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Merck Marketing, Pricing Practices Lead To Settlement With Justice Dept.

Executive Summary

Merck's $650 million settlement with the Department of Justice to resolve state and federal investigations into payment of Medicaid rebates and incentives to health care workers will act as a deterrent to other drug makers, the agency said

Merck's $650 million settlement with the Department of Justice to resolve state and federal investigations into payment of Medicaid rebates and incentives to health care workers will act as a deterrent to other drug makers, the agency said.

Merck settled fraud claims with DoJ Feb. 7, resolving two lawsuits brought by former employees who charged that Merck deliberately sought to deny federal health care programs the same prices for drugs provided to other customers.

"A big part of investigations like this is deterrence so that the industry will appreciate what is acceptable conduct and what is not," U.S. Attorney for the Eastern District of Pennsylvania Patrick Meehan said in an interview with "The Pink Sheet." Meehan's office led the Merck investigation.

"These efforts will create a recognition in the industry that the concept of 'best price' is there because it is an important principle that needs to govern and be respected during the natural tendency for the companies to compete among themselves for market share," he said.

One of the suits, filed in Philadelphia, alleged that Merck offered deep discounts to hospitals that used large quantities of Zocor and Vioxx over competitors' brands without providing the same discounts to Medicaid.

Medicaid law requires drug makers to report "best price" rebates to the agency but includes an exception allowing manufacturers to exclude "nominal" prices from their calculations. Nominal is defined as any price less than 10 percent of the Medicaid average manufacturer price.

According to DoJ, Merck improperly reported the discounts it offered to hospitals as nominal, despite the fact that it offered discounts of less than 10 percent of AMP for those drugs. In exchange, the hospitals achieved and maintained a pre-set volume of purchases for certain drugs. The allegations are for programs in place from 1998 to 2006.

The suit also alleges that from 1997 to 2001, Merck paid excessive fees to physicians that amounted to illegal kickbacks, disguising them as "training" or "consultation," to induce the use of Merck drugs.

"While an appropriate educational purpose may be used ... for a physician, we suggested that the kinds of marketing programs, the things from the preceptorships to the lavish trips to Florida resorts, were improper and were designed as inducements," Meehan said.

Merck will pay $399 million to settle the charges in the Philadelphia suit, which also includes a related Nevada action on pricing of Vioxx and Zocor rolled into the suit, and pay an additional $250 million to settle charges stemming from a separate suit filed in New Orleans.

The second lawsuit alleges the drug maker offered hospitals lower prices for Pepcid products if they agreed to use the antacid over others. Merck would benefit, in turn, after patients were discharged from the hospital but continued to use Pepcid, according to DoJ.

In this instance, the price discounts also were deemed as "nominal" in reporting to Medicaid. The program was in place from 1996 to 2001, according to Merck.

The Centers for Medicare & Medicaid Services recently took steps to limit nominal pricing practices by specifying that nominal pricing may be excluded from Medicaid best price calculations only when provided to certain charitable health entities, including "340B" public hospitals, intermediate care facilities for the mentally retarded and state-owned or operated nursing facilities.

Under the two settlement deals, the federal government, including programs like the Medicaid and Medicare Trust Funds and the Department of Defense's Tricare program, will receive more than $360 million and 49 states and the District of Columbia will receive $290 million. The whistleblowers will get a share of the award.

Merck took a $670 million charge in 2007 ahead of the anticipated settlements (1 (Also see "Merck $670 Mil. Charge Anticipates Medicaid Pricing Settlements" - Pink Sheet, 10 Dec, 2007.), p. 7).

As part of the deal, Merck also entered into a five-year 2 Corporate Integrity Agreement with Health and Human Services' Office of Inspector General.

"The settlements do not constitute an admission by Merck of any liability or wrongdoing," Merck said in a statement. "Merck believes its pricing and sales and marketing policies and practices were consistent with all applicable regulations and contracts during the relevant time."

In addition, Merck noted that it voluntarily put into place a comprehensive compliance program in 2001, prior to contact by the government. Some elements included in the CIA were already implemented at Merck under the voluntary program.

Under the CIA, Merck is required to maintain a compliance officer and compliance committee to develop and implement policies and procedures.

The company will also be required to use an Independent Review Organization to conduct an annual review of its government pricing and contracting functions and its promotional functions annually.

Additionally, the CIA calls for establishment of a disclosure program for reporting of unethical or illegal behavior. Merck's AdviceLine is a toll-free telephone line staffed by a third-party that is available 24 hours a day, seven days a week that individuals can call to report behavior and maintain confidentiality.

Dozens of pharmaceutical manufacturers are entangled in fraudulent pricing suits and investigations by federal and state authorities.

Merck's $650 million settlement comes after Bristol-Myers Squibb paid $500 million to settle with the DoJ over allegations it illegally paid health care workers to promote "off-label" uses of its atypical antipsychotic Abilify and misreported best price for the antidepressant Serzone (3 'The Pink Sheet' Oct. 1, 2007, In Brief).

In September, Sanofi-Aventis paid $190 million to resolve claims that Aventis Pharmaceuticals, acquired by Sanofi, inflated the average wholesale price of its antiemetic Anzement (4 (Also see "Sanofi Is Fifth Company To Sign AWP Settlement With DoJ, Pays $190 Mil." - Pink Sheet, 17 Sep, 2007.), p. 24).

In 2001, TAP Pharmaceuticals settled pricing allegations for $875 million - the highest settlement for such charges (5 (Also see "TAP To Audit Marketing Documents Related To Top Lupron, Prevacid Buyers" - Pink Sheet, 8 Oct, 2001.), p. 3).

- Jessica Merrill ([email protected])

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