Matt Quinn wrote this post about doctors charging Medicare for samples given to them by drug companies. Astra Zeneca has already settled with the Feds at  a cost of $330m for promoting that behavior. As I’ve mentioned many time, I think Medicare’s structure makes it easy to defraud, so I don’t place all the blame on the docs.  I actually think Matt’s a little over-critical of physicians (and by extension drug companies) here.  But Matt used to work in the business of marketing oncology drugs to physicians and knows many of the tricks. So bear that in mind when you read his post below:

A federal judge is blaming a pharmaceutical company (Astra Zeneca) for a physician, Dr. Saad Antoun, billing for (injectible) samples of their drug which he was given for free: "The judge said Antoun appeared to be ‘the kind of doctor everybody wants to go to and that this was a mistake of bad judgment fostered upon you by the drug company.‘" The full story from the Report on Medicare Compliance is here.
My question: if this doctor is so helpless as to 1) not ask Astra directly about "misleading labeling" regarding billing for samples 2) not ask his peers/staff about the legality of billing for samples and 3) not do the (minimal) research needed to know that it violates federal law and 4) follow the directions of a drug rep in running his practice and treating his patients, how much faith should anyone have that this guy is competent in his profession?  Would it be the drug company’s fault if he used Zolodex improperly and it harmed or killed a patient?  Perhaps the label was "misleading" or the drug rep told him about an off-label use that he had heard about.
My take is that Dr. Antoun knew exactly what he was doing — or should have.  Egregious pharmaceutical marketing only works because physicians allow it to work.  If physicians rejected trips, graft in the form of "unrestricted educational grants" and honoraria, free meals, gas, and concert tickets and other "non-scientific" aspects of drug marketing, then the companies would stop spending money on this stuff.  But many physicians don’t.  External agencies only need to regulate a profession when members of that profession can’t conduct themselves ethically.  I guess Judge Farnan can’t understand this and refuses to keep up the government’s (taxpayers’!) side of the deal.

In this post a while back I wrote about the problems that mid-market pharma companies are having dealing with patent expirations.  The Jenks Health Care Report has an article on the future of Schering Plough available here , which goes into much more detail about what’s wrong at Schering and whether it can be made right.  Their view is that Schering will be dressed up for sale.  The question is, would an acquisition of a wounded company help any of the usual big Pharma suspects? Most of them have already gotten big enough in terms of sales force and market clout, so would they want Schering’s somewhat lackluster portfolio and pipeline?  Probably not at its current PE ratio of 20, which is the same as that of Bristol-Myers Squibb.  Pfizer’s PE ratio is around 50.

Massachusetts is suing drug makers for ripping off the state’s Medicaid program.  But note carefully, they’re suing generic drugmakers. I thought generics were supposed to be cheap!  The suit accuses the generic-makers of a familiar tactic.  Selling the drugs to pharmacies at one price, charging Medicaid a higher price and kicking back (some of) the difference to the pharmacies to move around market share.  It’s a little odd that virtually every generic maker was allegedly doing this–how can they all be buying market share at the pharmacy?

However, this does start to get at some of the underbelly issues of marketing drugs.  It’s well known that doctors are marketed to extensively by pharma companies, and the definition of what’s a legitimate promotion and what’s  a kick-back has been changing over time. It’s also well know that PBMs are paid extensive spiffs by pharma companies (called "rebates") to favor one brand over another. What’s not so well known is that pharma companies are also paying pharmacies to try to move share around within the formulary–a kind of counter-formulary trying to move scripts from the first-tier drug to the second tier . These programs are run (somewhat quietly) as part of the Rx point of dispensing messaging by the big transaction companies, like NDC, WebMD and Proxymed. It looks like a similar activity by the generic makers in Massachusetts may have stepped over the legal line.

FDA Approves Sale Of Prescription Placebo as reported by The Onion.  You know it’s only 90% a joke.

The headline says Drug ads row snares Cronkite.  Walter Cronkite remains the most trusted source of news among senior Americans.  According to his version of events, he thought that he had signed a contract to make educational programs about new treatments, and later found out via the New York Times that the company he’d signed up for made promotional infomercials,  sponsored by drug companies. So Cronkite is being sued by the marketing company for pulling out.

However, this isn’t the first controversy about what’s educational promotion and what’s hucksterism.  Several articles like this one and this one examine celebrities not revealing that they are being paid to promote drugs in medical segments on shows like The Early Show, 48 Hours and CNN. Some networks actually produced a code of practice about this last year.

Of course there are similar controversies about the way that pharmaceutical companies promote to physicians. A Harris poll earlier this year showed that this isn’t  a big concern for too many patients yet, although 55% believe that drug company marketing to doctors is either "a little" or "much" "too aggressive." What is clear is that the very sophisticated and not always transparent ways that pharma companies use to market their product will be used as a weapon to bash them when they oppose re-importation, collective buying by state programs, or even (take a deep breath here, pharma folks) price controls.

The stock prices of the big three drug distributors, Bergen Brunswick, McKesson and Cardinal Health have taken different courses over the last 5 years.   Mckesson’s ill-fated purchase of HBO & Company put the company into a funk from which it has taken years to get out. Cardinal steered away from those problems by building a very diverse set of businesses, including specialty pharmacy services and niche information technology services. It has been a consistent profit generator and has generally had the stock result to match, although it had a big setback in late July when it announced that future growth would be 15% rather than 20%. 

Bergen which merged with Amerisource to match the scale of the big two in 2001 saw seen its stock rise dramatically faster than Cardinal’s for the next year (2001-2) and also since May 2003 .  Bergen’s revenue (of the two merged companies combined) at the time of the merger was around $35bn, and that’s shot up to $45 billion with profit growth to match. However, over the last year both stock prices have been mostly in negative territory and Bergen’s summer rally (up 40% between May and July) is well and truly over.

Friday’s news of an investigation into Bergen’s alleged double billing of rebates from pharma manufacturers may be old news (according to the company’s rebuttal).  However, the stock fell about another 5% on Friday and Bergen now has a significantly lower PE ratio than its competitors (15 vs 18 for Cardinal and 17.5 for McKesson).

Don’t forget that drug distribution is a complex, very low margin business.  Cardinal’s long term success in has been both due to its operational success and its push into several niche businesses in health information and specialty pharma services.  It hasn’t made the big misstep that McKesson made with the HBO& Company deal. McKesson, meanwhile, has also been regrouping and making pushes into related markets, such as pharma market research. It’s worth watching to see if Bergen has hit a real snag or if it’s just a hurricane in a tea cup, which gives what the traders call "a good buying opportunity". It’s also worth seeing what these three sizable companies do regarding the on-or-off Medicare reform package, and whether any of them decide to get closer with the PBMs or the mail-order business.

Drug imports from Canada are now being stopped at the border.  We’re already had Glaxo trying to cut the Canadians off at the wholesale source (later joined by Pfizer).  Now we have the FDA trying to shut down a major exporter, claiming that its Insulin was not delivered frozen. While this is going on, the state of Illinois was telling its retirees to look north for their drugs.

This long article in the Boston Globe, which I got to via the excellent Bloviator medico-legal site, suggests that the crux of the FDA’s case is that insulin and some other drugs need better care (i.e. temperature controls) during transit. Even if that’s true for safety reasons, it is a) equally true for US based mail-order pharmacies and b) probably not true for most drugs sent in pill-boxes. In fact the Canadian Internet pharmacies are bending over backwards to do this properly.  Look at this example.  You need a new Rx script from a real American doctor.  While, if you want to buy Viagra online from this American source, you just need an "online consult."

So why the crackdown on the Canadian imports only? Let’s take the FDA at their word for the moment and realize that they are where the buck stops for patient safety. But if the FDA is trying to avoid appearing to be the handmaiden of PhRMA, it needs to work on its PR a bit more!

Libertarians argue that the FDA prevents helpful drugs getting to market.  Pro-regulation types tend to argue that the FDA rushes drugs through too quickly allowing too many dangerous drugs on the market.  In the past few years, Phen-Fen, Rezulin and Baycol are just three drugs that have been pulled from the market because of adverse effects discovered well after Phase III trials were completed and the drugs approved for sale.

Besides the hidden human costs of restricting potentially helpful drugs from the market and the very visible human costs of not stopping potentially dangerous drugs getting to the market, there are real financial costs for the industry in not getting this right.  Bayer has already paid out over $450 million for damages caused by Baycol and is looking at something between $1bn and $5bn more to come–not to mention the loss of more than $1 billion in annual sales.  Just yesterday news started to surface that Avandia and Actos, both drugs for type-II diabetics may cause heart failure in some patients. There have also been serious suggestions that the other statins, Lipitor, Provachol and Zocor, don’t work and also have nasty side effects like Baycol. You can be sure that the attack-dog lawyers are just hoping that they can get their teeth into Pfizer, Merck, GSK and the rest over those issues. Yet we will see many, many more drugs coming to market over the next few years even before the flood of products from the genome revolution heads our way.

So what can we do to get out of this bind in which everyone loses but the lawyers?  One of the keys to this issue is that drugs work differently for different people. Clinical trials, even the big ones required for phase III, often exclude too many types of people who end up taking the drugs in the real world, or are not long enough to discover some of the long-term effects (the Baycol example). Phase IV clinical trials (those that happen after the drug is on the market) are expensive and really only used when the FDA demands them.

Some of the brighter people in the industry have been talking about a combination of silicon and genomics eventually solving this problem.  For one view, that of Kim Slocum at AstraZeneca, look at slides 75-95 of this long talk. I summarize Kim’s concept here (hopefully accurately!):

in the future we will understand the impacts of drugs on patients by recording their information electronically, matching it with their genetics, their treatment and their outcomes, and doing consistent long term monitoring and reporting of all of this information. Aggregated information from real care will then be collected, analyzed and delivered back to clinicians. This will eventually create a massive feedback loop that should show which drugs work best for which people over the long term. Inevitably this information will be incorporated into the drug development process, and the medical care process.

In other words drugs and their uses on different types of patients in the real world will become another facet of clinical trial research and of course another venue for FDA attention. In a meeting last year in direct response to my question Kim told me that he believed most of the pharma industry was on board with this new view of how pharmaceuticals should be used and monitored, despite its potential for showing up warts. Much like the related controversy over mistake-reporting, it would surely be better if we could see these types of systems in place, and find out the effects of pharmaceuticals before more drugs have to be pulled off the market in the face of human tragedies with only lawyers benefiting from the 20-20 hindsight.

When I first got into health care a little over a decade ago, the first lesson I learned about big drug companies was that they were very profitable. The second lesson was that a huge company might have only one or two profitable drugs. When I first looked at the Fortune 500 I found that Merck, then the big Kahuna of big pharma, had a market cap the same size as companies with ten times its sales, reflecting that profitability. Pfizer, which is now the big Kahuna, has a market cap of over $250 billion (here’s a list of the top pharmas) with net income of $9 billion on sales of $32 billion.  For comparison GE has net income of $14 billion on revenues of $131 billion.  (GE’s market cap is around $315 billion).

However, behind the numbers, the pharma industry, despite all its dalliances with PBMs, care management, and genomics, over the years still operated by simple rules.  So what a big pharma company did was to somehow develop a profitable drug and market it to doctors (and more recently patients). But there wasn’t a concentration in the industry like there is in automobiles, or steel, because the products were company-specific and of course patent-protected.

So the rules of the game are, if you’re a pharma company and you can’t develop a profitable drug, then license one in.  If you can’t license one in then buy the company that makes it — even if it’s  a huge company.  Pfizer’s purchase of Pharmacia was $60 billion spent largely to get hold of one drug — Celebrex. Since the early 1990’s Pfizer had successfully played a strategy of marketing drugs when others (especially Merck) were distracted by managed care, buying PBMs and generally cutting back on their sales forces. That gave Pfizer the marketing clout to license in other drugs, even from big companies.  For instance, they were already co-marketing Celebrex before they bought Pharmacia. And eventually it gave them the scope to have a full portfolio of drugs by acquiring other companies. Other big pharmas, notably GlaxoSmithKline — the combination of Glaxo, Burroughs-Wellcome, Smithkline-Beckman, Beecham (and a few I’ve probably missed), which were all largely "one-drug" companies at the start of the 1990s — followed suit by getting bigger to get both marketing clout and more comprehensive portfolios.

The other side of this coin is what happens when you don’t have the first part of the equation; the blockbuster drug. Schering-Plough’s new CEO Fred Hassan (ex-Pharmacia by the way) gave a talk this morning about the problems of his company.  Schering has been hit by the loss — more like the evaporation — of its main allergy products Claritin and Nasonex, as well as in the Hepatitis C market.  Schering has been unable to replace these losses with new brands, and also has had manufacturing and regulatory problems. It has been therefore unable to jump from being a one (or two)-drug company to being a serious heavyweight. Astra-Zeneca, a mid-size player that became big on one drug, Prilosec, looks like it is making that jump with Crestor — its new statin.

Usually the companies in that situation sell out/merge with others around the same size, rationalize their sales forces, and wait for new blockbusters to emerge.  However, its been more than a year since we saw the end of the last round of pharmaceutical mergers — last one was Pfizer-Pharmacia — and it may be that the really big guys don’t need the medium size guys any more. In that case we might see the slow withering of the medium-sized pharmas, especially those without strong pipelines.  And as I mentioned in last week’s post about biotech, there’ll be more continued interest from the big guys in cutting deals with interesting small research companies to keep that pipeline stocked.

The New York Times has a long and generally factual article about the impact of contributions from drug companies in the 2000 and 2002 elections, and it’s relation to the Medicare prescription drug coverage bills that are now in conference between the House and Senate. The industry, via its trade association PhRMA and in direct lobbying/contributions from individual companies, contributed $50 million in campaign contributions– almost all to Republicans–following the "Flo" TV commercials in 1999, which starred an old lady asking to "keep Big Government out of my medicine cabinet".

So with that anti-government stance, how come we have a prescription drug bill almost ready to be passed?  Well the answer is that, like the AMA and AHA in the 1960’s, the industry has cut a medium term deal with the government.  Given the costs of drugs to consumers, especially the elderly–and the near elderly "aging in" to Medicare by 2010–a government Rx program is inevitable at some stage.  So PhRMA figured better one that has no price controls now, rather than one that comes with them immediately.  Eventually, any government program that buys drugs will develop some type of budget restraint.  But that can be left for future Congresses to pass and for future senior executive teams in the pharma industry to suffer through.  After all, Medicare was introduced in 1965, and it took until 1983 before DRGs were introduced in a first attempt to restrain hospital costs.  19 years of an unrestrained government program with millions of new price-unconscious consumers probably looks good to the industry right now. OK, they won’t be that lucky, but you understand their position!