Pharmacy Industry News: Supreme Court sides with pharmaceutical industry in two decisions
Supreme Court sides with pharmaceutical industry in two decisions
Reporting from Washington— The Supreme Court gave the pharmaceutical industry a pair of victories, shielding the makers of generic drugs from most lawsuits by injured patients and declaring that drug makers have a free-speech right to buy private prescription records to boost their sales pitches to doctors.
In both decisions Thursday, the court’s conservative bloc formed the majority, and most of its liberals dissented.
About 75% of the prescriptions written in this country are for lower-cost generic versions of brand-name drugs. Federal law requires the makers of brand-name drugs to label their products with FDA-approved warning information and to update the warnings when reports of new problems arise.
But in a 5-4 decision, the high court said this same legal duty to warn patients of newly revealed dangers did not extend to the makers of copy-cat generic drugs.
Justice Clarence Thomas reasoned that the warning labels were the responsibility of the brand-name makers and the Food and Drug Administration. He said that because generics were just copies, their makers could not be sued for inadequate warnings if those warnings didn’t exist on the original.
Thomas said the federal regulatory law trumped the state liability law in this instance and therefore shielded the generic makers. “We acknowledge the unfortunate hand” that was dealt to the patients whose suits were dismissed Thursday, he wrote in his majority opinion.
The patients, Gladys Mensing and Julie Demahy, developed tardive dyskinesia, a severe neurological disorder, after taking metoclopramide, a generic form of the drug Reglan for digestive problems, including acid reflux. They sued, alleging that the drug maker failed to warn them of the danger of taking this drug for more than 12 weeks. Studies had suggested a potentially increased risk of the condition — and Reglan was eventually required to carry a “black box” warning about it. That wasn’t the case at the time.
In tossing out their claims in Pliva Inc. vs. Mensing, Thomas put the blame on “the special, and different, regulation of generic drugs.”
They are supposed to be copy-cat versions of the original, he said, so the makers cannot be sued for failing to give patients new and different warnings as they develop.
But the dissenters, led by Justice Sonia Sotomayor, said the generic drug maker should have alerted the FDA to the danger and then updated its warning label. “This outcome makes little sense,” she wrote. Justices Ruth Bader Ginsburg, Stephen G. Breyer and Elena Kagan agreed.
A consumer rights lawyer said the ruling stripped many Americans of an important legal right. “Three out of four patients just lost the right to sue” if they use a generic drug and suffer complications for which they were not warned, said Louis Bograd, counsel for the Center for Constitutional Litigation. These patients “appear to be left without any legal remedy.”
In the second decision, the court by a 6-3 vote struck down a Vermont law that barred pharmacies, drug makers and others from buying or selling prescription records from patients for marketing purposes. Vermont’s physicians had sought passage of the law, arguing that their prescriptions were intended for private use of patients and should not become a marketing tool.
Drug makers buy this data to gear their sales pitches to physicians. Several data-mining firms have made a billion-dollar business out of buying and selling the prescription data to drug makers and researchers.
Writing for the court, Justice Anthony M. Kennedy said that “information is speech,” and that under the 1st Amendment, the government usually cannot restrict speech because it does not approve of the message. “If pharmaceutical marketing affects treatment decisions,” he said, it does so because doctors find it persuasive.
Maine and New Hampshire have adopted similar laws, in part to deter drug makers from pressing doctors to prescribe newer and more expensive brand-name drugs.
Dissenting were Breyer, Ginsburg and Kagan. Breyer called Vermont’s measure “a lawful governmental effort to regulate a commercial enterprise.” The case was Sorrell vs. IMS Health Inc.
Sen. Patrick J. Leahy (D-Vt.), chairman of the Senate Judiciary Committee, criticized the decision for having “overturned a sensible Vermont law that sought to protect the privacy of the doctor-patient relationship.”
Express Scripts continues on long path to growth, analysts say
When Express Scripts Inc. got blindsided this week by the nation’s largest drugstore chain, Walgreen Co. — which publicly threatened to end their multibillion-dollar relationship — the episode marked an epic clash in the pharmaceutical industry.
Walgreen officials, in announcing they had canceled contract negotiations with the St. Louis-based pharmacy benefit manager, pronounced themselves ‘surprised” that Express Scripts had the temerity to drive such a hard bargain with “the largest retail provider in their pharmacy network.”
The reaction from Express Scripts? Whatever — customers can just take their Express Scripts benefit cards to competitors literally down the block. “On average, another pharmacy within the Express Scripts network is within one-half mile of a Walgreens pharmacy,” taunted a company release, while careful to also emphasize an interest in continuing talks.
Wall Street responded Tuesday by driving down Walgreen stock — while Express Scripts’ shares inched up, apparently unaffected. While such brinksmanship often characterizes such high-stakes negotiations, and some analysts believe a deal will be forthcoming, the dust-up nonetheless underscored the extent to which Express Scripts has penetrated the market after years of explosive growth. And yet investors believe the company has capacity to grow further still, even as the company matures into an established player.
“If there’s one thing that’s constant, our company is focused on growth,” said Larry Zarin, a senior vice president and chief marketing officer at Express Scripts.
For the second year in a row, Express Scripts is the Post-Dispatch’s top-performing publicly traded company in the St. Louis region, based on the newspaper’s analysis of revenue size and growth, return on capital and profit growth. It is the fourth time since 1992 that the company has claimed the distinction.
Express Scripts, which manages about 450 million prescriptions annually, posted $45 billion in revenue in 2010 and a profit of $1.2 billion — compared with $24.7 billion in revenue and $828 million in profit in 2009.
HURDLES AHEAD
Maintaining that upward trajectory remains a challenge. A new report by bond rating agency Moody’s Investors Service concluded that one of the biggest challenges facing the nation’s three largest pharmacy benefit managers — New Jersey-based Medco Health Solutions, Express Scripts, and Rhode Island-based CVS Caremark Corp. — is ‘stagnant to declining commercial insurance membership trends.”
According to Moody’s, other challenges faced by the industry include customer resistance on pricing and health care legislation.
Pharmacy benefit managers administer prescription drug benefits for employers, government agencies and health plans. They also help manage the amount of money their clients spend on drugs by encouraging employees to choose generic drugs, rather than brand-name medicines, and obtain these drugs via mail order (effectively skipping retail outlets such as Walgreens).
Moody’s praised Express Scripts’ financial flexibility but noted that the overall market for pharmacy benefit managers remains uncertain. United Healthcare indicated recently that it is exploring the efficiencies it might gain from “in-house” management of the pharmacy benefits of its $11 billion contract with Medco. Other health insurers, which are under mounting pressure to keep costs down, also may be considering the in-house option.
In the face of such challenges, Express Scripts seems determined to run lean. In a year of reorganization, the company laid off several hundred workers last year and shut down a prescription processing plant near Philadelphia. It opened a high-tech, heavily automated mail-order facility in northern St. Louis County. And like many other large companies, it has outsourced and sent offshore some of its operations.
Wall Street analysts remain upbeat about Express Scripts’ growth potential.
“For the next five years, the growth looks good — and near term, it’s pretty significant,” said Art Henderson, an analyst at Jeffries & Co. in Nashville.
Henderson and other financial analysts said that, although 2011 has provided a bit of a market lull, Express Scripts is well-positioned to exploit the pipeline of drugs whose patents will expire in the next few years — by providing lower-cost generic drugs instead of branded ones.
The company makes higher profits on generic drugs because it can negotiate lower rates from the multiple drugmakers that offer generic substitutes for branded medications.
The patent on Lipitor, a blockbuster anti-cholesterol drug, is due to expire in December; and patents for other top-selling drugs, such as Plavix, antidepressant Lexapro, and Singulair (an asthma drug) are due to expire next year.
Express Scripts’ profits on generics, however, could face incursions from government regulation. Some federal and state lawmakers have voiced the need for greater transparency from pharmacy benefit managers about their pricing schemes and acceptance of manufacturer rebates and discounts.
Express Scripts has received kudos from an industry trade association for its degree of transparency, but some lawmakers remain puzzled as to how exactly the company buys and sells prescription medications, how it chooses the drugs on its formularies, and from which kinds of transactions it reaps the largest profits.
Express Scripts spent about $1.9 million last year on federal lobbying activities about such issues as legislation, pricing, antitrust, Medicare payment rates, and generic versions of biotech drugs, according to records filed with the clerk’s office of the U.S. House of Representatives.
‘FLUSH WITH CASH’
Jeff Jonas, an analyst at Gabelli & Co. in Rye, N.Y., agreed that Express Scripts’ has “a bright future” via the generic drug pipeline. But he said the firm also may continue to grow through acquisitions.
“There are still deals out there, either traditional PBMs or something along the lines of specialty companies that manage biotech drugs,” Jonas said, “and their track record (for acquisitions) is pretty good.”
In the past, Express Scripts has been able to grow its business by expanding its existing operations and acquiring competitors including National Prescriptions Administrators Inc. (2002), Curascript (2004) and Priority Healthcare (2005).
In December 2009, Express Scripts purchased Indianapolis-based Wellpoint’s Next RX subsidiary for $4.68 billion.
“Express Scripts is a very strong cash generator. … They’re flush with cash, and they have good balance sheets,” said Helene Wolk, an analyst at Sanford C. Bernstein & Co. Inc. in New York. “They still have enough flexibility to do acquisitions if one presents itself.”
As one of the largest pharmacy benefit managers, it’s unclear whether the Justice Department would permit Express Scripts to acquire one of its chief rivals (or, for that matter, to be acquired by one of them). The nation’s top three PBMs control about 60 percent of the market. But the company could target a variety of other potential acquisitions.
With or without more acquisitions, Wolk said, it is likely that Express Scripts will experience a “robust growth swing of about 20 percent” in the next three to five years. “Express Scripts’ earnings have been stellar in the last few years,” Wolk said.
The company appears to want to build its business by becoming more competitive among larger employers. A substantial portion of the company’s revenue depends on its contract to manage pharmacy benefits for the military’s TriCare Program.
But analysts said Express Scripts has done well locking up long-term contracts with the Defense Department and Wellpoint.
The company is focused heavily these days on cost-cutting, reorganization and sending a portion of its information technology and customer support work to places like India and the Philippines.
“I can assure that we’re always trying to get more efficient,” Zarin said. “Our clients hire us to reduce costs, with no compromise to clinical outcomes. We are counted on to run lean and mean.”
Still, pharmacy benefit managers including Express Scripts are expected to gain more business as an additional 32 million Americans are insured under the health reform law.
Jeff Hall, the firm’s chief financial officer, said in a written statement that Express Scripts’ research and innovation into consumer behavior “translate into strong returns for shareholders and superior outcomes for our plan sponsors and patients.”
Later this year, the company plans to open its fourth headquarters building in northern St. Louis. “We are excited about further expanding our workforce in St. Louis,” Hall said.
Independent Pharmacies Upset Over State Employees’ Prescription Drug Plan
Connecticut’s independent pharmacists, whose numbers have significantly dwindled in the past two decades, are warning that an impending state policy that would require state employees to buy most prescription drugs by mail could force many of them out of business.
At least one, the owner of a 60-year-old drug store in Storrs, is blaming the policy for the decision to close his shop. He said he believes the change could have wiped out his business.
“I knew we were going to lose so many patients,” said Naufel Tajudeen, a pharmacist and the owner of Storrs Drug. “Once my suppliers knew, they started dropping my credit limit. July 1 would have been way too late to close.” Tajudeen had to lay off the store’s four full-time workers and 10 part-time employees.
Storrs Drug, which depends on state employees for nearly 70 percent of its prescription business, may be the first “mom and pop” drug store to close as a result of the policy, and more could follow. There are about 160 independent pharmacies in the state, down from 400 in the 1990s, said Marghie Giuliano, executive vice president of the Connecticut Pharmacists Association.