AstraZeneca last week settled with the Department of Justice over allegedly offering kickbacks to Medco Health Solutions, a pharmacy benefits manager, in exchange for Medco maintaining AstraZeneca’s drug Nexium in favorable status on its formulary. AstraZeneca settled the allegations for $7.9 million.

A drug’s listing as “brand-preferred” on a pharmacy benefit manager’s formulary is crucial to a brand. Pharmaceutical companies want to be on a formulary so that when a physician writes a prescription for Nexium, for example, the patient can get it covered under their insurance when they walk into a pharmacy.

Price negotiations between pharmaceutical companies and pharmacy benefits managers (PBMs) have been criticized for being too secretive. While this settlement may indicate a trend towards greater scrutiny into the manufacturer-PBM relationship, it does little to draw a definite line between a seemingly permissible rebate (that theoretically is passed on to the customer) and illegal kickbacks.

According to a Department of Justice’s press release issued on February 11, AstraZeneca gave Medco “concessions” on other drugs, such as Prilosec, Toprol XL and Plendil, as long as the PBM made Nexium the “sole and exclusive” drug of its kind on certain formularies and other marketing activities.

The United States contended that this arrangement between AstraZeneca and Medco (bought by Express Scripts in 2012) violated the Federal Anti-Kickback statute, and thereby caused the submission of false or fraudulent claims for Nexium to the Retiree Drug Subsidy Program.

The allegations were initially made in a whistleblower lawsuit filed in 2010 by two high ranking former AstraZeneca employees – Paul DiMattia, a former executive director of commercial operations, and F. Folger Tuggle, who had been a managed markets account director in charge of the Medco account. The two relators will split $1,422,000 from the settlement.

Interestingly, many of the relators’ chief allegations in the original complaint are left out of the DOJ press release. The original 2010 whistleblower lawsuit focused on the fact that AstraZeneca did not offer similar discounts to government healthcare programs as required by the Medicaid “best price” rebate system, which requires drugmakers to enter an agreement with the Centers for Medicare & Medicaid Services and state Medicaid agencies to offer the state either 23.1 percent of the Average Manufacturer Price (AMP), the average price wholesalers pay to manufacturers for drugs sold to retail pharmacies, or the best price obtained on the private market, whichever is the greater rebate.

The complaint stated:

“Ignoring its [ ] legal obligations, AZ never reported the substantial sums paid in illegal inducements to Medco to secure a favorable formulary position for Nexium…which would have significantly undercut Nexium’s profitability.”

“The illegal inducements/discounts and rebates AZ provided Medco were subject to “best price” reporting requirements.”

“AZ’s intentional circumvention and misreporting of its Nexium best price was intended by AZ to deprive, and fraudulently did deprive the federal government and states of discounts and/or reimbursement in the hundreds of millions of dollars or more over the relevant period.”

Writing what was probably on a lot of people’s minds, Ed Silverman of the Wall Street Journal noted that this $7.9 million settlement “is rather small compared with the $3.6 billion in revenue that Nexium generated last year and the sometimes sizeable payouts made by drug makers to resolve allegations over kickbacks to physicians or illegal marketing.” Indeed, the original complaint alleged that AstraZeneca’s “intentional circumvention and misreporting of its Nexium best price was intended…to deprive, and fraudulently did deprive the federal government and states of discounts and/or reimbursement in the hundreds of millions of dollars or more over the relevant period.”

The small settlement figure compared to the underlying allegations perhaps corroborates AstraZeneca’s statement denying fault: “It is in the best interests of the company to resolve these matters and to move forward with our business of discovering and developing important, life-changing medicines – while avoiding the delay, uncertainty, and expense of protracted litigation,” the company stated.

Silverman concludes that “[s]till, the case is interesting if only because it pulls back the curtain a wee bit on interactions with pharmacy benefit managers.”

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We will continue to follow enforcement action in the PBM space, especially as it relates to pharmaceutical pricing and transparency. The Assistant Attorney General Joyce R. Branda of the Justice Department’s Civil Division stated that her office “will continue to pursue pharmaceutical companies that pay kickbacks to pharmacy benefit managers…Hidden financial agreements between drug manufacturers and pharmacy benefit managers can improperly influence which drugs are available to patients and the price paid for drugs.”