Rangel-ing Over Drug Promotional Expenses: A Tussle That Might Not Scare Pharma Too Much

The advertising, broadcast and medical publishing sectors were thrown into a tizzy on June 16 when reports from Capitol Hill said that removing the tax deductibility of drug promotional expenses remains a live issue in the funding discussions around health care reform.

They should have been ready. There have been reverberations for over a year that pharma’s critics on Capitol Hill might try to raise some money for health care reform from the drug industry’s marketing budgets. White House Chief of Staff Rahm Emanuel has previously talked about giving manufacturers a choice between deducting R&D expenses or promotional expenses.

So it shouldn’t have come as such a shock when House Ways & Means Chairman Charles Rangel (D-NY) said on June 16 that his committee was looking seriously at removing the deductibility for drug promotional spending. But the thought of losing such a lucrative and solid stream of funding has a way of focusing the attention of the sectors that count on pharma promotional budgets: think of the nightly news programs on TV. Their ad sales staff must be in a panic.

The $37 billion price tag that Rangel casually attached to the possible change quantified the challenge and gave it a magnitude that made it more threatening.

The $37 billion figure is presumably calculated as a ten-year revenue estimate, the format that dominates government projections. It does not, however, appear to relate directly to any discreet part of promotional spending like DTC, which is generally estimated at about $4 billion per year.

Eliminating ten years of DTC expenditures would add up to a figure in the ballpark range to Rangel’s number, but that does not mean the government would collect that amount of money. The government revenues would come from the reduced taxes on the expenditures, not from the reduced expenditures. The total expenditures do not translate directly into new tax revenues.

To achieve $37 billion in new tax revenues at the current corporate tax rate would require removing the drug industry business deductions on somewhere around $106 billion in expenditures over the next ten years.

We’ll have to wait a while to find out where the calculation comes from. Removing the tax deductibility of promotional spending was not included in the June 19 draft of the House Democratic health reform proposal.

There is one quick hint in the bill about what promotional expenses being considered for losing deductibility. The June 19 draft contains a penalty provision for companies that do not live up to new sunshine disclosure provisions for gifts to doctors. If companies get caught failing to report gifts or misreporting gifts, then they would lose the ability to deduct “any expenditure relating to the advertising, promoting, or marketing (in any medium)” of a drug or device during the year of the violation.

That can’t be a penalty if elsewhere the bill would take away the deductibility of all promotional spending. Therefore, the Democrats do not appear to have in mind a full-out assault on the deductibility of promotional spending. Which means if you are a business that relies on promotional spending from pharma, now is the time to get to the Hill to draw the line between the dollars that support your efforts versus the dollars that support other forms of promotion. The definition could have a big impact.

Did Critics Force Pharma To Cut Back Spending Too Early?

Maybe Rangel and company hoped to get some of the saving from the lavish pharma entertaining budgets. But in what may now appear in hindsight as a strategic miscalculation, the industry critics have already forced pharma to stop some of that entertaining voluntarily – getting rid of what could have been a nice source of health care funds.

Pharma’s voluntary cutbacks over the past five years in the most unseemly marketing practices, in fact, gives a hint why Rangel’s comments may not scare the industry so deeply.

Forcing pharma companies to think more carefully about their marketing expenditures (as tax disadvantaged expenditures will be more painful) may provide the cover that some industry execs want to trim back marketing and sales budgets. This is similar to arguments by pharma execs for decades that they did not like having to fund expensive sampling/giveaway programs but were afraid to stop until their competitors stopped.

An across-the-board rule like taxing ad expenditures would force all the industry companies to reassess promotional budgets and force an assessment of new ways to build customer loyalty and interest in their products.

In Vivo Blog and its affiliate The RPM Report have been touting the new post-market control programs (the REMS of the 2007 FDAAA Act) that are being required more frequently by the Food & Drug Administration as an alternative to fill the gap for discredited promotional activities. There are other, less costly ways that the current detail forces and TV ads for pharma to build its ties to the medical community and patients. Rangel and his tax approach may just be hastening the era of those changes.

That may be why we are hearing that some influential strategists within pharma are not putting a fight with Rangel at the top of the 2009 health care reform fight. Privately, they say there are much more important fights and issues in health care reform to waste too much time and effort fighting the deductibility of promotional expenses. This may be a legislative argument that pharma is not afraid to lose. They won’t say that openly, but don’t expect much effort and money directly from the drug companies to be devoted to the promotion fight.

Of course, if pharma reacts in a prudent way to higher promotional costs and cuts back those expenditures effectively, then the government will not have promotional tax dollars as one of its sources of revenues for health care reform. That would mean that the government would under-estimate the sources of funding for a new health care program. Would that be the first time?

What's the Secret of Comedy ... and PR?*

Our colleagues at the Tan Sheet think the Consumer Healthcare Products Association, the trade group representing over-the-counter drug manufacturers, has a handle on the latter, given the timing of their announcement today that their members plan to relabel OTC pediatric cough cold products “do not use” in children under 4.

The announcement garnered industry headlines like this: Drug companies: No cold medicines for kids under 4. The relabeled products including some in Novartis’ Triaminic Line, McNeil’s Tylenol line and and some from Procter & Gamble, Reckitt Benckiser and Wyeth Consumer Healthcare (a full list is here) will be on shelves within weeks, under a plan the association worked out with FDA's blessing - well before the agency's Part 15 hearing held last Thursday to gather information on the products.

Notably, both the agency and the association kept mum at the hearing about the relabeling plan.

As a result, petitioners seeking to have pediatric cough/cold products off the market for children under 6 didn’t get a chance to pick at the plan at the widely covered event, and industry is able to announce a public safety initiative that appears to address at least part of the program in the next news cycle.

Which had some reporters griping at FDA today when the agency held a press call on CHPA’s plan. “Why couldn’t you have brought this little tidbit up during the nine-hour meeting on exactly this topic last week?” was the gist of the complaint. FDA’s director of the Office of New Drugs, John Jenkins, and drug center head Janet Woodcock said they deferred to CHPA on the announcement and split a hair, saying the meeting was about proposed changes to the OTC monograph, not about short term industry efforts. Given FDA’s recent track record on public relations, this isn’t too surprising.

For an in depth look at FDA’s meeting and some clues to agency thinking about revising the OTC monograph for the products, see “The Tan Sheet” here.

--Chris Walker

*(timing.)

Why Merck’s Problems are Also Your Problem

Will Vioxx never go away?

It has been four years since Merck withdrew the COX-2 inhibitor. It is a full year since Congress enacted legislation intended to “fix” the drug safety problems highlighted by Vioxx.

But Vioxx is still in the news. Now, the focus is on how the product was marketed. Academic journals, mining product liability dockets, are highlighting instances of “ghost writing” and “seeding studies” involving the product. The media gleefully piles on.

If you don’t work for Merck, you may be tempted to think none of this much matters. (Except perhaps as an occasion for schadenfreude, if the unrestrained glee of these posts is any indication.)

We’ve written before about the far reaching impact of a damaged reputation, and specifically about the implications of the blemishes on Merck’s once-stellar image as the drug company that does things the “right way.”

But Merck’s problems are not just Merck’s problems. The damage to Merck’s reputation is the whole industry’s problem.

Here’s why: Just as Vioxx was the short-hand explanation for a whole host of drug safety changes—most of which, both Merck and its harshest critics agree—had nothing whatsoever to do with the drug, now it is a short-hand for everything that people object to about industry marketing practices.

And Vioxx’ potency as a weapon against the whole industry is all the greater because it was sold by Merck.

One example came during the Food & Drug Law Institute advertising & promotion conference September 8, when Ann Witt, a former FDA ad division head who is now an advisor to Congressman Henry Waxman, discussed Waxman's opposition to a proposed guidance that would allow companies to disseminate peer-reviewed journal articles on off-label uses:

"There are many many examples, and unfortunately there are more coming to light every day, of company-manipulated data that ends up in peer reviewed reports. I’m sure we’ve all followed the somewhat distressing trail of evidence that is coming out about how Vioxx was promoted. There have now been at least four or five separate articles on the different methods that Merck used to manipulate study results."

"I--who have spent probably 20 years following drug advertising and thought I was pretty cynical about it--I found the stories about Merck personally extremely depressing. I would imagine many of you do. "

"I, like many people at FDA, always thought of Merck as sort of the gold standard in the industry, and to find that this kind of really irresponsible marketing and distortion of the scientific record was so pervasive there is truly troubling."

"I would hope that it would lead all of us to question whether substituting peer review, for FDA review and approval, is really a good way for doctors to learn about new uses of drugs."

In other words, if Merck does it, then everybody must do it.

And consider the context: Witt is citing allegations against Merck to block a guidance on off-label journal reprint distribution. That is an issue that is of far less significance to Merck than to dozens of other companies with more prominent positions in oncology, pain or other markets where off-label uses are essentially standard practice.

That is how it works. Companies that never marketed a COX-2 inhibitor have to live with mandatory post-marketing studies and Risk Evaluation & Mitigation Strategies. They may also have to live with a whole host of new marketing restrictions—whether enacted by Congress or simply created by more aggressive enforcement at FDA.

Lilly's "Transparent" Move

Lilly’s May 13 endorsement of the Grassley-Kohl Senate “sunshine” bill (S2029) calling for listing physician payments from pharmaceutical companies shows more about Lilly’s political positioning skills than about the prospects for the bill.

In fact, it looks like a transparent move in favor of transparency. It’s pretty easy to see the advantages that Lilly sees in coming out in favor of the bill now.

At first glance, the endorsement may seem like big news, a break with the general slow, foot-dragging response to the push toward transparency. Most companies have been telling Grassley they will look at making some grants to organizations public but staying away from the full push to “transparency” that would start naming individual doctors. (See “Saying ‘No” to Legislated Disclosure”.)

For Lilly, open support for the legislation fits the current situation and the company’s traditional approach to staying out ahead of efforts to rein in novel marketing strategies.

Lilly has been out on the front of transparency for over a year. The company was pushed in that leadership position in response to allegations that it used grants and payments to physicians to support marketing efforts, primarily for the antipsychotic Zyprexa (olanzepine).

The company put up the first listing of grants on its webpage a year ago at the start of May 2007. That puts it more than a year ahead of the next drug company to make the information public.

Pfizer put its listing of grants up on May 15 right on schedule with a self-imposed deadline. (See Pfizer grants here.) Lilly’s May 13 statement of support, in fact, also has a touch of upstaging the Pfizer postings. Pfizer made its deadline public at least two months ago.

As first off the blocks in transparency, Lilly has no reason not to want the rest of the industry to follow. Lilly has taken the plunge: they want everyone else in industry in the water with them.

By signing on to the Grassley proposal, Lilly follows Zimmer and Medtronic and several other device firms which have similarly come out in favor of the sunshine approach.

Some of the device companies, of course, have also been pushed into transparency as the result of settlements of charges against payment practices for consultants. Once pushed to transparency, it makes little sense to oppose legislation if the legislation makes your competitors follow the same path.

Some companies (most notably Stryker Orthopaedics) have gone the next step and determined that, handled right, physician listing can even be a good tool for cementing relationships with key physicians. Stryker turned the requirement to expose physicians on its head and created a clever, open treatment of its listing of consultants. The open approach leads to a website that is part endorsement, part networking page for its outside consultant physicians (See “Flourishing in the Sunshine: Disclosure as a New Commercial Advantage”).

Lilly also timed its support well. Not only does it take some of gloss off of Pfizer’s move, it is from of no-cost, no-pain support. The Grassley-Kohl bill still faces substantial hurdles to get attached to the Medicare physician payment fix this summer. The payment fix is the best vehicle to get the sunshine bill through Congress. If there is not much chance that the proposal will really get through Congress, then it gives Lilly a chance for some gratuitous support.

Getting out in front in support, also assures Lilly a voice in writing the important final details if the bill breaks through this year. It positions the company as a corporate good guy for the debate if it starts up again next year, in a potentially less favorable environment.

The move to stay out ahead of the other pharma companies on the issue interestingly takes place under a new senior Lilly management team: CEO John Lechleiter just officially took over the top spot at the beginning of last month, the new top policy person, Alex Azar joined the company just under a year ago from the number two position at the Department of Health & Human Services. (See here for background on the choice of Azar to join the Lilly team and here for Azar’s advice to the industry on a legislative strategy.) Several close observers of pharma in Washington see Azar's hand in the decision to work with Grassley.

But the tactic of trying to make the most out of being caught by writing the rules your way is not new to this Lilly team. Lilly has done this before under other senior managers. It is a well-tried and tested approach.

Lilly took the same posture of getting out ahead on working with the government during the industry rush to own pharmacy benefit companies in the early 1990’s. Lilly used negotiations with the Federal Trade Commission on its deal for PCS to help write rules for the entire group of pharma-owned PBM companies. It’s a well-worn path; Lilly is skilled at following the path to its advantage.

Can a Sleep Drug Awaken Demand from European Consumers?

Superficially, it’s paradoxical.

Sepracor wouldn’t sell US marketing rights to its sleep drug Lunesta, even though it could probably have gotten a great deal. And then last week it goes and sells European rights to GSK for just $20 million upfront and another $135 million in milestones?

OK, that’s by no means a true yawner. But it’s hardly a wake-up call in this age of colossal licensing fees and milestones. VX950, the barely post-proof-of-concept hepatitis C candidate from Vertex, fetched $165 million upfront, and $380 million in pre-commercial milestones for merely European rights. Why didn’t Lunesta, with US sales approaching $600 million, do at least the equivalent?

Because the comparison isn’t at all fair. Hep C is a life-threatening disease currently treated with a couple of inadequate, problematic therapies. Insomnia is probably just as big a market -- but is less important to doctors than it is to patients (for some background on the insomnia markets and related dealmaking, see our coverage here and here).

And that’s precisely the challenge. In the US, Sepracor sets its own price and then can spend hundreds of millions of dollars getting its message out to consumers. In Europe and Japan it can do neither.

Which means that Lunesta will have a lot more commercial risk outside the US than something like VX950. GSK’s $20 million bet on the product isn’t exactly trivial, but it isn’t a huge vote of confidence that European insomniacs and their doctors will clamor for Lunivia (European for Lunesta) in the face of a host of generics like racemic zopiclone, Ambien, and a number of benzodiazepines.

And it’s why so much of the deal’s $135 million in milestones apparently depends not merely on getting a centralized approval, but on getting reasonable levels of pricing from various European countries. Sepracor could still make plenty of money: we estimate that it’s getting what might, on a blended basis, work out to a 15% royalty (the rate increases with sales) plus another 10-15% profit on selling the material to GSK. But Sepracor will only make money if the drug is successful.

Thus the $20 million upfront fee represents a cautious gamble that Lunesta’s data package will not only pass muster with the EMEA, but will convince the national reimbursement groups that they should pay a premium for a drug that can be used chronically and which comes with a host of data showing its beneficial effects on insomnia-associated co-morbidities, like depression.

Same thing in Japan, where a pricing milestone on Lunesta is also a key part of the value in the deal Sepracor signed in July with Eisai. The upfront in that deal was probably considerably smaller than what GSK paid: not only is the market about half the size of Europe, the product has to jump through more clinical hoops before it can be approved. In any event, the Eisai terms were undisclosed, which means they weren’t material.

Financially material that is. Sepracor is certainly hoping they’ll be seen as strategically material. The company has recently been a punching bag for investors, taking particularly heavy punishment when new CEO Adrian Adams lowered revenue expectations for 2007 during the company’s July earnings call.

Thus the biggest value to the deals may yet be validation for Sepracor’s ability to take a product developed in the US and convince leading CNS companies they can rely on the company’s US clinical and marketplace work to win approval for, and successfully commercialize, a consumer-driven product in markets where consumers don’t rule.

While You Weren't Working

For those of you in the US, we hope you had a relaxing three-day weekend. Here are a few items you may have missed while sparing a thought for the Noble and Holy Order of the Knights of Labor and/or enjoying a cocktail. Not everyone took the weekend off ...

• Merck & Co said on Sunday at the European Society of Cardiology congress in Vienna that Cordaptive, it's extended-release Niacin plus flushing inhibitor, was effective at lowering LDL cholesterol while raising HDL. Reuters has the full story.
• The Observer takes a look at investor unrest at GlaxoSmithKline, and in particular institutions attempts to get their points across to the company's as-yet unchosen new CEO, who will take the reigns when JP Garnier retires in May 2008. You might recall the Telegraph running something along these lines back in May (and our comments at the time on succession speculation). We'll have more to say on this later in the week.
• The Philadelphia Inquirer weighs in on the state of drug marketing, and finds that drug samples and TV ads help drive uptake of medicines.
• Eli Lilly's new schizophrenia drug may offer safety and efficacy improvements over existing antipsychotics, according to results of a 200-patient Phase II trial. From Nature, via the New York Times.
• Acambis has received FDA approval of its ACAM2000 smallpox vaccine

Locking the Sample Cabinet

Maybe nothing lasts forever
not the mountains or the sea
but the times we had together
they will always be with me
- The Samples “Nothing Lasts For Long”

It's a potent weapon in pharma's arsenal. But is drug sampling on the way out?

The New York Times has a story today about a handful of leading academic medical centers and physician practices restricting or eliminating drug samples. While the drug industry--or more specifically, the drug industry information providers IMS and Verispan--yesterday prevailed in its quest to overturn New Hampshire law forbidding gathering of physician prescription data there, knowing which docs prescribe which drugs and how often will be of less use if reps can't drop in and drop off drug samples.

This isn't necessarily news: the University of Michigan Health System has banned drug samples since 2002. The upshot? Docs and students there practice "without the influence of drug samples, encouraging them to prescribe higher cost brand name medications when a generic or lower cost brand would work as well." But sampling proponents contend that (among other benefits), freebies can be helpful for patients concerned about costs--after all, a free drug costs less than a drug that's, well, not free.

And a new Booz Allen survey published in IN VIVO shows that it's not just the poorest patients who are affected. As more consumers take on much bigger shares of the health costs, say the consultants, they've started to focus on price, including the price of drugs--often going so far as to reject their doctors' recommendations to save money.

So, sampling is good? Maybe, in some cases. But in general sampling is designed to make money for pharmaceutical companies over the long haul, whether or not it saves patients a few bucks at the outset of treatment. Sadly, there's no such thing as a free drug, most of the time.

Despite a few locked cabinets here and there, drug sampling isn't going away quite yet. But these sampling skirmishes are another issue for primary care drug marketers to worry about. Another reason why the appeal of specialty drugs continues to grow.