Merck’s Zocor Deal Stirs Ill Will

It’s a novel approach in the long battle between brand-name drugs and their generic rivals: Merck & Co. is slashing the price of its cholesterol drug Zocor so low for one insurance plan that members will actually pay less for the original pills than for the generic.

Some consumer advocates fear that the practice will spark a movement among pharmaceutical companies, compounding other pressures they fear will weaken the generic industry and compromise the country’s source of low-cost drugs.

Under the deal, members of UnitedHealth Group Inc. will pay about $10 for a month’s supply of brand-name Zocor and $40 for a generic after the drug loses patent protection Friday. Both Merck and UnitedHealth say the arrangement demonstrates how market competition drives down costs, benefiting patients.

Consumer advocates typically cheer lower prices, but in this instance they worry that a short-term benefit for patients will ultimately result in long-term problems. They say moves such as Merck’s undermine generic companies’ chances to generate the profits that fuel their ability to conduct research and challenge drug company patents -- eventually resulting in fewer cheap medicines.

Generic companies make most of their profits when awarded six months of market exclusivity because a lack of competition means they don’t have to sell their product at an enormous discount to the brand. If the brand chops its price, the generic may be forced to follow suit.

Teva Pharmaceutical Industries Ltd., one of the world’s biggest generic drug makers, was widely expected to have six months of exclusivity. With Merck’s decision, U.S.-traded shares of the Israeli firm plunged $3.40, nearly 10%, to close at $32.27 on Wednesday. Shares of New Jersey-based Merck rose 35 cents to $35.27.

Sales of drugs typically shrivel when they face generic competition because the low-cost products are as much as 60% cheaper than the brand-name medicine. Zocor’s sales totaled $4.4 billion last year.

A.G. Edwards & Sons Inc. analyst Albert Rauch slashed his revenue projection for Teva’s generic version of Zocor for the second half of this year to $65 million from $385 million and decreased his earnings-per-share estimate on the company for 2006 to $1.86 from $1.99. He also dropped his revenue predictions for Merck’s Zocor to $611 million from $664 million in the second half of 2006 and trimmed his estimate for the company’s earnings per share to $2.35 from $2.37.

Sen. Charles E. Schumer (D-N.Y.) accused Merck of engaging in predatory pricing and called its actions “a legal bribe.” He has asked the Federal Trade Commission to investigate the deal between Merck and UnitedHealth. “Merck is taking an end run around the generic drugs laws to make sure there are no generic drugs,” Schumer said.

Merck’s vice president of public policy, Ian Spatz, said the arrangement with UnitedHealth was nothing more than typical marketplace price competition.

UnitedHealth spokesman Mark Lindsay wouldn’t discuss Schumer’s allegations or the larger issues facing the generic industry and said the deal with Merck was part of the company’s ongoing efforts to lower prescription drug costs for its customers.

Tim Heady, the chief executive of UnitedHealth’s pharmacy benefit management arm, said this was the first time a generic had ever cost more than a brand but expected more such deals in the future. That is what some consumer advocates fear.

“I’d begin to worry if [similar deals] take off,” said Alex Sugerman-Brozan, director of the Prescription Access Litigation Project, a nonprofit that sues drug companies for practices it alleges are illegal. “It puts pressure on the generic companies. Sure there are short-term consumer benefits, but what about the long term?”

George Barrett, chief executive and president of Teva North America, said other health plans had spurned Merck’s offer of low-cost Zocor and that his company was considering legal action over the issue. Still, he expressed optimism about the prospects of Teva’s version of Zocor.

Litigation is still pending about whether Teva is entitled to the six months of exclusivity and Barrett declined to say whether it would launch its product on Friday. Analysts said drug companies were taking a more aggressive stance against generics because the patent suits they filed cost brand-name makers time and effort. A generic company must challenge the brand’s patent to win the 180 days of exclusivity.

Federal agencies are already examining whether other drug company practices are hurting consumers’ access to generic drugs. The FTC is examining whether brand-name manufacturers are muting competition by authorizing generic versions of their own drugs to coincide with the launch of a rival generic. Authorized generics can cut the profit of the generic company with the 180-day exclusivity by more than 50%, analysts said.

FTC Commissioner Jon Leibowitz said in a recent speech that he was concerned about the number of deals in which brand-name companies paid a generic rival to settle litigation and delay the generic’s debut.

Meanwhile, the Food and Drug Administration is studying whether drug companies can file citizen petitions to block a generic approval.