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Executive Summary

Glaxo offered Medi-Cal a Zantac rebate of 36% in 1993, 32% in 1994 and 25% in 1995 as part of an unsuccessful proposal submitted during Medi-Cal's "therapeutic category review" of ulcer drugs. Glaxo is currently providing a 12.96% rebate on Zantac under a direct rebate contract with Medi-Cal that extends through June 30 of this year. The inside look at Glaxo's negotiations with California is disclosed in court documents filed May 3 seeking to block Medi- Cal's decision to require prior authorization for dispensing of Zantac to Medicaid outpatients after June 30 ("The Pink Sheet" May 10, p. 4). Glaxo wants Zantac to remain available without restriction pending further talks with the state. Glaxo had sought a hearing date of May 21 but the session is now expected to be scheduled for June 14. The court documents detail Glaxo's two main arguments: first, that the company's offer was rejected with no further opportunity for negotiation or advice on the price sought by Medi-Cal; and second, that Medi-Cal's evaluation uses a now-outdated list of companies that directly sell to retail stores and a price calculation formula that gives unfair advantage to these direct sellers. With regard to the first point, the complaint in Glaxo v. State Department of Health Services states that "Glaxo believed that its Dec. 15 [1992] proposal for Zantac was economically reasonable. However, since Glaxo was not advised by DHS that it would have only one chance to make its best offer, and, in fact, had engaged in give-and-take negotiations in prior dealings with DHS, Glaxo anticipated entering into negotiations with DHS" as governed by Medi-Cal statutes. "Accordingly," the complaint reads, "Glaxo's Dec. 15 proposal for Zantac did not exhaust the cost savings that Glaxo was willing to offer to DHS. Glaxo was prepared to negotiate with DHS and offer additional cost savings in the course of those negotiations." A budget rescue package adopted by California last year set target savings of $18 mil. from the therapeutic category reviews; however, the review program was established via legislation enacted in 1990. Glaxo noted that the budget legislation directed Medi-Cal to "negotiate as aggressively as necessary to achieve the savings" and "negotiate or renegotiate contracts" as necessary. The original legislation authorizes Medi-Cal to limit the number of covered single-source products in a therapeutic category. The complaint states: "Nevertheless, contrary to the statutory direction to negotiate 'aggressively,' DHS simply advised Glaxo by telephone in January 1993 that Zantac had not been selected as one of the drugs to remain on the Medi-Cal list of contract drugs in the anti-ulcer therapeutic category." Glaxo states later that it was "never notified" that Medi-Cal was "proceeding with the anti- ulcer therapeutic category review on a bid basis," an approach that would be subject to a separate set of regulations. The company met with Department of Human Services Director Molly Coye on March 4, the complaint adds, and at the "invitation of the director, Glaxo submitted written objections to the decision to remove Zantac from the list of contract drugs and the director had promised to respond in writing to Glaxo's objections." As of the filing of the suit, Glaxo "has not received any written response." Under the "direct seller" provision, Medi-Cal uses a direct selling price for companies that distribute drugs directly to retail stores and uses average wholesale price minus 5% for other manufacturers. Use of the AWP, described as a "list price from which manufacturers discount to their customers," results in a price calculated for Zantac that is 14% higher than it would be otherwise, Glaxo argues. Medi-Cal officials have "admitted" that the list is "outdated," according to Glaxo. "In particular, Merck Sharp & Dohme -- whose anti-ulcer drug, Pepcid, was retained on the list of contract drugs -- was included in the list of 'direct price' manufacturers when the list was first prepared in 1979 and remains on the list today even though Merck (like Glaxo) presently distributes in California predominately through a wholesale distribution network and not directly to California pharmacies." Companies "like Merck that incorrectly appear on the 'direct price' list are afforded an irrational and unfair competitive advantage by DHS over similarly situated companies that are not on the list," Glaxo contends. To illustrate, Glaxo said the AWP for 60-tablet bottles of Zantac 150 mg is $91.98, and thus the acquisition cost under Medi- Cal's formula is 5% less, or $87.38. "In fact, the price which wholesalers pay for Zantac, which is its 'direct price' equivalent, is $76.65," Medi-Cal says. "Thus the figure used by DHS for Zantac -- $87.38 -- is at least 14% higher than would be the case if DHS used the 'direct price' equivalent - $76.65. In other words, the first $10.73 of Glaxo's proposal merely covers the difference in the application of the two formulas." In a March 31 letter to DHS Director Coye, Glaxo outlined a "simple economic proposal for retention of Zantac" on Medi-Cal's formulary that the company had first proposed in the March 4 meeting. "The proposal consists of 1) an immediate cash premium payment covering the savings differential, created by DHS' EAC [estimated acquisition cost] regulations, between Glaxo's Zantac proposal and its nearest successful competitor. This premium payment would be made in each year of a single or multi-year agreement with DHS until such time as the artificial differential is eliminated by amendment to the DHS EAC regulations. The proposal is coupled with 2) a guaranteed, fixed aggregate rebate on Zantac to be negotiated with DHS for the full period of the agreement," Glaxo explained. Glaxo also asked Coye to "personally compare its December 1992 proposal to DHS for Zantac specifically with the economic analysis for Pepcid and advise it, in writing, that even if the Zantac rebate proposal had been increased by an additional 14%, Zantac would not have been selected over Pepcid based on net cost of product to DHS." Glaxo added in the letter that Coye promised to "'look into'" how the price for Zantac compared with both Pepcid and SmithKline Beecham's Tagamet. Pepcid and Tagamet are the only two H[2] antagonist products that will remain on Medi-Cal's formulary without prior authorization; Glaxo said in the letter to Coye that Medi-Cal officials indicated in one conversation that all the H[2] products might be retained if sufficient savings were achieved. SmithKline Beecham is not included on the direct seller list. Among companies on the list in addition to Merck are Bristol-Myers Squibb, Wyeth-Ayerst, Abbott, Lederle, Upjohn and Parke-Davis. Glaxo also states in the lawsuit that Medi-Cal conducts an "economic analysis" that factors in utilization rates to determine the net daily cost of therapy. "This procedure for performing the 'economic analysis' was never promulgated by DHS pursuant to the Administrative Procedures Act and was never the subject of public comment," the company maintains. Another Glaxo argument maintains that its existing direct contract with Medi-Cal for Medicaid rebates must remain in force and, consequently, drugs covered by that contract -- including Zantac -- are exempt from the therapeutic category review. The original 1990 law establishing the review program states that agreements signed before Jan. 1, 1991 shall be "considered to be contracts executed'...and 'the department shall exempt the drugs included in these contracts from the initial therapeutic category review in which they would normally be considered,'" Glaxo says. Its initial contract was executed on Aug. 10, 1990. A copy of that direct rebate contract submitted to the Sacramento Superior Court shows that Glaxo agreed to provide Medi- Cal with additional rebates if Zantac exceeds a 25% share by volume of Medi-Cal utilization of H[2] ulcer products, or if general product price increases exceed specified amounts. The contract stipulates that Glaxo will "reimburse the Department for any increase in the net wholesale price of covered drugs greater than the rate of increase of the Consumer Price one-half of one percent." The increases will be measured on a quarterly basis, and if they exceed the ceiling, the rebate percentage will be adjusted by adding the "number obtained by dividing the dollar amount by which Glaxo increased its price for the covered drug in excess of the maximum price permitted under this section [of the agreement] by the maximum price permitted under this section, stated as a percentage." The Zantac provision directs that if California "notifies Glaxo in writing that, based on the Medi-Cal utilization data at the end of any quarter during the term of this agreement, the number of units of Zantac for which reimbursement is made by the department pursuant to the Medi-Cal outpatient prescription drug benefit during the quarter exceeds 25% market share of the drugs within the H[2] blocker therapeutic category and included on the department's list of contract drugs, then Glaxo will remit to the department within 60 days a payment equal to an annualized $20,000 for every percentage point above 25%." This provision would be "subject to renegotiation" if any drugs currently covered are deleted from coverage.

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