Schering-Plough Letter - Limitations on Contraceptives

May 15, 2008

Jimmy Mitchell, R.Ph., M.P.F ., M.S.
Director
Office of Pharmacy Affairs
Health Resources and Services Administration
Department of Health and Human Services
5600 Fishers Lane, Parklawn Building
Mail Stop 10C-03
Rockville, Maryland 20857

Re: Allocation for Desogen®

Dear Mr. Mitchell:

We are writing to keep you apprised of recent developments affecting sales to 340B covered entities of Desogen®, a widely used oral contraceptive product manufactured by Organon, a part of the Schering-Plough. In order to avoid shortages or other market disruptions that would otherwise occur in the near future, as a result of application of the 340B program's "penny-price" policy to sales of this drug, Schering-Plough has initiated an allocation system for distribution of Desogen® that would apply both to wholesalers and to direct purchasers. Following a model that we understand to have been approved by your Office last year in connection with sales of another contraceptive product marketed by a different manufacturer, we have attempted to address the Desogen® situation on a proactive basis, through an allocation system that applies equally to 340B covered entities as well as to all other commercial purchasers of the drug. We hope that this product allocation system will avert distribution imbalances that otherwise will predictably occur, and will both avoid potentially detrimental impact on patients, and assure fairness to all purchasers of our product.

Desogen®, which has been marketed by Schering-Plough since November of 2007, is a covered outpatient drug subject to 340B discount pricing when purchased by eligible "covered entities," as defined in Section 340B(a)(4) of the Public Health Service Act. Beginning in the second quarter of 2008, Schering-Plough calculates that the unit rebate amount (URA) for Desogen will exceed the drug's Average Manufacturer Price (AMP). Consequently, under HRSA policy, the applicable 340B ceiling price will be one cent. Especially since the shelf-life of the product is reasonably long (three years), the availability of Desogen® to 340B purchasers at a "penny price" will naturally lead to anticipatory buying patterns and "stock-piling" of product by 340B entities. Availability of an unlimited volume of the product to 340B entities at a penny price, moreover, could create incentives for improper diversion of excess supply that can be purchased cheaply and resold or otherwise utilized for non-patients of 340B facilities.

Indeed, Schering-Plough has already noticed a significant upward trend in the volume of Desogen® purchased by 340B covered entities during April, and has been contacted by wholesalers concerned about stock availability. Moreover, we estimate that approximately 48% of the sales of this product are already made to 340B covered entities, so the 340B penny pricing is certain to have a very substantial impact on the marketplace. We believe we must act now to avoid a situation in which some purchasers are unable to obtain Desogen® for their patients because others, taking advantage of an exceptionally low price, will seek to buy product in excess of their patients' current needs.

Distribution System

Schering-Plough has informed its wholesalers that, until further notice, the allotments of Desogen® they receive for distribution will be based on the average quarterly volume of sales to that wholesaler during 2007 (the "base year"). Schering-Plough has also confirmed with its wholesalers that product is to be equitably distributed to 340B entities as well as other commercial customers based upon the volume of their historical purchasing of the drug, i.e., based on their average volume of quarterly purchases of Desogen® during the base year For each direct sales customer who purchased the product from Schering-Plough for the period designated as the base year, we have calculated the customer's average quarterly volume of Desogen® purchases during that time, and have used this historical purchasing data to allocate a maximum amount of future, quarterly product sales to the customer.

Customers who qualify as 340B entities will receive identical treatment to other commercial entities under this system. No purchaser will be subjected to a minimum purchase requirement, or any impediment to the operation of normal product distribution channels. Customers may order Desogen® directly from Schering or through a wholesaler, just as they have done prior to allocation. Orders will be filled on a first-in-first-out basis, with total quarterly sales to each customer limited to the volume of product it has been allocated, consistent with historical purchasing in the base-period. Where a customer did not purchase Desogen® during the base period, we will work with that customer to determine an appropriate allocation.

It should be noted that, unlike the situation we understood to exist respecting penny-price 340B sales of Yasmin during certain quarters of 2007, we anticipate that the price of Desogen® to 340B entities is likely to remain at one cent (or only very marginally higher) for quite some time. This is because 340B pricing for the drug has been, and in all likelihood will continue to be, dramatically affected by the new CMS rule regarding the calculation of AMP and Best Price for brand name products that have authorized generic versions. The allocation system we propose to institute, therefore, may be necessary on a long-term basis in order to maintain equitable distribution of product to Desogen purchasers.

Conclusion

In order to protect patients from negative consequences, it is critical to prevent shortages or other distribution imbalances that may deprive some pharmacies or facilities of sufficient product to supply their patients' needs. Schering-Plough has concluded that an allocation program must be implemented immediately in order to assure equitable and appropriate distribution of Desogen within the existing market, and to avoid stockpiling of product by some purchasers to the detriment of other purchasers and patients. We are confident that the allocation program we propose will result in equitable and non-discriminatory treatment of 340B entities, and hope we will have OPA's full support and approval in implementing that program.

Should you have any questions or concerns about the allocation program for Desogen® sales, we hope that you will contact us at your earliest convenience. We would be happy to speak with you by telephone, or to meet with you in person, about this topic whenever such a conference or meeting can be arranged. As we have explained above, we have attempted to proceed in this matter in a manner consistent with OPA policy, as indicated by its apparent approval of similar measures instituted by Bayer in a similar situation that created risks of product shortage. We will keep you apprised of any further developments that might alter the present situation with respect to Desogen®; and we thank you for your time and attention to this letter.