Merck: Pricing Gardasil

Transcription

1 KEL400 TIM CALKINS Merck: Pricing Gardasil Allison Watkins, senior director of Merck s Vaccines Division, leaned back in her office chair. It was February 9, She glanced at the clock and noted that most of the day had somehow slipped away. Nonetheless, her most important task remained unfinished: Watkins needed to decide on the pricing of Gardasil, Merck s newest vaccine and one of the company s most important product launches of the year. Watkins knew that her decision was crucial. Watkins had hired an outside consulting firm to recommend a price for Gardasil. The firm had suggested a price of $120 per dose, or $360 per person, as each person required three doses over six months to achieve adequate immunity. The Gardasil marketing team disagreed about this recommended price; some thought it was clearly too high, whereas others said it was too low. The latter group argued that Merck would be missing a major opportunity by setting the price at such a low level. Watkins now needed to decide whether to follow the consulting firm s recommendation or to set a different price. Merck & Co., Inc. Merck & Co. was the world s seventh-largest pharmaceutical company at the end of Founded in 1891, Merck prided itself on being a research-driven company that consistently developed drugs and vaccines considered first or second in their class and market. In 2005 Merck had revenues of $22 billion and an adjusted net income of $4.6 billion (see Exhibit 1). The company, based in Whitehouse Station, New Jersey, employed 61,500 people. In the late 1980s Merck was the world s most respected and top-ranked pharmaceutical company. Merck had become a pharmaceutical leader by introducing a succession of revolutionary medicines, including drugs to lower cholesterol and treatments for congestive heart failure and HIV. All this changed in September 2004, when Merck received information from a clinical trial that one of its drugs, Vioxx, a treatment for arthritis, was associated with an increased risk in heart attacks. Before the month ended, Merck had withdrawn Vioxx from the market. In November 2004, an article in The Lancet, a prominent medical journal, suggested that Merck had been aware of the increased heart attack risk as early as As a result of the negative publicity that followed, Merck s reputation suffered and the company faced thousands of lawsuits. In early 2006 Merck was in a grim situation. The company was swamped with Vioxx lawsuits; its once-sterling reputation was in tatters; and morale across the company was low by the Kellogg School of Management, Northwestern University. This case was prepared by Professor Tim Calkins and Megha Vora 07. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call (or outside the United States or Canada) or custserv@hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise without the permission of the Kellogg School of Management.

2 MERCK: PRICING GARDASIL KEL400 Further compounding the situation, Merck s best-selling drug, Zocor, a cholesterol-lowering medication that generated $4.5 billion in sales in 2005, was scheduled to go off-patent in June As a result, Zocor sales and profits would immediately plummet. Several of Merck s other best-selling drugs, such as Fosamax (for osteoporosis) and Singulair (for asthma and allergies), were also scheduled to go off-patent in the next five years. Merck s stock price on January 1, 2006, was just over $32 per share. The stock had fallen more than 40 percent over the past three years, and more than 60 percent over the past five years (see Exhibit 2). The CEO who had presided over the demoralizing decline, Ray Gilmartin, left the company in May By early 2006, his replacement, Richard Clark, along with the entire company, was in desperate need of a win. Gardasil, a new vaccine for the prevention of genital warts and cervical cancer caused by certain types of human papillomavirus (HPV), could prove to be the good news that the company was hoping for. Cervical Cancer and HPV Human papillomavirus was the most common sexually transmitted virus in the United States. It was estimated that approximately 20 million people in the United States had the virus and another 6.2 million became infected each year. 1 Both men and women could contract the virus, which was most often spread through genital contact. People usually did not know they were infected by the HPV virus because they experienced no symptoms. More than 50 percent of sexually active men and women acquired an HPV infection at some point, with some estimates showing that 70 percent of women would be infected with the virus. HPV usually went away on its own. Although most of the more than one hundred types of HPV were considered harmless, nineteen types were considered high risk. Some of these could lead to cervical or other genital cancers; two HPV strains alone (types 16 and 18) caused 70 percent of cervical cancers. Cervical cancer followed a general progression, beginning with HPV infection. For many women, the HPV infection never progressed. In some women, however, the infection led to cervical intraepithelial neoplasia (CIN). This abnormal cellular growth had three phases: CIN 1 was low grade; CIN 2 was moderate; and CIN 3 was high. In some women, CIN 3 led to cervical cancer. About 10 percent of women progressed to CIN 1 at some point in their lives, with 28 percent of this group progressing to CIN 2 or 3, and then 21 percent of that group progressing to cervical cancer. Cervical cancer was the second most common cancer in women worldwide, representing 10 percent of all cancers in women. In 2005 there were 500,000 new cases of cervical cancer and 290,000 deaths worldwide. 2 However, the occurrence rate in the United States and other developed countries was lower than worldwide rates because of the prevalent use of the Pap test to detect cancer or precancerous cells early. According to the American Cancer Society, in U.S. Centers for Disease Control and Prevention, Genital HPV Infection Fact Sheet, HPV.htm (accessed May 1, 2008). 2 Denise Grady, Vaccine Prevents Most Cervical Cancer, New York Times, October 7, KELLOGG SCHOOL OF MANAGEMENT

3 KEL400 MERCK: PRICING GARDASIL there were 12,200 new cases of cervical cancer and 4,100 deaths from cervical cancer reported in the United States. In comparison, 212,600 cases of breast cancer were diagnosed in the United States that same year, and 40,200 deaths from breast cancer were reported. 3 In the United States there was a 0.6 percent chance that a woman would have cervical cancer at some point in her life. Cervical cancer was once one of the most common causes of cancer death in women. But with the development of the Pap test, the number of cervical cancer deaths dropped significantly in the United States because the test was able to detect the cancer in the early stages, when it was still curable. With a cost of about $55, the Pap test was inexpensive. It was not exceptionally accurate, however; there were many false positives. The American Cancer Society predicted that the U.S. cervical cancer death rate would continue to decline by 4 percent each year. Cervical cancer mortality rates were significantly higher in developing countries, however, where women did not regularly get Pap tests. Medical experts recommended that women older than 18 have a Pap test once every one to three years. In 2006 there were 154 million women in the United States, with 118 million over 18, and each year about 55 million Pap tests were administered. Of that number, about 3.5 million (6 percent) revealed abnormalities. 4 In many cases the Pap test was simply repeated, and the second round of results were usually normal. In some cases, however, the abnormal results remained. The most common abnormality was CIN. Patients with CIN 1 were generally not treated because there was only a 28 percent chance the patients would progress to the next stage. Patients with CIN 2 or 3 were almost always treated. Of the several different treatments for CIN 2 and 3, the most common was large-loop excision of the transformation zone (LLETZ). During this procedure, a physician would remove the abnormal cells using a thin wire loop. LLETZ was usually performed on an outpatient basis, at a cost of about $1,400. Cervical cancer tended to occur in mid-life (average age of 54), with half the reported cases occurring in women between ages 35 and 55. About 20 percent of reported cases occurred in women older than 70. Cervical cancer had a five-year survival rate of about 60 percent. The average life expectancy for a 50-year-old woman without cancer was 31.6 additional years. This dropped to 20 years for a 50-year-old woman who developed cervical cancer. Pap tests, LLETZ procedures, and cancer treatments (which cost about $100,000) were generally covered by health insurance plans in the United States. Vaccines Vaccines were an antigenic preparation used to establish immunity to a disease. The U.S. Food and Drug Administration (FDA) approved them for use in the United States, and the Centers for Disease Control (CDC) determined their recommended use in children and adults. Although the CDC had no power to mandate a particular vaccination, the organization s recommendations could influence state authorities to do so; school districts generally enforced state vaccination guidelines by requiring parents to provide proof of immunization upon entering a specific grade (see Exhibit 3). 3 American Cancer Society, Cancer Facts and Figures 2003, p National Cancer Institute, (accessed May 1, 2008). KELLOGG SCHOOL OF MANAGEMENT 3

4 MERCK: PRICING GARDASIL KEL400 States typically mandated CDC-recommended vaccines for diseases that were contagious or had a high fatality rate. Illinois, for example, required that all children present proof of vaccination before enrolling in school. Illinois required children to be vaccinated for diphtheria, pertussis, tetanus, poliomyelitis, measles, rubella, mumps, haemophilus influenzae type b, and hepatitis B. If a state required a vaccine, it was obligated to cover the cost of the vaccine for children who were not covered by health insurance. The Vaccines for Children program (VFC), established in 1994, was a federal CDC program that provided free vaccines to doctors who served eligible children, e.g., those whose families were uninsured or were Medicaid recipients. The VFC program paid for about half the vaccines administered in the United States annually. Normally, a CDC recommendation for routine vaccination resulted in the vaccine being added to the VFC program (see Exhibit 4). Most vaccines were relatively inexpensive. The Hepatitis A vaccine, for example, sold for about $12 to the CDC and about $30 to private sector buyers. Many other common vaccines were priced between $20 and $75 (see Exhibit 5). Vaccines were usually administered by injection in a physician s office. The shots were given by a physician, nurse, or physician s aide. Insurance companies generally paid physicians a flat rate to deliver a vaccine. After administering a vaccine, a physician sent two bills to an insurance company, one for the vaccine and one for the shot. Physicians were responsible for ordering the vaccine, managing the inventory, and doing the billing. Payments for administering vaccines were low, usually about $20 per dose. In Kansas, for example, Medicare paid physicians just over $17 per flu vaccine given. Gardasil The development of the HPV vaccine was the result of more than twenty-five years of research by scientists at Georgetown University Medical Center, the University of Rochester, the University of Queensland in Australia, and the U.S. National Cancer Institute. Each organization tried to patent the development of the vaccine, but the U.S. Patent and Trademark Office ultimately recognized Georgetown University Medical Center as having the dominant patent claim based on its filing date. After the vaccine was developed, collaboration between CSL Limited, an Australian biopharmaceutical company, and Professor Ian Frazer of the University of Queensland led in 1991 to the development of the technology needed to commercialize the vaccine. It was difficult to grow the HPV virus in the laboratory, but Dr. Frazer s discovery of HPV recombinant viruslike particles (VLP) circumvented the need to cultivate HPV in the lab. In 1995 Merck entered into a license agreement and collaboration with CSL Limited to commercialize the vaccine. As part of the deal, Merck was required to pay CSL a royalty of approximately 25 percent of revenue on Gardasil. In return, Merck would hold the rights to market Gardasil in all countries except Australia and New Zealand, where CSL would maintain 4 KELLOGG SCHOOL OF MANAGEMENT

5 KEL400 MERCK: PRICING GARDASIL the rights. Merck would not face generic competition until at least 2017, when the first patent on Gardasil would expire. 5 All told, Merck spent fifteen years and $1.2 billion developing Gardasil before seeking approval from the FDA. The company tested Gardasil in four placebo-controlled, double-blind, randomized Phase II and Phase III clinical trials. In total, the studies included 20,541 women ranging in age from 16 to 26. The studies followed participants for up to five years. The results were impressive. As stated previously, HPV types 16 and 18 caused 70 percent of cervical cancer cases and HPV types 6 and 11 caused 90 percent of genital wart cases. Gardasil prevented 100 percent of cancers related to HPV types 16 and 18 in women not previously exposed to the HPV virus. Gardasil also prevented 99 percent of genital warts caused by HPV types 6 and 11. There were very few side effects from the vaccine. Although Gardasil was shown to dramatically reduce the chance of cervical cancer, it was still possible to get the disease from HPV types other than 16 and 18. As a result, Gardasil would not eliminate the need for annual Pap exams in women. In addition, it was still unclear whether a booster shot, a common practice with vaccines, would be needed. Based on its strong data, Merck submitted a Biologics License Application (BLA) to the FDA in December On February 7, 2006, the FDA announced it would give Gardasil priority review. As a result, Merck was hoping to receive approval to introduce the product in the United States in June Merck s BLA application requested approval for use in 9- to 15-year-old girls and 16- to 26-year-old women; about 35 million women in the United States were in this age range. 6 Merck also submitted applications in other countries in which it hoped to introduce the product shortly after the U.S. introduction. Although Merck was fairly certain that Gardasil would be the first HPV vaccine to be approved by the FDA, GlaxoSmithKline was well on its way to developing its own HPV vaccine; GSK s Cervarix was already in Phase III clinical trials. Most clinical data showed that both Gardasil and Cervarix were comparable in efficacy and safety, and Cervarix s only point of differentiation was that it protected solely against HPV types 16 and 18. Merck s estimates showed that Cervarix was about one year behind Gardasil; it seemed clear that Merck was going to have a first-mover advantage if Gardasil s approval process ran smoothly. First-mover advantage was of greater importance in this case than with most medicines because vaccines were one-time as opposed to ongoing treatments. Gardasil generated considerable excitement both at Merck and in the broader medical community. Some industry analysts projected that annual revenues on Gardasil could top $4 billion. 5 Merck K, p United States Population by Single Year of Age by Gender in 2000, (accessed May 1, 2008). KELLOGG SCHOOL OF MANAGEMENT 5

6 MERCK: PRICING GARDASIL KEL400 Gardasil Pricing Pricing this new vaccine was one of the most challenging issues facing the Gardasil marketing team and Allison Watkins. Although most vaccines were priced under $75, many people on the team thought Gardasil should be priced substantially higher than traditional vaccines because it was the first to prevent a type of cancer. In addition, Merck had invested more than $1 billion in the product s development to date and would have to invest millions more to support its launch. The outside consulting firm s recommendation had not resolved the pricing debate. Some on the Merck marketing team worried that a price so much higher than that of other vaccines would limit demand for the product and create bad publicity for Merck at a time when the company needed some good press. The suggested price of $120 per dose ($360 per person) would make Gardasil the most expensive vaccine ever sold. Cost alone certainly would not support a price of $120 per dose; the actual production cost for vaccines was low, often less than $10 per dose. Reimbursement was going to be a key issue for the vaccine. Insurance companies had never reimbursed such an expensive vaccine, and because there was a thirty- to forty-year period between HPV infection and the development of cancer, covering the cost of the vaccine for all patients would not be expected to reduce healthcare expenditures until many years later. In the biomedical industry it was common to use economic models to evaluate the cost effectiveness of a particular drug or therapy. Most of these models attempted to calculate the cost of a quality life year (cost per QALY). One QALY was equal to one year of perfect health. An older person would most likely receive 0.8 QALYs for each actual life year because of expected declines in health. Most health policy experts believed that a medical treatment with a cost per QALY above $50,000 was not economically justified. Economic models of the benefits of Gardasil were complex, and they depended on assumptions. For example, reducing the number of Pap tests administered each year would be a major financial savings. Because Gardasil did not eliminate all cervical cancers, however, many people thought the number of Pap tests would not decrease. Indeed, Merck recommended that women still receive a regular Pap test even after vaccination. Many people on the Merck marketing team thought that $360 was too low for such an innovative product. The value proposition was so strong, these people reasoned, that a price of $500 or more would be acceptable. Allison Watkins thought that $120 per dose was probably the wrong price, but she was unsure whether it was too high or too low. 6 KELLOGG SCHOOL OF MANAGEMENT

7 KEL400 MERCK: PRICING GARDASIL Exhibit 1: Merck Financial Highlights ($ in millions) Revenue 22,460 22,939 22,012 COGS 4,437 4,960 5,150 SG&A 6,200 7,239 7,156 R&D spending 3,280 4,010 3,848 Operating income 9,052 8,003 9,052 Net income 6,831 5,813 4,631 Exhibit 2 Merck Monthly Stock Price Stock Price ($) Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Month KELLOGG SCHOOL OF MANAGEMENT 7

8 MERCK: PRICING GARDASIL KEL400 Exhibit 3: Recommended Immunization Schedule by CDC, 2006 Source: 8 KELLOGG SCHOOL OF MANAGEMENT

9 KEL400 MERCK: PRICING GARDASIL Exhibit 4: Approved Vaccines for the Vaccines for Children (VFC) Program Disease Diphtheria a Haemophilus influenzae type b (Hib) Hepatitis A Hepatitis B Influenza (flu) Measles Meningococcal Mumps Pertussis (whooping cough) Pneumococcal Poliomyelitis (polio) Rubella (German measles) Tetanus a Varicella (chicken pox) Vaccine or Biological DTaP, DTaP/Hib, Tdap Hib, DTaP/Hib, Hib/Hepatitis B Hepatitis A (pediatric) Hepatitis B preservative free (pediatric/adolescent) Hepatitis B 2 Dose (adolescent) Hib/Hepatitis B Influenza MMR, Measles b Meningococcal polysaccharide (quadravalent) Meningococcal conjugate (quadravalent) MMR, Mumps b DTaP, DTaP/Hib, Tdap Pneumococcal conjugate (7-valent) e-ipv MMR, Rubella b DTaP, DTaP/Hib, Tdap Varicella Note: This table represents the vaccines and biologicals available under CDC contract as of December a Although DT, Td, and pneumococcal polysaccharide vaccines are recommended vaccines for inclusion in the VFC program, CDC has not been successful in negotiating a contract for these products as of February 28, b These biologicals may be available only under special circumstances, as determined by the state. KELLOGG SCHOOL OF MANAGEMENT 9

10 MERCK: PRICING GARDASIL KEL400 Exhibit 5: Pediatric Vaccines Price List, 2006 (VFC Price and Private Sector Price) Vaccine Brand Name/ Trade Name DTaP a Tripedia DAPTACEL CDC Cost Per Dose ($) Private Sector Cost Per Dose ($) Manufacturer sanofi pasteur DTaP a Infanrix GlaxoSmithKline DTaP-Hep B-IPV b Pediarix GlaxoSmithKline DTaP-Hib c TriHIBit sanofi pasteur e-ipv d IPOL sanofi pasteur Hepatitis B-Hib e COMVAX Merck d Hepatitis A pediatric d VAQTA Merck d Hepatitis A pediatric d Havrix GlaxoSmithKline e Hepatitis A-Hepatitis B 18 only e Twinrix GlaxoSmithKline d Hepatitis B pediatric/adolescent d ENGERIX B GlaxoSmithKline d Hepatitis B pediatric/adolescent d RECOMBIVAX HB Merck d Hepatitis B 2 dose adolescent (11 15) d RECOMBIVAX HB Merck Hib d PedvaxHIB Merck Hib d ActHIB sanofi pasteur Measles, mumps, rubella, and varicella (MMR-V) c ProQuad Merck Meningococcal conjugate (groups A, C, Y, and W-135) d Menactra sanofi pasteur a Measles, mumps, and rubella (MMR) a MMRII Merck d Pneumococcal 7-valent (pediatric) d Prevnar Wyeth/Lederle e Tetanus and diphtheria toxoids e DECAVAC sanofi pasteur Tetanus toxoid, reduced diphtheria toxoid, and acellular pertussis a BOOSTRIX GlaxoSmithKline a Tetanus toxoid, reduced diphtheria toxoid, and acellular pertussis a ADACEL sanofi pasteur Varicella d Varivax Merck a Vaccine cost includes $2.25 per dose federal excise tax. b Vaccine cost includes $3.75 per dose federal excise tax. c Vaccine cost includes $3.00 per dose federal excise tax. d Vaccine cost includes $0.75 per dose federal excise tax. e Vaccine cost includes $1.50 per dose federal excise tax. KELLOGG SCHOOL OF MANAGEMENT 10