How the "Mighty" Hath Fallen…
Tom Curb, R.Ph.
(The announcement hit the media like the proverbial "ton of bricks": "Merck has decided to sell its cholesterol-fighting drug, Zocor, to some major managed-care companies at what is expected to be a lower price than what it will be available for in generic form.")
Those of us who have been around a while realize how much ego Merck had to swallow to make such a decision - a primary factor must have been its financial straits due to the Vioxx debacle. For as long as I can recall, Merck has assumed that its ability to retain the allegiance of doctors and purchasing agents was rock solid. About 25 or 30 years ago, that pragmatism was validated when its market-leading steroid, Decadron, met competition from the generic, dexamethasone. Before that, Decadron’s only competition was Hexadrol, a minor company’s equivalent brand.
When generic dexamethasone became available, I asked a Merck salesman if the company would reduce Decadron’s price. His reply was, "No, Merck feels that if we cut the price of Decadron by 50%, we’ll lose half of the dollars up front, and they don’t think we’ll lose 50% of the business by holding firm on price." Guess what? They were right. Fortunately for Merck (and unfortunately for consumers), the anti-substitution laws supported by the drug industry, pharmacy associations, and state regulators made generic substitution almost impossible – especially when drug companies were "wining and dining" doctors and purchasing agents at every opportunity.
Years later, after repeal of those anti-consumer regulations, Eli Lilly tried that same Merck logic when its antibiotic, Keflex, was faced with generic competition. Bad move – Keflex lost about 75% of market share in just a few weeks. The drug industry suddenly developed a whole new philosophy: Sell their generically-available brands at "generic prices" to mail-order, institutional, and other "closed pharmacies", and use that pricing to leverage sales of their other products.
This is why I find it strange that a Raymond James analyst, Michael Krensavage, said, "Some industry analysts were taken by surprise by Merck’s move", and that, "(He) had never seen a branded company cut price…" (This guy must be a new kid on the block. In the 1980’s and early 1990’s, as pharmaceutical buyer for hospitals and HMO’s, I rarely bought generics – I could buy their equivalent brands for less money – and, since these were "bottom-line" institutions, by referencing the brand’s higher AWP, they retailed the discounted brand higher than the generic.)
Historically, when price concessions such as this have been made by a manufacturer, almost all of the "cost savings" are retained by the managed-care entity and/or its mail-order pharmacy arm. Little, if any, has been passed on to the customer or insurer. Also, since Congress has denied Medicare the ability to negotiate drug prices, Medicare Plan D enrollees and the U.S. taxpayer will still be "hung out to dry", and once again local U.S. retail pharmacies will be at a pricing (and profit) disadvantage with respect to Merck’s "select" PBM customers.
Although, it seems that Merck now embraces the concept that "50% of something is better than 100% of nothing", these favored managed-care entities’ preference of Merck’s Zocor over the generic may not translate to savings for Medicare, its Plan D enrollees, other consumers, or their Client-insurers. Remember, Merck is dropping Zocor’s cost only to some managed-care companies, including WellPoint’s and UnitedHealthGroup’s mail-order pharmacy operations. As part of the "deal" UHG will further confuse its patients, especially Medicare enrollees, by flipping to a $10 copay for Zocor and a $50 copay for the generic. (Then after about six months - when the bottom falls out of the generic’s price - they will probably reverse that copay structure to maximize the generic’s increasing profitability – again confusing already-befuddled seniors.)