Biotech Members of CEO Roundtable, LLC Prepare for Unanticipated Outcomes of Medicare Reform

BOSTON, Mar 09, 2005 (BUSINESS WIRE) -- "The most important thing that will happen in the pharmaceutical industry in our lifetime is the pricing pressure that the current Medicare reform will create," Mason Tenaglia of Charles River Associates advised a group of Boston-area biotech CEOs during a recent seminar sponsored by CEO Roundtable, LLC.

Tenaglia advised the biotech CEOs that their companies need to anticipate the results of the changes of this price and profit erosion and the turmoil it will cause for the current major pharma companies, and anticipate the changes that will result in the structure of the drug and financial markets as they negotiate with these companies today.

Tenaglia, who leads the pharmaceutical industry consulting practice for Charles River Associates, a Boston/Cambridge-based international management consulting and litigation support firm founded in 1965, has spent more than 20 years as a consultant to the top management of some of the largest pharmaceutical companies in the country.

He foresees that many aspects of the Medicare plan will converge to cause significant price competition - and it will happen without the federal government directly negotiating pricing.

Tenaglia compared the situation to the impact on the infant formula market caused by the Special Supplemental Nutrition Program for Women, Infants and Children administered by the Food and Nutrition Service (FNS), a Federal agency of the U.S. Department of Agriculture.

Known more popularly as WIC, the program serves to safeguard the health of low-income women, infants, & children up to age 5 who are at nutritional risk. Under the program, Tenaglia said, the original 15% of covered children grew to 48% and forced the states to require competitive single source bidding that took the entire margin out of the infant formula product line.

Just so, Tenaglia predicts a series of unintended outcomes under the new Medicare reform. While the Pharmaceutical Research Manufacturers Association (PHARMA) lobbied for passage of a comprehensive prescription drug benefit, it had visions of a $400 billion subsidy with limited government intervention and new coverage for millions of seniors, increased drug utilization and avoidance of national price controls. But, to the contrary, Tenaglia foresees:

-- The Prescription Drug Plan (PDP) providers will not be profitable under the reimbursement plans and will withdraw from many areas, forcing large segments of the senior population into fall back (i.e., government) plans.

-- Large corporations will stop paying for drug benefits for retirees.

-- The HMOs will target only the healthiest seniors in their plans.

-- The new system creates regions of the country that have very different demographics and economies. PDPs will leave regions forcing that whole area into the fall back plans which will force single provider bidding as in WIC.

Mason predicts that by the end of 2007 over 50% of the country will be on fall back plans.

He also thinks that the big winners of the 90s will be the biggest losers in 2006.

Ultimately, biotech firms must determine if they want to peg their royalty or licensing revenues to declining prices.

"In the final analysis, this program could fundamentally change the basis for competition for a population segment that generates almost half of annual drug spending. And that, in turn, could change all the rules for in-licensing and acquisition of biotechnology compounds, turning companies topsy-turvy," Tenaglia said.

"The major point that was driven home for me was that the MMA reform will impact the licensing and deal making for Biotech," Indu Isaacs, CEO of Formatech in Andover, Mass., said. "It is tough now and will be even tougher. The companies have to be more careful about partner selection and managing the deal."

CEO Roundtable brings CEOs, presidents and company owners together each month in professionally facilitated peer groups of 8 to 12 members from non-competing companies for invigorating exchanges of information, ideas and insights. CEO-Roundtable conducts six groups in Massachusetts and in New Hampshire, including general business, biotech/pharma, and high tech. For more information, contact Loren Carlson at 978-685-8743 or visit www.CEO-Roundtables.com.

SOURCE: CEO Roundtable, LLC

CEO Roundtable, LLC
Loren G Carlson, 978-685-8743
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lgcarlson@CEO-Roundtables.com