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Medicare 'doughnut hole' chipped away at pharma's Q2 revenue, execs say

Drug companies are feeling the pinch as Congress attempts to close the Medicare prescription drug coverage gap, known to industry insiders as the "doughnut hole."

The 2018 U.S. congressional budget increased discounts that are paid by drug manufacturers in order to reduce certain patients' out-of-pocket payments.

Executives at several of the largest pharmaceutical companies in the world said during their second-quarter earnings calls that the change in the Medicare payment paradigm requiring they provide heftier discounts has led to lost profits and slower growth. The section of Medicare that covers branded prescription drugs is called Part D.

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Certain patients fall into the coverage gap after their drug costs reach a certain level but before they fall under the plan's "catastrophic coverage" category, which significantly reduces costs for the remainder of the year. Barring other circumstances, Medicare beneficiaries in the doughnut hole paid 35% of their drug costs in 2018, which was reduced to 25% in 2019.

For 2019, once patients have spent $5,100 out-of-pocket, they are out of the coverage gap and automatically get catastrophic coverage.

To reach the new 25% rate — originally a goal for 2020 but adopted one year earlier — and to account for another 10% reduction in what the Medicare plan pays for prescription drugs, the congressional budget called on manufacturers to provide rebates of 70% in 2019, up from 50% in 2018.

"One of the most significant challenges that we face in the U.S. is that the way the Part D design was built originally, it didn't necessarily envision the level of specialized medicine it would develop over time, and the out-of-pocket cost for patients made many of those drugs unaffordable for the average senior," AbbVie Inc. CEO Richard Gonzalez said July 26 during the company's second-quarter earnings call.

But Gonzalez said some aspects of the change could stymie innovation at leading pharmaceutical companies and even reward those that operate in different areas of the coverage gap. For AbbVie, about 20% of U.S. sales and 14% of global sales come from drugs covered under Medicare Part D.

"There are some aspects of the legislation that we believe are punitive, particularly to innovation-driven companies," Gonzalez said.

Because of the nature of Medicare's different parts, drugmakers had to explain lower profits from certain products in particular. Eli Lilly and Co. saw lower than expected sales of diabetes drug Trulicity despite growth in prescriptions due to the changes in the law, executives said.

Trulicity sales totaled $1.03 billion for the second quarter of 2019, up 32% versus $779.8 million in sales in the year-ago period. Lilly Diabetes President Enrique Conterno said Trulicity notched 41% growth in the number of prescriptions in the second quarter and sales growth did not match that volume due in part to price erosion but also as a result of the 20% additional discount required for the Medicare coverage gap.

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Lilly CFO Joshua Smiley said the soft sales numbers will persist at least into the next quarter.

"Going forward, we expect the changes in coverage gap funding to continue to impact Q3 with less impact in Q4, and we still anticipate mid-single-digit declines in U.S. price for the full year," Smiley said.

Johnson & Johnson's blood thinner Xarelto saw similar losses that could be attributed in part to the changes in Medicare. Patients' access to the drug was an issue, but because the rebates will continue, future quarters will be less affected on a year-to-year basis, Executive Committee Vice Chairman Joaquin Duato said.

"We expect that we will be able to come back to positive territory once we anniversary these factors," Duato said.

Merck & Co. Inc., which gets about 25% of its business from Part D, is looking at the patients who fall into the higher end of the doughnut hole and who are eligible for catastrophic coverage.

"The catastrophic changes are a step in the right direction, but that's a very small number of people who actually progress through the system and get to catastrophic," Merck CEO Ken Frazier said. "So we continue to work with people as part of a legislative process and the administration because we support lowering costs for seniors at the counter and not just at the catastrophic portion."