Bristol-Myers Squibb is the first company to step forward to dispute a judicial ruling from earlier this month that defines the term "average wholesale price" as the sum of its dictionary parts. It's likely that other drug makers may follow BMS' lead in appealing the ruling that pulled the rug out from under the defense in a class-action suit brought against 42 pharma companies for over-billing Medicare.

If the ruling stands, it is unclear how much the companies stand to lose. But in some cases, the difference between a strictly defined AWP and what the industry reported is as much as 1,000 percent. GlaxoSmithKline in August was the first company to settle the case for $70 million.

Drug makers have historically reported AWP as a sticker price, an amount that is higher than the acquisition price paid by physicians and pharmacists after rebates and other negotiations. But they argue that the practice wasn't deceptive--and that government officials knew they were being quoted a sticker price rather than a strict average wholesale price. Yet earlier this month, Judge Patti Saris ruled that AWP is not a "term of art"--that is, it does not have a widely understood meaning within the industry--and therefore should be interpreted by its plain language definition.

BMS (with its subsidiaries Oncology Therapeutics Network Corp. and Apothecon) is now fighting that interpretation. In its appeal, filed on Friday, it argues that Saris relied too heavily on a friend-of-the-court brief filed by the government and did not take into account "significant legislative history." The motion cites a back-and-forth between the Senate and the House of Representatives over the Balanced Budget Act of 1997 to demonstrate that Congress had already debated the definition of AWP and determined that it is a list price--and moreover, that Congress adjusted its reimbursement rate accordingly.

It also raises other examples from as far back as 1969 to further argue that "it was undisputed that Congress understood that AWP did not represent acquisition cost."

The motion continues, "Even if the court is inclined to credit the claim of payers that they were confused about the meaning of AWP ... the question of statutory interpretation should not be confused with the question of deception."

Steve Berman, managing partner at Hagens Berman Sobol Shapiro, the law firm representing the plaintiffs, sees the legislative debate over AWP another way. "Our argument is that it wasn't a question of what was known--it was a question of what Congress intended," he said.

Hagens Berman is representing Medicare beneficiaries and third-party Medigap insurance providers that made payments for Medicare Part B or physician-administered drugs. These include Coumadin (warfarin), Imitrex (sumatriptan), Taxol (paclitaxel), and others. The trial is currently underway in Boston, and is largely considered to be a test case for other jurisdictions.

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BMS is the first on what's bound to be a long list of opponents in the recent ruling on the definition of "average wholesale price."

Here Come the Appeals ...

With Big Pharma's appetite for biotech companies being what it is--insatiable--Genentech's purchase this month of Tanox, its first in 30 years of business, appears in-line with current trends. But not if you ask CEO Arthur Levinson.

"Not only does [the acquisition of Tanox] not represent a major strategic shift," said Levinson in a conference call, "I would say it doesn't even represent a minor strategic shift."

Before this month's acquisition, Genentech and Tanox had been co-promoting Xolair (omalizumab), a drug for allergic asthma that was underperforming by Genentech standards. For the first three quarters of 2006, Xolair only made $300 million--and that's a 30-percent improvement over what it was making at the end of Q3 2005.

"We think we can grow the market," said David Ebersman, Genentech's CFO. "Our enthusiasm for this molecule made us increasingly want financial returns that we'll get in trying to make this a big product for us."

With Tanox wholly under its wing, Genentech is pursuing a comprehensive program to propel sales of Xolair, an injectable drug that has struggled to hold share against more convenient inhaled or oral asthma formulations.

"It's a combination of education; it's a combination of new data," Ebersman said. "We have penetrated a small percentage of the asthma market and we are focused on increasing uptake."

Genentech is hoping to expand Xolair's label and get approval for pediatric patients. It is also seeking to develop a liquid formulation of the drug. The Tanox acquisition could also push Genentech into the HIV market--but the company is cagey about whether it will pursue that area or seek a partner for those compounds.

Since 2004, Big Pharma and Big Biotech have veered away somewhat from their strategy of in-licensing products in favor of making full-on acquisitions. These days, ceaseless acquisitions have tripled the going price for biotech companies--to the point that recent analyses have shown that it often is more lucrative for a firm to sell than go public.

The Burrill Biotech Select Index recorded gains of more than 10 percent for small and mid-cap biotech companies in the first three quarters of 2006--growth that Big Pharma is driving. Moreover, companies appear to be seeking more control over products that they initially intended to in-license. Eli Lilly, for instance, recently bought Icos in a $2.1 billion deal that gave the company full control of the previously co-promoted Cialis (tadalafil).

Two other billion-dollar-plus deals in 2005 also grew out of earlier collaborations on specific products: Amgen's acquisition of Abgenix ($2.1 billion) and Pfizer's acquisition of Vicuron ($1.9 billion).

"Such collaborations enable companies to establish whether they represent a good match before taking the ultimate step of outright acquisition," according to the annual Pharma Insights report from PricewaterhouseCoopers.

Yet Genentech's Levinson noted that it could well be another three decades before the company makes another buy. "Sometimes acquisitions can cause a lot of defocus," he said. "The vast, vast majority of ones will fail to meet [our] high bar."

Genentech says Tanox acquisition does not signal a shift in strategy.

It's Not What It Looks Like

Pharma may be, at least temporarily, regretting that two-thirds of its campaign contributions went to Republicans. The industry is taking a defensive posture now that the Democrats have gained control of Congress, and issues such as drug pricing and drug safety go from lukewarm to hot-button. House Speaker-elect Nancy Pelosi (D-CA) has outlined priorities for the first 100 hours that the newly elected Congress is in session, and the self-proclaimed "party of the middle class" has the drug industry in its sights, along with the national debt, the minimum wage, the oil industry, and CEO salaries.

One issue to get an early airing is Medicare Part D, and whether government negotiation of drug prices can help close the so-called doughnut hole coverage gap.

Mason Tenaglia, managing director at consulting firm The Amundsen Group, believes that much of the rhetoric is unlikely to translate into sweeping changes. The current system "is one of the few mechanisms that gives the plans the power to squeeze drug makers on prices," said Tenaglia, whose firm compiled a report on Part D for PhRMA. "The plans are far more effective [at negotiating] than they've been in the commercial space."

The Centers for Medicare and Medicaid Services is closely tracking how well private drug plans have been able to negotiate with the pharmaceutical industry, and early data suggest that the system--contrary to Democratic claims--is effective. In some states, up to 40 percent of beneficiaries might be on a single plan, and with co-pays averaging $22 for preferred drugs and $60 for non-preferred, there is heavy incentive for manufacturers to negotiate lower prices in return for preferred formulary placement.

The Kaiser Family Foundation has similarly compiled a study comparing plans offered between this year and next--and pharma can find some good news in its pages.

Yet there is still reason for the drug industry to be concerned about the power shift on the Hill.

"Democrats are going to turn to a lot of pocketbook issues," said Dean Rosen, who runs the healthcare practice at government affairs firm Mehlman Vogel Castagnetti. He cited the State Children's Health Insurance Program (SCHIP), the Deficit Reduction Act, and the Prescription Drug User Fee Act, which could usher in new drug safety initiatives, as three areas where Democrats can have an immediate impact.

"I think on these issues [pharma] is going to play good old-fashioned defense," he said. "They are going to make the argument that the private market is working pretty well."

Robert Schooling, managing director of the Washington office of public affairs firm APCO Worldwide, noted that the industry should focus on issues that cut across the political spectrum--such as undoing the pitfalls of the drug benefit, reauthorizing SCHIP, and eliminating health disparities. "These are areas where there is common ground," he said. "This should never be seen as a partisan industry."

Exit polls have suggested that this year's election was a referendum on national issues like Iraq, with healthcare lower on voters' worry list. But Tenaglia noted that the implementation of Medicare Part D was the beginning of a "sea change" in healthcare spending--and is likely to keep the issue of drug prices on the front burner.

He pointed to Ford, the automaker that recently announced it would replace healthcare benefits for retirees with an annual stipend--a move that reflects the general change from a defined benefit to a defined contribution.

"The government has changed the rules and put the onus on the consumer," he said. "The government started it, and how long will it take until employers adopt this? And that's what's going to put the biggest price pressure on the manufacturers."

Industry points to new reports on Part D to blunt new Congressional critics.

Pharmaceutical Executive-11-22-2006

Here Come the Appeals ...

It's Not What It Looks Like

Pharma Defensive After Dem's Victory