Germany's Top Insurer Reveals Winners of Generic Discount Contracts; Losers Appeal

Germany's largest insurer AOK has announced the winners of its two-year, price-driven generic supply contracts, but court appeals by disgruntled losers threaten the system.

Germany's largest health insurance fund, the AOK, has announced the sixth round of its discount contracts which seek to secure drug supplies on the basis of tenders that target the lowest-price offering from manufacturers.

However, the insurer has only been able to officially announce the completion of 28 of a total of 87 contracts. The other 59 are being disputed in court by disgruntled losers, who stand to be shut out of supplying AOK with certain products for the two-year duration of the contracts.

The cases threaten the validity of the discount contract system and could cause its framework to be altered (Also see "Germany's Discount Contracts Are Changing The Pharma Market Landscape" - Pink Sheet, 9 Aug, 2010.).

New Pharma Law Allows Fresh Set Of Court Appeals

Since first begun in 2007, Germany's discount contracts for generic drugs have saved health insurers about €1 billion ($1.35 billion). Every tendering round has attracted court appeals. This time around, the majority of the complaints against the AOK at the Higher Regional Court of Dusseldorf have been filed by Mylan, according to Apotheke Adhoc.

AOK Deputy Chairman Christopher Hermann said that the recent flurry of cases - the numbers have grown significantly - is the direct result of the government's law on the restructuring of the pharmaceutical sector, which took effect on Jan. 1, 2011, and allows companies to bring cases before the civil courts, rather than the social courts, as was the case before. This means that previous social court decisions can now be disregarded and the same type of case can be tried again in a civil jurisdiction - something Hermann claims that pharma companies are "exploiting" as they "hope to destroy the successful instrument of discount contracts through subjecting it once again to trials."

According to Hermann, the contracts will save AOK alone some €720 million in the current year. Many of the new contracts will replace those from the AOK's third round - launched at the start of 2009 - which are set to expire at the end of May 2011. The fourth and fifth round contracts will expire in March and September 2012 respectively. The new contracts for the seven bidding regions will run from June 2011 until the end of May 2013.

Big Generic Pharma Wins Big Again

The AOK says that the current round of discount contracts were geared towards attracting bids from small- to medium-sized manufacturers, partly because the number of regions in which the insurer launched tenders was increased from five to seven, thereby giving companies more opportunities to bid. The insurer was under pressure from government and the courts to give more consideration to small and medium-sized entities after previous rounds of contracts appeared to favor larger firms.

The nature of the game - competition based purely on pricing - would appear inherently to favor larger firms, however, and the latest round of winners suggests that little has changed, despite AOK's claims.

Big generics players scooped most of the 28 confirmed contracts, with Teva Pharmaceutical Industries' recently-acquired ratiopharm taking top spot with 11 contracts; Stada Arzneimittel, via subsidiaries Aliud and Cellpharm, winning eight, plus an additional contract in a joint offering with Fresenius Kabi; and Novartis AG's generics subsidiaries Sandoz, Hexal and 1A Pharma securing six contracts.

Smaller firms made only minor gains, with Nuremberg-based Heumann gaining two contracts, MIP Pharma, headquartered in Blieskastel-Niederwurzbach, one, and Kiel-based Galenpharma also one.

Hermann added that: "For the first time, companies could make bids for medicines that they themselves do not actually market at this point in time." They would simply need to convince the AOK of their manufacturing and supply capabilities, perhaps based on evidence that they have marketed the product elsewhere or have entered into an agreement with a company that would be able to do so.

Insurers Under Fire, But Likely To Retain Upper Hand

While manufacturers continue to dispute the validity of the discount contract system, both inside and outside of the courts, the situation may yet get worse for drug providers as consolidation sets foot amid Germany's highly-fragmented health insurance sector. According to local press reports, two of the country's largest funds the TKK and the KKH-Allianz could be looking to merge. Such a merged firm would outsize even the AOK, giving the new fund even more price negotiating power and reducing the number of insurers available with which to enter discount contracts.

So far, both funds have stressed that they are not officially in preliminary merger talks. At the same time, neither side has denied that this is a possibility.

Meanwhile, the federal association of German pharmacies (ABDA) recently criticized health insurance funds for failing to pass on to patients the savings from discount contracts. In fact it claims the opposite is true: the association reports that patient co-payments since 2007 have secured insurers additional profits of €1.8 billion.

If the Dusseldorf court accepts the pleas of the plaintiffs in the forthcoming discount contract cases, there could be implications for the tendering system in its current form. It may lead to a wholesale restructuring of the system in order to make it more inclusive. But whatever the changes made, it's hard to imagine that price-based tendering for generics will go away any time soon. And few commentators have altered their view that discount negotiation between drug firms and insurers will continue to spread into the innovative sector (Also see "Pricing Experiments: Pharmas Get Creative in Germany" - In Vivo, 1 Jul, 2009.).

- Faraz Kermani (f.kermani @elsevier.com)