Pricing in Pharma Industry

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					                                                                                                                       APRIL 25, 2005


 Vol. 05-12                                            PHARMACEUTICAL INDUSTRY ALERT

The Pharmaceutical /                                   First DataBank Announces Phaseout of
Health Care Practice of
Sidley Austin Brown & Wood LLP                         Average Wholesale Price
Our Pharmaceutical Industry/Health Care
Practice represents participants in all facets
of the health care industry, including phar-
maceutical companies, pharmacies, manu-
                                                       On April 1, 2005, First DataBank (FDB), whose price reporting service is
facturers of dietary supplements, and                  widely used as a benchmark for pharmaceuticals, announced a new reporting
medical device companies. Our lawyers
combine a strong background in the com-                policy that could spell the beginning of the end for Average Wholesale Price
plexities of health care financing and deliv-          (AWP) as a pricing benchmark. Specifically, FDB has announced that it will
ery, including coding, reimbursement, and
coverage issues, privacy and security, trade           begin phasing out the reporting of AWP in favor of a new variable based on
regulation, and competition. We have                   the manufacturer’s reported Wholesale Acquisition Cost (WAC) or Direct
extensive experience representing drug
and device manufacturers on enforcement                Price.
and regulatory matters before the Food
and Drug Administration, the Centers for               Historically, FDB has surveyed drug wholesalers for their catalog or list prices
Medicare and Medicaid Services, the
Office of the Inspector General for the                and then used these figures to calculate an average wholesale mark-up for a
Department of Health and Human                         particular product or group of products to be applied against WAC. If WAC
Services, Federal Trade Commission, and
state enforcement agencies.                            is not available, the markup is applied against the manufacturer’s Direct Price,
                                                       i.e., the manufacturer’s list price to non-wholesalers. If a manufacturer did
                                                       not report a WAC or Direct Price, FDB would publish the manufacturer’s
For further information on the
Health Care practice, please                           Suggested Wholesale Price (SWP).
contact:
                                                       Under the policy announced April 1, FDB will begin reporting a new variable
Paul E. Kalb                                           called Alternative Benchmark Price (ABP). FDB will calculate ABP by apply
202.736.8050
                                                       a standardized mark-up of 25 percent (in the case of branded drugs) or 23 per-
pkalb@sidley.com
                                                       cent (in the case of over-the-counter drugs) to the manufacturer’s last
                                                       reported WAC, or to Direct Price if WAC is not available. (According to FDB,
                                                       these percentages were determined by calculating the cumulative average dif-
                                                       ference between the WAC or Direct Price and AWP for all products included
                                                       in FDB’s database between December 31, 2001 and December 31, 2004.)
   To receive future copies of the Health              Under FDB’s new policy, if a manufacturer does not report a WAC or Direct
   Care Industry Alert via email, please
     send your name, company or firm
                                                       Price for a particular drug, FDB will no longer report the manufacturer’s SWP
         name and email address to                     as AWP. Instead, FDB will simply report the fact that the manufacturer has
              jyeh@sidley.com
                                                       not reported a WAC or Direct Price for the drug.

This Health Care Industry Alert has been pre-          FDB will continue to report AWP until such time as manufacturers report a
pared by SIDLEY AUSTIN BROWN & WOOD LLP for            WAC or Direct Price data for at least 95 percent of the products included in
informational purposes only and does not consti-
tute legal advice.This information is not intended     its database. As of January 1, 2005, only 57 percent of the products included
to create, and receipt of it does not constitute, an   in the database included WAC or Direct Price data, suggesting that it may be
attorney-client relationship. Readers should not
act upon this without seeking professional counsel.    several months or quarters before AWP is completely phased out.
                                                                                                                                       PHARMACEUTICAL INDUSTRY ALERT
                                                                                                                                                              PAGE 2




Nevertheless, the announcement has significant implica-                                                Thus, pharmaceutical manufacturers need to re-evaluate
tions for pharmaceutical manufacturers that need to be                                                 their pricing strategies and contracts to ensure that they
addressed before the phase-out is complete.                                                            account for changes in the new manner in which prices
Manufacturers whose pricing historically has been based                                                will be reported. Manufacturers who currently rely on
on AWP will need to consider how to set pricing in an                                                  an AWP-based pricing structure need to consider
environment in which FDB no longer intends to report                                                   whether to switch to a pricing structure based on WAC,
that benchmark. Though other price reporting services                                                  ABP, or some other mechanism; or whether to amend
have not, as of yet, announced any intention to discon-                                                contracts that currently reference AWPs published by
tinue reporting AWP, that may only be a matter of time.                                                FDB to instead rely on another price reporting service.


                                                                                              * * *
               Please contact one of the following lawyers in our Pharmaceutical group for more information.
Washington, D.C.                                                                                       Chicago
Bill A. Sarraille            202.736.8195              wsarraille@sidley.com                           Jack R. Bierig      312.8553.7614                       jbierig@sidley.com
Patrick Morrisey             202.736.8228              pmorrisey@sidley.com                            Michael A. Clark 312.853.2173                           mclark@sidley.com
Paul E. Kalb                 202.736.8050              pkalb@sidley.com                                Jim C. Dechene 312.853.7275                             jdechene@sidley.com
Greer O. Lautrup             202.736.8117              glautrup@sidley.com                             Karen O. Dunlop 312.853.2223                            kdunlop@sidley.com
Stephen C. Payne             202.736.8068              spayne@sidley.com                               Richard D. Raskin 312.853.2170                          rraskin@sidley.com
John F.Wester                202.736.8162              jwester@sidley.com                              Jeffrey S. Rothstein312.853.7260                        jrothstein@sidley.com
Eileen L. Kahaner            202.736.8599              ekahaner@sidley.com                             Eugene A. Schoon 312.853.7279                           eschoon@sidley.com
Anna L. Spencer              202.736.8445              aspencer@sidley.com                             Honey J. Skinner 312.853.7577                           mskinner@sidley.com
Julie A. Muroff              202.736.8341              jmuroff@sidley.com                              Lynn D. Fleisher 312.853.2065                           lfleisher@sidley.com
Peter V. Lindsay             202.736.8991              plindsay@sidley.com                             Meena Datta         312.853.7169                        mdatta@sidley.com
James C. Stansel             202.736.8129              jstansel@sidley.com                             Jaime L.M. Jones 312.835.0751                           jaime.jones@sidley.com
                                                                                                       Lara Leniton Liss 312.853.0579                          lliss@sidley.com
San Francisco
                                                                                                       Scott D. Stein      312.853.7520                        sstein@sidley.com
Hae-Won Min                  415.772.1227              hmin@sidley.com




The affiliated firms, Sidley Austin Brown & Wood LLP, a Delaware limited liability partnership, Sidley Austin Brown & Wood LLP, an Illinois limited liability partnership, Sidley Austin Brown & Wood,
an English general partnership and Sidley Austin Brown & Wood, a New York general partnership, are referred to herein collectively as Sidley Austin Brown & Wood.




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