Investors usually focus on marketing approvals, but that's only half the battle for drugmakers; getting the drug paid for is arguably more important.
Health insurance giant UnitedHealth Group (NYSE: UNH) hasn't quite said that it won't pay for Merck's (NYSE: MRK) Zetia and Vytorin, but it's not making it easy for its members either. According to news reports, co-pays for the drug are doubling to a range of $50 to $60 starting July 1, up from $25 to $30.
Most insurance companies have multiple tiers for their drugs coverage, with increasing co-pays to discourage the use of some drugs. Tier one is usually reserved for generic drugs while branded drugmakers strive to get their drugs on tier two, and the higher tiers are where insurance companies put drugs when they don't feel the cost justifies the benefit.
Zetia and Vytorin seem to have been moved to the third tier to encourage members to take generic versions of Merck's Zocor. Vytorin is a combination of Zetia and Zocor, and studies to date have failed to show that Vytorin has any benefit over Zocor other than decreasing cholesterol levels. Changing the value on a lab test was enough to get the drug approved, but an outcome like decreased plaque in arteries or lower incidence of heart attacks will be needed to justify the higher cost.
Merck has already been hurt by those studies -- sales of Zetia and Vytorin fell to $4.3 billion last year from $5 billion in 2007 -- but the change in co-pays could hurt even more, especially if other insurers like Cigna (NYSE: CI) and Aetna (NYSE: AET) follow suit.
Generic-drug makers may benefit if the sticker shock from increased co-pays have patients running to their doctors. But we could also see switching to stronger statins like Pfizer's (NYSE: PFE) Lipitor and AstraZeneca's (NYSE: AZN) Crestor. Doctors likely put their patients on Vytorin because they have higher cholesterol levels, so it seems likely that they may recommend a stronger brand-name drug rather than the cheaper generic.
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