Allergan (AGN) is currently locked into a battle with Mylan (MYL), Pfizer (PFE) and Teva (TEVA) over patents related to its dry-eye drug, Restasis. In U.S. District Court in Marshall, Texas Allergan accused the rival drug makers of violating Restasis’ patent protections. Allergan’s rivals see the claim as an attempt to extend Restasis’ exclusivity. The original patent on Restasis was due to expire in May 2014, but Allergan got it extended for another 10 years. The Senate has voiced a desire to bring down runaway drug prices, and the Restasis patent battle could test lawmakers’ resolve.
In 2015 potential price gouging by certain drug companies reached the attention of the Senate Special Committee on Aging. A year later the Senate Special Committee released its a 130 page report titled, Sudden Price Spikes In Off-Patent Prescription. The report was launched by Chairman Susan Collins (R-Maine) and Claire McCaskill (D-Missouri), and focused on the business practices of four comp – Turing Pharmaceuticals, Retrophin, Inc. (NASDAQ:RTRX), Valeant (NYSE:VRX) and Rodelis Therapeutics.
Two major recommendations from the report were to import cheaper drugs and prioritize FDA review of generic drug applications for certain off-patent prescription drugs. Despite the efforts of lawmakers drug costs continue to rise at multiples of the rate of inflation. The Restasis patent debate could test the Senate’s resolve for the following reasons:
Entrance Of Xiidra Might Not Have Helped Dry Eye Pricing
Restasis dominates the dry eye market. It lost some dominance after Shire’s (SHPG) Xiidra entered the market in 2016.
In Q2 2017 Restasis and Xiidra had sales of $354 million and $57 million, respectively. Restasis’ revenue was up 10% sequentially; however, it fell 9% Y/Y, likely due to the impact of Xiidra’s presence. Xiidra’s revenue was up 46% sequentially as the product continues ramp up.
A year’s worth of Restasis costs about $5,000 per year. According to Fierce Pharma Xiidra was priced the same as Restasis, potentially creating a duopoly in the market place:
What’s a quick way to nab market share from a competitor? Roll out a superior product at the same price–and that’s what Shire believes it’s doing with newly approved dry eye med Xiidra.
The Dublin-based drugmaker has decided to roll out its new product–green-lighted by the FDA earlier this month–at about $5,000 per year, according to Evercore ISI analyst Umer Raffat. A 30-day supply will cost $426.73–which just so happens to be the exact same price of a 30-day supply of rival Allergan product Restasis.
With the move, Shire forgoes an opportunity to slap a premium price on its med. Some industry watchers had expected as much; after all, Xiidra is the first med indicated specifically for dry eye, with blockbuster Restasis technically meant for “tear production.”
Consumers were better off after Xiidra’s entrance into the market because it gave them another choice. However, they may not have gotten cheaper prices since both products were priced the same. Prices might not fall until generics enter the market.
The Dry Eye Market Remains Underserved
The dry eye market is currently underserved. There are an estimated 30 million dry eye sufferers, yet only about one million have prescriptions:
With an estimated 30 million dry eye sufferers and only 1 million or so on prescription treatment, many a new entrant may have a difficult time convincing these largely underserved patients to seek treatment. Shire concentrated its efforts on playing off Xiidra’s double “i”s, playfully asking consumers to “say hii to Xiidra,” or “niice to meet you.” …
Allergan upped the ante and started advertising that encourages people through “eyepowerment” to talk to their physicians if they have symptoms of dry eye … Allergan noted overall sales for Restasis grew substantially during 2016, going from $1.05 billion in 2015 to $1.49 billion in 2016. The company introduced a new multidose bottle during 2016, yet kept pricing the same, which may have bolstered sales as well.
Shire and Allergan are likely fighting over the one million customers who currently have prescriptions. Maintaining the current pricing might not be enough to encourage the 29 million dry eye sufferers to get treatment.
Letting generic producers like Mylan and Teva enter the market place could lower prices and bring more people into the market. It could actually expand the market to millions of more consumers instead of taking share from Shire and Allergan who are currently fighting over one million customers.
Green-lighting Generics Is Consistent With Senate Goals
Restasis’ original patent was due to expire in May 2014. Allergan got the patents extended through 2024 with “issuance of very narrow patents covering the exact concentrations of active and inactive ingredients used in the commercial embodiment.” The patent extension likely protected its $5,000 price point in the dry eye market.
In December 2016 the FDA green-lighted the approval of a generic version of Valeant’s heart drug Nitropress. The action was consistent with the recommendation from the Senate Special Committee on Aging pursuant to its probe on price gouging. Prior to the action Valeant had raised its prices for Nitropress and Isuprel by 212% and 525% shortly after acquiring them. Amid the public furor over its drug price increases Valeant promised to cut prices for the two drugs. However, as recently as September 2016 certain medical centers said they had not received discounts Valeant had promised.
Pushing for the approval of generics in the dry eye market would be consistent with the Senate Special Committee’s findings. Furthermore, generics could potentially drive down pricing in certain segments of the market and expand the market to those who might not be able to afford prescriptions. To help tamp down rising drug prices I believe it is paramount that lawmakers follow through on recommendations of the Senate Special Committee. The Restasis patent fight could be a key test.
Growth is dead at Allergan even if the company is able to protect patents for Restasis. Organic growth is stagnant and the company could find it difficult to make acquisitions in a frothy M&A market. Restatis represents 9% of revenue and an even larger share of its EBITDA. AGN trades at over 15x run-rate EBITDA, yet its organic growth does not justify its lofty valuation. If Restatis loses its patent fight then sentiment could wane and the stock could crater. AGN is a sell.
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