective that no indigent American is denied access to the prescription medicines he or she needs." In 1992, PMA set up a board task force on the indigent access issue which led to the directory of programs ("The Pink Sheet" April 13, 1992, T&G-2). Pfizer has experimented with a community-based donation program in Arkansas and Kentucky that could be a further model for expansion of the indigent care program. Steere's description of the industry as vulnerable exemplifies one of the key components of the industry's counterattack to criticism from the Clinton Administration. Through interim operating reports and several public appearance campaigns, drug companies are trying to undo the image of a wealthy and greedy industry and create a picture of themselves as a valuable but fragile national resource. The industry is trying to answer an informal calculation in Washington that describes drug profitability as being 2-3% too high. Rep. Waxman (D-Calif.) used that figure in comments on the Office of Technology Assessment report on drug R&D ("The Pink Sheet" March 1, p. 14). Similarly, University of Minnesota professor Stephen Schondelmeyer has maintained in Washington presentations that the drug industry could "lose a third of their profits and still remain the leader among all industries" in profitability. Outgoing PMA Chairman Paul Freiman (chairman of Syntex) expressed the same theme in his March 29 speech to the annual meeting. "Investors are concerned in general about President Clinton's approach to health care and are selling our stocks in droves. Entrepreneurs in our field are concerned that investment capital is drying up." Summing up his year as the top elected officer of the PMA, Freiman said: "We have had some fine moments, but objectively, this industry is a lot worse off now that it was a year ago." Freiman maintained that the industry is "in a dangerous situation today -- more so" than in his 34 years in it. Industry execs on the public speaking circuit are making similar statements. At an April 1 press briefing in Washington, Hoffmann-La Roche Chairman Irwin Lerner cited the decline in market valuation of drug stocks over the past 18 months and said "we are a very fragile industry." BCG argues that in addition to reduced price elasticity, drug companies continue to face increased regulatory and development costs. From a completed survey of nine firms, BCG estimated that the average number of patients in trials per NDA have risen to over 3,500 from roughly 3,200 in the 1985-1988 period and under 1,500 in the 1981-1984 period. The average number of trials per NDA was estimated by the consulting group at 60 up from 36 in the 1985-1988 period. The length of NDA applications continues to increase as well. The consulting report estimates that NDA applications in the 1989- 1992 period reached 90,650 pages up from 56,349 pages in the three-year period before. To monitor these larger NDAs, the major firms have increased the size of their regulatory affairs departments. In 1992, the BCG found 34 employees per firm working as direct liaisons with FDA compared to 23 in 1988 and 19 in 1984. Part of the increase in clinical work is apparently related to the commercial demands for justification of drug costs. Over 17% of clinical studies in 1992 contained health economic analyses compared to 3.4% in 1990. The economic research is starting earlier in the development process. The majority are now started in Phase II. A literature search of medical databases by BCG showed a sharp jump between 1989 and 1990 in the number of published health economic analyses (from about 300 in 1989 to almost 700 in 1990). The consulting report points out that the pursuit of economic data is part of a trend of manufacturers working more closely with managed care organizations. BCG maintains that drug companies have a lot to offer managed care operations in the area of economic research. The consulting firm notes the relative newness of cost- effectiveness and outcomes research. Drug companies could provide their expertise to managed care organizations to interpret results of such studies, BCG concludes. The report quotes Harvard Community Health Plan's Steve Schoenbaum, who says: "Managed care organizations currently talk about cost-effectiveness, but they don't yet understand the data...there needs to be an educational process." Discussing the opportunities for the industry in customized research, BCG said managed care organizations "are increasingly looking" to drug companies to help them develop the systems needed to do in-house outcomes and cost-effectiveness research. A Kaiser-Permanente regional pharmacy manager, Joan Veal, interviewed by BCG, said: "We need to see the data within our own population in order to help persuade our physicians...but we don't have the resources or the technology to pull the data together and apply it to our situation." The trend toward collaborative work between drug companies and managed care operations is further exemplified by data in the consulting report on the number of collaborations between drug companies and managed care groups. Currently, each major drug company is involved in about 11 collaborative agreements, BCG found. By 1994, that number will have more than doubled to 25 per company. Johnson & Johnson, for example, has an outcomes program in place with four health maintenance organizations in chemotherapy, BCG reports. Presumably related to its erythropoietin product Procrit, the J&J program's objective is to reduce the number of cancer patients undergoing chemotherapy who require blood transfusions and thereby reduce hospitalizations and their concomitant costs. In 1992, Sandoz developed software on medication errors for pharmacists in a hospital buying group in an effort to reduce patient hospitalizations associated with medication errors, BCG said. The buying group expanded the program with a grant that followed on Sandoz' initial backing. Additionally, Pfizer has a program with the U.S. Indian Health Service, the Pharmacist-Patient Consulting Program, designed to train pharmacists in counseling patients about their medications. BCG notes that 16,000 pharmacists have been trained so far in the program and Pfizer is initiating a second phase in 1993 to train pharmacists to handle "particularly difficult or challenging patient situations." Collaborative programs also include those for disease management, BCG notes. "Although still few in number," these types of programs between drug companies and health care providers "have increased significantly." By 1994, BCG forecasts, the average pharmaceutical firm will be involved with 20 such programs, or double the 10 programs ongoing during 1992 on average. Two programs highlighted in the report are an Upjohn program on diabetes management and a Schering-Plough program for asthma. Upjohn has a number of diabetes programs ongoing, BCG notes, that "provide non-product-specific, high-quality educational material on diabetes for patients and physicians." These include sponsoring health fairs where diabetes screening information and blood tests are available. Upjohn also provides patients with diet tips and educational videotapes, the report notes, as well as underwrites nurses to run diabetes management training sessions for patients in managed care organizations. Upjohn Corporate Account Sales Director James Heenan is quoted by BCG on the program's usefulness, saying it brings "value to the business relationship with the managed care organization...differentiating [Upjohn] from competitors." Schering-Plough's asthma programs with managed care groups focus on prevention of asthma attacks and potential hospitalizations and lost days due to misuse of steroids for controlling asthma, BCG reports. In one such program, the HIP/Rutgers Health Plan, Schering initially ran the program but then turned over videotapes and handout materials to the HMO so it could administer the program itself, BCG notes. Schering also runs program training seminars twice a year for HMO nurses and pharmacists, the report adds.

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